The National Bank of Ukraine sharply lowered the hryvnia exchange rate. What does that mean

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The National Bank of Ukraine (NBU) switched from a floating hryvnia to a fixed exchange rate policy on February 24. Then the regulator pegged the hryvnia at 29.25 per dollar. On July 21, the Central Bank lowered the exchange rate by a quarter. Now the dollar costs 36.56 hryvnia.

The NBU explained that in the current situation this will “support the stability of the economy”: fixing the exchange rate should include inflation. Another goal is to increase the competitiveness of Ukrainian producers. NBU also stated that the new exchange rate will increase the inflow and accordingly increase the foreign exchange sales revenues of exporters.

Why did Kyiv really go for it?

The aim of the fixed exchange rate policy is to stabilize the economy and reduce inflation. However, in the face of a deficit in the balance of payments, the fixed exchange rate policy inevitably leads to a decrease in international reserves.

“In April 2022, Ukraine’s consolidated balance of payments deficit amounted to 783 million dollars.

In April, Ukraine’s international reserves decreased by 4.1%. In May – 6.8%, in June – 9%. “As of July 1, it was $22.8 billion, while Ukraine’s state and state-guaranteed debt exceeded $100 billion,” he said.

– said the head of the analytical department of the bank “BKF” Maxim Osadchiy.

According to him, the reduction of international reserves could lead to a sovereign default.

“Ukraine is forced to negotiate the postponement of foreign debt payments. As a result, the decrease in international reserves contributes to an increase in the service cost of foreign currency sovereign debt. To ease the pressure on international reserves, the Ukrainian regulator had to resort to a sharp devaluation of the hryvnia. The new official hryvnia rate is close to the rate set by Ukrainian banks – 37 hryvnia per dollar.”

According to Mark Savichenko, principal analyst at Ivolga Capital, the 25% weakening of the fixed exchange rate is primarily aimed at helping Ukrainian exporters. In the new conditions, their goods become more competitive. This should increase their income.

What is the real hryvnia exchange rate?

“The National Bank of Ukraine has the opportunity to continue the course they have set so far. This is the real exchange rate. However, foreign exchange reserves are needed to maintain the exchange rate. If the reserves run out, the hryvnia will weaken. However, it is not possible to give quantitative estimates under the current conditions.

At the same time, various amounts of dollars are sold on the black market at the rate of 38.5-40.1 hryvnia per dollar, should From information on Ukrainian sources. On Wednesday, the exchange rate on the black market was 37-38 hryvnia per US currency.

“Since February, the hryvnia exchange rate has remained stable against the dollar. Thus, a black market for currency was established. In fact, the NBU has brought the official exchange rate closer to the unofficial one,” explained Evgeny Mironyuk, expert at BCS World of Investments.

What will the artificial weakening of the hryvnia mean for Ukrainians?

The weakening of the national currency often causes inflation. The price of imported goods increases, and after that the average price level in the economy. Osadchy is confident that devaluation of the hryvnia will increase inflation and reduce the real disposable income of the population. Inflation in Ukraine reached 20.1% in June.

“Inflation will continue to rise,” Mironyuk said. Savichenko noted that by fixing the exchange rate, the Central Bank has the opportunity to reduce the weakening of the national currency. Hence the inflation rate.

“The actions of the Ukrainian authorities are not yet aimed at introducing a flexible exchange rate with free interbank foreign exchange transactions. Therefore, the devaluation potential of the hryvnia is still limited,” he said.

GV Plekhanov Ayaz Aliyev, Associate Professor in the Finance Department for PRUE’s Sustainable Development, is confident that the hryvnia will depreciate if the pegged exchange rate regime is abolished. “The hryvnia has lost a lot recently and would have weakened further if it had not been corrected,” he said.

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