You're reading: Central bank meets key IMF demand, starts floating hryvnia exchange rate

The National Bank of Ukraine on Feb. 7 introduced a new exchange rate for the hryvnia at 8.708 to the dollar in what appears to be an attempt to meet the lending requirements of the International Monetary Fund. 

The exchange rate may be reviewed on a daily basis
depending on market conditions, Olena Shcherbakova, director of the monetary
and credit policy department of the central bank, told UNIAN news agency.

“It (the exchange
rate) should change every day…If it will be 8.6 to the dollar, then we’ll set
it at 8.6,” said Shcherbakova.

The measure sharply reversed the central bank’s much
criticized tight monetary policy where the previous exchange rate was 7.993 to
the dollar. The hryvnia was pegged to that rate since July 9, 2012, and the
central bank would only allow it to trade within a narrow corridor, demonstrating
its belief that a high currency price is a key indicator of the economy’s
health.

However, the new hryvnia exchange rate does not mean
that bank regulators have become more liberal in their economic views or sincerely
want to let market forces dictate the currency’s value. The country’s fragile financial
system is seriously endangered by the risk of collapse as Russia suspended a $15
billion bailout package, $3 billion of which was invested in Ukrainian
government’s securities.

The alternative, an IMF bailout, requires a flexible
hryvnia exchange rate. Perhaps foreseeing an upcoming default, the central bank
is demonstrating its willingness to execute at least one of the IMF’s policy
recommendations.

“Starting today, we are
introducing a flexible hryvnia exchange rate. There will be no strict corridor
anymore. The (Official) rate will fully respond to the interbank rate,” said
NBU’s Chairman Igor Sorkin. He added though, that the regulator will keep using
currency interventions to keep the rate stabile.

Analysts don’t believe the central bank is actually
loosening monetary police, however. Oleksandr Parashchiy, head of research at Concorde
Capital, said the hryvnia rate’s flexibility seems unlikely, it will stay
fixed. The new official rate is just an attempt to calm the markets down and
show them that the regulator has a sober vision of the financial situation in
the country.

Meanwhile, the hryvnia kept strengthening on the
interbank currency market. On Feb. 6 it went from 9.05 to the dollar to 8.8.
The next day the hryvnia traded at 8.54 to the dollar. It was preceded by Sorkin’s
meeting with top commercial bank officials where he stated that were no
objective reasons for the hryvnia devaluation and demanded that the panicking stop.

There were other central bank innovations. It didn’t release
gold and currency reserve figures on Feb. 6 as the markets expected. However,
Standard Bank said the central bank’s reserves shrunk to $17.7 billion in
January. Regulator’s official figures appeared on Feb. 7: volume of international reserves totaled $17.8 billion, declining over the month by 12.8% or $2.6 billion.

Instead, the NBU introduced a number of controls on interbank
currency trading and measures to maintain liquidity in the banking system by
providing credits within extraordinary capital tenders. Nonetheless, the
regulator has not explained precisely what these limitations would be.
Regarding extraordinary liquidity support, banks experiencing massive deposits
outflow will have an opportunity to borrow money from the NBU at 19.5 percent,
which is seen by bankers as very high and, therefore, unprofitable. The last
time the NBU was used such a high interest rate was in 2009, during the
financial crisis. That’s when the regulator also introduced currency trade
limitations. That is not all. In 2008-2009, NBU prohibited early deposit
withdrawals. Rumors have circulated for months that the NBU would reinstate the
prohibition, but this hasn’t happened.

Kyiv Post
associate business editor Ivan Verstyuk can be reached at [email protected]. Staff writer
Nataliya Trach contributed to this story.