Ukraine’s Currency In Crisis, Explained
The national currency has taken a serious hit since the start of the year, but the conflict with Russia is only partially responsible for its decline.
by Devin Ackles, Hromadske International, Case Ukraine
produced by Maxim Eristavi, Randy. R. Potts
What You Need to Know:
✓ The hryvnia continues to hit new historic lows on a monthly basis and it is the worst performing currency in the world this year;
✓ The government is trying to stabilize the currency, but has had mixed success;
✓ The currency’s devaluation is the result of balancing reforms with maintaining stability;
✓ The Ukrainian hyrvnia is not in real danger unless it fails to secure further loans from international donors;
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Why are People Panicking?
Ukraine’s national currency has been grabbing headlines locally for months now. Every day people are checking the current exchange rate and trying to determine whether they should try to buy up dollars (or euros) to be able to weather the potential economic storm.
It does not take an economist to explain the difficulty that Ukraine is facing. Ukraine has no hope of attracting serious investment so long as the conflict continues. An important segment of its economy, which is found in the industrial heartland of the Donbas, is struggling to hang onto what little it has. Further, there are no jobs being created in the regions. Quite the reverse - many towns and cities continue to see unemployment rise.
All of these things weigh on the minds of the average Ukrainian citizen who is, more often than not, thinking about it today. Rising utility bills, growing inflation and few, if any, prospects for the general economic situation improving in the near future all have Ukrainians rightfully concerned.
The simplest indicator of the economic situation and, consequently, the political situation is how many hryvnia it takes to get by. With the hryvnia losing nearly 60% of its value against the US dollar, people are spending more to get considerably less. And yet, outside of conflict zones, there are no breadlines forming.
Why is the Hryvnia Collapsing?
After President Yanukovych fled the country back in February, the new interim government discovered that the state’s coffers had been essentially looted. Within a week of coming to power, Prime Minister Yatsenyuk reported that nearly $70 billion had been sent offshore from government accounts and it was unclear how some $34 billion in loans were spent under the previous administration.
In its time of need Ukraine turned to western leaders to help it avoid a full-scale economic meltdown. Western donors were willing to help Ukraine, but not without a series of reforms. While emergency stopgap funds were made available by the US, EU and other international partners, serious loans would depend on implementing long-over due reforms, including with the nation’s currency.
The International Monetary Fund was tasked with taking the lead on Ukraine. One of the IMF mission’s many ‘recommendations’ (criteria to be fulfilled in order to receive support) was for Ukraine to get rid of its long-standing fixed currency exchange rate policy and switch over to a free floating exchange rate, something which it began gradually introducing at the beginning of February, even before President Yanukovych fled.
Ukraine’s fixed exchange rate was around 8 hryvnia per 1 USD (or 11 hryvnia per 1 Euro). By getting rid of the fixed exchange rate, the national currency was allowed to ‘float’ at a rate set by the market. The rationale behind this, according to the IMF, was that it would allow Ukraine to protect ‘scare reserves and provide an important shock absorber’.
Previous governments had avoided allowing the hryvnia to float, since it would lead to devaluation and appear to the public that their economic policies were failing. This time around, the government had no choice. If Ukraine wanted to receive significant financial support, it would have to undergo a series of reforms and fully implement them, some of them long feared to be political suicide.
Can the Hryvnia be Saved?
In response, Ukraine’s central bank (The National Bank of Ukraine or NBU) has taken a number of administrative measures to stabilize the situation with the currency. For example, limits have been set on how much money can be withdrawn from (and transferred out of) bank accounts in a 24 hour time period. Foreign currency interventions, though limited, have also been used to bolster the hryvnia.
At the end of September President Poroshenko personally set a benchmark for the hryvnia after meeting with leading bankers and business leaders. It is difficult to say if this was part of a move to ganer public support for his party during parliamentary elections, as it was a sign of a potentially stable exchange rate, but the challenge was met and the public welcomed it.
While the central bank did its best to accommodate the benchmark set by President Poroshenko (12.95 hryvnia per 1 USD), its foreign currency reserves have dwindled to their lowest point over in the past 12 months. In addition to paying $2 billion dollars of its gas debt to Russia, an additional $985 million was spent in direct currency supporting interventions in October. As a result, Ukraine’s foreign currency reserves dropped to $12.58 billion.
As a result it has had to let the market determine the real exchange rate. Should the hryvnia see a serious drop, Ukraine’s central bank will likely step in to curb rapid devaluation and rising inflation. This time, however, it will have the support of its donors, as the situation on the ground has changed significantly since the original terms of the loans were agreed upon.
In exclusive interview to Hromadske International, the chairman of the National Bank of Ukraine said that she’s doing her best working with the market to find a stable exchange rate for Ukraine’s national currency, but since the country has a war economy now, it is forced to take extraordinary steps to stabilize the hryvnia:
A market trader counts out hryvnia currency banknotes at a stall in Kyiv, Ukraine.
Can It Get Worse Than This?
The National Bank of Ukraine policies are not without their own dangers. Although they readily acknowledge many of the potential problems in public, the perfect storm of war, a weak economy, and enduring corruption is taking its toll on the ability for the authorities to act.
With the hryvnia recently achieving the title of ‘worst performance of any currency in the world’ in a report by Bloomberg, the situation has clearly become dire. One way or another, something needs to be done to turn the situation around. And missteps will be both politically and economically costly.
Two cases illustrate the complexity of the issues facing the Ukrainian central bank. In trying to keep as much foreign currency in the country as possible, the authorities set limits on how much can be sold. By artificially setting limits on how much money a person can withdraw or how many dollars or euros they can receive, they have encouraged the black market to make up for the demand unable to be met by the banks. If people cannot buy in dollars at the official rate in a bank, then they will go to whomever has dollars for sale.
While seeking to limit the currency’s devaluation, they must be careful not to overlook the potential benefits that it may have. One commonly cited example is how devaluation is driving down costs for exporters who are able to temporarily benefit from a unilateral free trade agreement with the EU. Admittedly, the benefits are limited since Ukraine does not have much to offer the EU in the way of exports, but it is better than nothing.
And yet, there are sound policies that can be implemented and adjusted as well as expertise from the United States, EU and international community that can be tapped to support the Ukrainian government. The issues facing the hryvnia are complex, but outside of a full-scale war with Russia, they are by no means unmanageable, especially with the continued support of the US, EU and international financial institutions like the IMF and World Bank.
In truth, the currency’s struggles, more than being the result of policies being implemented by its national bank, are a symptom of the general economic malaise in which Ukraine is mired. Due to its inability to carry out systemic reforms, for once it has no real choice but to act lest it go bankrupt.
