You're reading: Help! Aid delays threaten to sink economy, currency

With the national currency trading at 36 to the dollar during the Feb. 26 interbank session, twice the rate it was at the beginning of 2015, fears are rising that the economy is heading for a meltdown.

In some parts of the country, people started stocking up on basic foods such as oil, flour and buckwheat. By the evening of Feb. 25, the Novus supermarket near Lisova metro station announced that staples, or “social food,” will only be sold in limited quantities. The Kyiv Post heard reports from residents in Ivano-Frankivsk and Ternopil, both in western Ukarine, that some local shops started to run out of food that has a long shelf life.

With no end in sight to Russia’s war in Ukraine’s eastern Donbas, and not enough progress being made in transforming a corrupt and Soviet-like economy, Ukraine can only hope for short-term emergency help from the International Monetary Fund.

Ukrainian Finance Minister Natalie Jaresko said on Feb. 25 she expects the IMF to approve dispersal of an agreed $17.5 billion, four-year loan at its board meeting next month. But for that to happen, Ukraine’s parliament needs to do some homework and approve a number of new laws, including amendments to a budget based on a hryvnia exchange rate of Hr 21.7 to the dollar.

“Approval of this package of laws is a precondition for the board of directors of the International Monetary Fund to approve on March 11 a new credit for Ukraine under the extended fund facility,” Jaresko said.

She said the first tranche of this facility could be “expected within days” after approval, and “will become an anchor that will allow us to stabilize the economy in Ukraine, and the situation on the currency market in particular.”

As the currency deteriorates, protests outside the National Bank of Ukraine headquarters in Kyiv have become a common sight. Calls for the resignation the NBU governor Valeriya Gontareva, who took office in June when the hryvnia was selling at 11 to the dollar, have increased in frequency and intensity.

The NBU has been trying to regain control over the market by introducing more limitations on buying hard currency for business.

These temporary measures pushed the hryvnia rate down by about Hr 15 in one day, but the currency continued to tumble thereafter.

Economists are saying the collapse is not just due to the central banks’ policy mistakes, however.

“The fall of the hryvnia is a reflection of the situation in the economy that all the authorities are responsible for – the National Bank, government, president and the Verkhovna Rada,” Olena Bilan, an economist at Dragon-Capital, an investment bank, said in her recent blog.

“The reasons are not just shifts in the economy and a worsening of the situation in the east, but more likely the population’s loss of confidence in the banking system, in the statements of officials and in the government’s ability to assess risks and control the situation.”

The other major issue is the absence of credible reform.

Ukraine’s Economy Minister Aivaras Abromavicius told the Kyiv Post’s “Doing Business With China” conference on Feb. 25 that each government agency had to submit a plan of concrete reforms, as well as deadlines by which they committed to fulfill them. He said his ministry, for example, will replace the head and members of the Anti-Monopoly Committee in March.

Jaresko continues to reassure the nation and the world that the situation is tough, but manageable. “We will continue to prove ourselves step by step so that all of the ‘Ukraine fatigue’ and disbelief in our ability to reform will be chipped away day-by-day,” she said in an interview with CNBC on Feb. 25.

Her next step is approval of budget amendments. The ministry wants to increase the deficit from 3.7 to 4.1 percent of the gross domestic product, and expects the economy to shrink by 5.5 percent.

Her ministry also revised budget revenue figures, upping them by Hr 23 billion to Hr 599 billion, or roughly $20 billion at current rates.

The budget expenditures were hiked to adjust subsidies for housing bills, payments to internally displaced persons and serving the sovereign debt to reflect devaluation.

But economists are still saying the government proposals are unrealistic.

“The 5.5-percent GDP contraction forecast is too optimistic,” says Oleksandr Valchyshen, an analyst at ICU investment house in Kyiv. “The public budget for the year of 2015 should obviously be revised to reduce the deficit. So far, the Cabinet does not have a precise plan for cutting the deficits.”

Moreover, there are calls coming from some political camps to “revise” the minimum wage and pensions upwards to compensate for inflation, which the NBU said has already hit 30 percent this year. But economists are saying this is a sure way to spark the hyper-inflation that Ukraine had seen in the 1990s. Instead, many say the government should start to own the budget and actually cut both revenues and expenditures.

“The Cabinet has to revise its revenues and spending, so they wouldn’t be taken by the privately-owned business groups,” he said.

Kyiv Post associate business editor Ivan Verstyuk can be reached at [email protected].