You're reading: ​As hryvnia keeps falling, people wonder where currency will settle

With the hryvnia weaker than Hr 26 to the dollar at the close of trade on Feb. 10, Ukrainians are asking themselves "How low will it go?"

The head of the National Bank of Ukraine, Valeria Gontareva, refuses to comment. She told parliament on Feb. 5 that the bank can’t be responsible for controlling devaluation. The priority is to fight inflation.

Speaking to lawmakers, Gontareva laid the blame for the hryvnia’s weakness on recent political instability, rather than seasonal factors. The central bank sold $50 million on the interbank exchange market on Feb. 5 in an attempt to smooth the devaluation.

“The National Bank is responsible for inflation, price stability and the financial stability of the state. Our targeted inflation rate is 12 percent. It order to achieve this we can’t afford to have the devaluation that we had before. But I’m not going to predict the exchange rate, because the National Bank answers (only) for the rate of inflation,” she said.

The exchange rate does affect the rate of inflation and there are some tools that can help control it, but their effectiveness is limited, according to Oleksandr Paraschiy, the head of investment firm Concorde Capital. For instance, the National Bank can monitor the circulation of the hryvnia and reduce the number of hryvnias on the market, which can theoretically lower inflation.

The New Year has brought further pressures.

Lithuania-born economy minister, Aivaras Abromavicius, resigned on Feb. 3, accusing Ihor Kononenko, a lawmaker and close associate of President Petro Poroshenko, of blocking reforms. This was later followed by text messages which also implicated Prime Minister Arseniy Yatsenyuk in Kononenko’s activities.

Such accusations from a minister sent alarm signals to Ukraine’s Western partners and culinated in a blunt warning from the head of the International Monetary Fund, Christine Lagarde on Feb. 10.

“Without a substantial new effort to invigorate governance reforms and fight corruption, it is hard to see how the IMF-supported program can continue and be successful,” Lagarde said.

The executive director at the Center for Economic Strategy, Hlib Vyshlinsky, told the Kyiv Post: “There are lots of factors workings against the hryvnia. The most important of which are the political crisis and economic policies that effect the economy, followed by world commodity prices and seasonal factors – Ukraine exports less grain and steel in the autumn and winter.”

Vyshlinsky predicts the currency will further weaken if the IMF program is not fulfilled, but otherwise it should stabilize in the spring.

As Finance Minister Natalie Jaresko told the parliamentary committee on economic policy: “No one institution in this country is responsible for the hryvnia exchange rate… The hryvnia exchange rate is formed on the basis of the monetary base of the country.”

In the mid-term, the exchange rate is determined by supply and demand for dollars, says Paraschiy.

Therefore, if the investment climate is good and investors bring more dollars into Ukraine to exchange for hryvnias, the value of Ukrainian currency will increase. The same goes for export volumes – the more Ukraine exports, the more foreign currency will flow into the country, which will be exchanged for hryvnias.

Another factor that Paraschiy stressed is the low global prices of steel and iron ore, which account for 30 percent of Ukraine’s exports. Profits are down, meaning fewer dollars are coming in. However, the devaluation will at least help the major commodity exporters keep their production costs down and businesses afloat, says Paraschiy.

“For a year and a half Gontareva blamed speculators, but in the last few days she has changed her tune. She is now saying that there are fundamental reasons for the hryvnia’s devaluation,” Paraschiy told the Kyiv Post. Earlier, commodity prices were higher and there was still hope that the war would stop and investment would increase, he said.

Paraschiy said he expects the hryvnia to continue to devalue, but slowly, as he believes the earliest Ukraine can expect the investment climate to improve is 2017.

“It’s important that it’s slow. No one likes shocks…There will be a deficit this year. We will spend more on goods in dollars than we generate.”

The currency saw its worst period of devaluation this time last year. Starting on Jan. 23 through February 2015 it devalued from Hr 15.81 to the dollar and bottomed out at Hr 33 to the dollar, after months of gradual depreciation which began in 2014. It then stabilized for a period of eight months from March, 2015, fluctuating between Hr 21 and Hr 23 to the dollar.

Kyiv Post staff writer Isobel Koshiw can be reached at [email protected]