NBU's refusal to control hryvnia: Despair or provocation?

Viktor Suslov
23:10, 28 August 2018
Economy
248 3
Opinion

Deputy head of the National Bank of Ukraine, Oleh Churii said that the NBU will not keep the hryvnia rate at a certain level, continuing to adhere to the policy of flexible exchange rate and only smoothing out excess fluctuations in the foreign exchange market. According to the official, the idea of supporting the exchange rate is wrong at its root, since the National Bank does not print dollars and euros, and it is possible to maintain the rate only by accumulating foreign currency debts or spending money from reserves.

However, the constitutional duty of the National Bank is to ensure stability of the national currency. Meanwhile, rate stability is also about the hryvnia stability as such. Therefore, the statement, from the perspective of the NBU's tasks, is not entirely correct. And since it was voiced, it is probably the result of extreme circumstances as over the past month the NBU spent more than $700 million on maintaining the exchange rate, while filing to stabilize it. At the same time, Ukraine's international reserves began to decline threateningly.

The statement means that now the hryvnia might start falling rapidly, at least until the International Monetary Fund (IMF) decides on the issue of granting Ukraine the next bailout tranche. Under these conditions, the IMF's actions will inevitably acquire a purely political character: it is an organization in which the Western countries, primarily the U.S., play a decisive role, and it is of fundamental importance for them to politically support the authorities in Ukraine. If hryvnia and the economy collapse, this will inevitably lead to a change of leadership, and perhaps, the country's general political course.

The statement means that now the hryvnia might start falling rapidly, at least until the International Monetary Fund (IMF) decides on the issue of granting Ukraine the next bailout tranche

Therefore, much is at stake, and ensuring the stability of the hryvnia is not only Ukraine's task.

I don't rule out that the said statement could be followed by political decisions of international financial organizations and Western powers, aimed to save the Ukrainian economy. They could relate primarily to the provision of financial aid - most likely, the United States will now put pressure on the IMF to make sure the bailout is provided as soon as possible. In addition, the World Bank has been preparing a project to allocate over $800 million for Ukraine.

But at the same time, the West is dissatisfied with Ukraine implementing such erroneous economic policies amid rampant corruption, while money poured into Ukraine has already been spent and lost. For example, recently Prime Minister Volodymyr Groysman said that the government could not find where $50 billion was spent that Ukraine had received on credit lines in recent years. Therefore, all this will be accompanied by a strong pressure on the Ukrainian authorities, so that the fight against corruption becomes real, and that the authorities attract competent people to work for the state.

Whatever the case, the rate will be limping, although it would be too early to predict any figures. One thing is clear: if the National Bank refuses to continue currency interventions in the interbank market, the hryvnia will keep falling.

This could lead to an automatic increase in prices for all imports, first of all, we will see a rapid rise in prices for fuel (gasoline, LPG), especially before the start of the heating season. On the one hand, budget revenues will increase from the taxation of imports, but at the same time, there will be gaps, as it will be necessary to increase expenditures. For the population, this will result in a noticeable decline in the standards of living due to rising prices, inflation, and depreciation of savings. Lack of popular trust in the national currency will speed up the flight of both businesses and citizens from the hryvnia, which will further ruin its rate and increase the demand for foreign currency.

One thing is clear: if the National Bank refuses to continue currency interventions in the interbank market, the hryvnia will keep falling

The fact that now the National Bank is, in fact, provoking panic in the foreign exchange market, may indicate that it acts in the interests of a certain group of people willing to cash in on the rate hikes, because many of its staff have been associated with various groups in the system of commercial banks, engaged in such dealings.

The National Bank should not have made such a statement, even if it does not intend to support the national currency in the future. In any case, it would be logical to wait until the arrival of the IMF mission in Ukraine on September 6, and, perhaps, Ukraine would have a chance to make change.

Viktor Suslov is an Honored Economist of Ukraine, former Minister of Economy

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