Avoiding indicative exchange rate could once again devaluate hryvnia

Avoiding indicative exchange rate could once again devaluate hryvnia
Photo: Konstantin Melnitskiy

Starting on Thursday, February 5, the National Bank of Ukraine (NBU) will no longer hold daily currency auctions, the main purpose of which was to determine the balanced exchange rate, said First Deputy Chairman of the Kontrakt Bank Pavlo Krapivin. The management of the regulator announced the decision at the weekly meeting with the leaders of the 40 largest Ukrainian banks. This means that financial institutions will have no upper limit for quotations, explains the banker.

“We support transparent policy in formation of exchange rates and transition to the market-based mechanisms. We also would like the market to have a single and efficient exchange rate. The main thing for the regulator’s monetary policy is the continued use of a flexible exchange rate system,” said Governor of the NBU Valeria Hontareva. At the same time, she stressed that the regulator does not reject its ability to influence the market through administrative levers and it might resort to them again at any time if needed.

The much desired dollar

As a reminder, the NBU resorted to daily currency auctions in November 2014, when the hryvnia had already devaluated against the dollar by more than twice. Introduction of the indicative exchange rate provoked flourishing of the black market where the exchange rate is a bit higher, but there is always a possibility to buy the currency.

The NBU management is convinced that market and administrative regulation was supposed to help banks determine the balanced exchange rate, since it was impossible to find one in the market due to low trading volumes. In April 2014, trading volumes in the interbank market dropped to an average of US $200 mn. The 0.5% tax on purchase of foreign currency imposed on banks, legal entities and individuals, as well as shortage of foreign currency resulted in the sharp drop in turnover in the foreign exchange market.

Since the beginning of the year, the tax on purchase of non-cash foreign currency was abolished, which means there were no more restrictions for active trading except for the indicative rate. Exporters do not want to sell their revenues at indicative rates. So, quite reasonably, the NBU decided to cancel the daily auctions.

The majority of financial institutions supported the decision to move away from the practice of determination of balanced rate. For example, managers of the Independent Association of Banks of Ukraine (IABU) consider the NBU’s desire to set a single national currency exchange rate favorable for reduction of the volumes of the black market. “Creation of a single rate should reduce the volumes of the black market and return foreign exchange transactions into the legal plane, i.e. cash departments in banks,” said Chairman of the Council of the IABU Roman Shpek.

Professor at the Kyiv-Mohyla Academy Oleksandr Mertens supports the initiative of the regulator, arguing that in such a manner the NBU will be able to avoid the multiplicity of exchange rates. “This is the right move. It is better to have the rate of UAH 20 / USD, rather than pretend that it is UAH 16 / USD. It is technically impossible to find a balanced rate in conditions of continuous flight of capital, which we are currently observing in the country,” he said.

At the same time, financial expert Artemiy Yershov doubts that the measures announced by the regulator will eliminate the black market, given the restriction on daily purchase of foreign currency in the cash market equivalent to the amount of UAH 3,000.

Straight ahead

Bankers’ forecasts about the future of the hryvnia are less optimistic. When determination of the indicative rate comes to an end, the rate on the interbank market (and respectively in the banks’ cash departments) will grow by at least UAH 1 – 2. “The gap between the interbank market and the black market will narrow. In this case, the population is unlikely to panic, because people have been living in stressful environment for a while now,” believes Deputy Chairman of Citibank Ukraine Vladyslav Sochynskiy.

Krapivin hopes that the US dollar will rise in price for Ukrainians only for a short while. “Within two weeks its exchange rate will go down, because up until now exporters held back their revenues and importers have been trying to buy foreign currency in advance. When it is clear that the rate has a market price, the supply of currency will rise and the demand for it will fall,” says the banker.

Admittedly, not everyone is so optimistic. As of today the pent-up demand for purchase of foreign currency in the banks is close to UAH 1 bn. Therefore, theoretically, the rate may rise up to UAH 25 / USD, said Capital’s source on condition of anonymity. “But it will be too much. I believe the rate will stop at approximately UAH 22 / USD,” added the source. Expecting the skyrocketing growth the rate started rising even today and set a new official record low. Today, the NBU has fixed its official rate at UAH 16.24 / USD. On the black market the US dollar was traded at the rate close to UAH 21 / USD.

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BATHIK CEPARATICT 06 February 2015, 11:17

Мені чогось пригадалися слова Яценюка, які він сказав чотири місяці тому "Україна курсу доллара вище 15 грн за доллар ПРОСТО НЕ ВИТРИМАЄ..."