As almost a decade of strong economic growth comes to a juddering halt, the extent to which Ukrainians will have to tighten their belts is becoming increasingly clear.

 The hryvnia is sliding as the National Bank of Ukraine refrains from its previous policy of supporting the currency by interventions. While a weak hryvnia will help to balance the country’s wide trade deficit, it is putting pressure on Ukrainians with dollar-denominated loans and a taste for imported goods. The questions on many people’s lips are: “Where is the hryvnia going to end up and when is it going to stop sliding?”

“From next year, people will need a new psychological orientation about the value of currency,” said Oleksandr Savchenko, deputy chairman of the NBU, at a conference organized by the Fitch Ratings agency on Nov. 27.

The hryvnia-to-U.S.-dollar exchange rate jumped from 5.79 on Nov. 18 to 7.24 on Dec. 3 as the NBU curtailed its previous policy of supporting the national currency by selling dollars or euros, in line with conditions set by the International Monetary Fund. The IMF emergency standby credit of $16.4 billion granted last month comes in tranches, which will be made available as Ukraine fulfills a series of strict conditions.

“Without a flexible exchange rate, we can’t overcome the crisis. No amount of currency reserves would be sufficient,” Savchenko said. “At the moment it is a free-floating exchange rate with the possibility of correction by the NBU.”

Supporting the hryvnia saw NBU reserves plummet from $38 billion to $32 billion in October. “The market is looking for the adequate exchange rate. We understand that [this process] is shocking,” Savchenko added. But continuing to spend reserves would simply delay finding the hryvnia’s true value, he added.

The hryvnia has come under pressure in recent months as export revenues have dried up, while domestic demand for dollars has shot up. Ukrainian companies are gearing up to repay foreign loans and citizens have rushed to convert savings out of the national currency. NBU figures show that Ukrainians bought $2 billion more in foreign currency in November than they sold.

On Nov. 30, President Victor Yushchenko blamed the hryvnia’s depreciation on “a large-scale speculative attack.” He added, there are no economic reasons for the current exchange rate to be higher than 6 hryvnia to the U.S. dollar. He criticized the NBU’s refinancing of banks, saying that funds were immediately used by banks to buy currency. The respected weekly Zerkalo Nedeli published accusations on Nov. 29 that the hryvnia was held at below 6 to the dollar earlier this month “so that the necessary people could … buy foreign currency at a profitable rate. This was then sent offshore under fictitious import contracts, in order to wait for better times.”

The hryvnia’s devaluation should provide a boost to the economy by supporting exporters, priming the country’s businesses for the expected resurgence in demand in the second half of 2009. “Any recovery depends on the global environment, the demand for Ukrainian products. A strong devaluation is the only way [the authorities can] affect exports,” said Gerhard Boesch, deputy board chairman at Raiffeisen Bank Aval.

A weak hryvnia will also lead to a decrease in imports, taming Ukraine’s current account deficit, which in October increased to 6.5 percent of GDP, up from 5.8 percent one month earlier. The deficit has widened the back of rising consumer demand, and a most recent sharp fall in exports.

But while these macroeconomic benefits seem a long way off, devaluation is putting strain on Ukrainians’ finances by pushing up the price of dollar loan repayments and imported goods, as well as threatening the already-struggling banking sector.

“There are two competing forces. There is a need for a real exchange rate, but also a need for the banking system to survive,” said Balazs Horvath, the IMF’s representative in Ukraine. “Adjustment has to be balanced against risk.”

“There is a level … beyond which the system may become insolvent, because of the large share of foreign currency loans in portfolios,” said the Association of Ukrainian Banks after a meeting of banking leaders. The NBU puts the proportion of dollar-denominated loans at 50 percent.

On the same day, Fitch Ratings downgraded the outlook of 11 Ukrainian banks to negative on the back of concerns about the implications of the falling hryvnia for the quality of assets. Fitch also cited concerns that the falling hryvnia will eat into already-low confidence in the banking sector and could lead to further deposit withdrawals and dollarization.

Top NBU officials have repeatedly called on people not to panic, and hit out at the media for fuelling concerns. “It’s not satisfactory to live by the rules of panic,” Savchenko said.

These problems have been compounded by a chronic lack of dollars available to exchange, as the NBU limited the selling price of dollars to no more than 1.5 percent above the official rate, making it not profitable for banks to sell dollars. Dollars are now becoming increasingly available, local media reported, after the NBU cancelled the restrictions, but with commission charged at up to 15 percent.

Savchenko said he believed the hryvnia had almost reached its correct level, but analysts have predicted more pressure on the currency into next year, as the price for natural gas imports swells and tens of billions of dollars in corporate debt owed to foreign lenders comes due. Other analysts suggest a stabilization in the exchange rate as the population starts to convert back to hryvnia to spend on basic needs.

Oleksandr Klymchuk, an analyst at Concorde Capital, said that the exchange rate also depends on foreign currency inflows through foreign direct investment and privatization. “If these are strong, the hryvnia can strengthen and stay at 7.5 to the dollar. If not, we’ll be looking at 9 or 10,” he added.

In the short term, the NBU appears powerless to intervene in the hryvnia’s slide as one of the IMF conditions stipulates that only $2-$4 billion can be spent until the end of this year to support the currency, ING Bank wrote on Dec. 1. “The reserves requirement means that the possibility for intervention doesn’t exist,” said Anastasia Golovach, an analyst with Renaissance Capital. “The best the NBU can do is smooth the hryvnia’s fall.”