It is interesting to see the hryvnia weakening again this morning, pushing up through 27.5/$1 and I would not be surprised to see further momentum towards 30.
The foreign exchange policy of the National Bank of Ukraine has certainly been a rod used by the Verkhovna Rada and the NBU board’s detractors to beat the management team at the NBU, and helping I think to leverage the ouster of NBU board governor, Yakiv Smolii.
I actually think this is all smoke and mirrors, as I don’t think that foreign-exchange policy is really at the heart of the problem or perhaps even risks a break with the International Monetary Fund. It’s kind of subjective and debatable whether the correct level is 27 or 30 or indeed 33. Note here comments over the weekend by Robin Brooks at the Institute of International Finance that the real depreciation benefit from the 2014/15 devaluations has gone and arguably the hryvnia looks expensive compared to the Russian ruble and Turkish lira. The IMF staff report from the standby agreement also had a 30+ average exchange rate in its macroeconomic forecast for 2020.
If the newly convened NBU board decide that they can live with the hryvnia at 30 plus I don’t think the IMF will have major issues therein – note the National Bank of Poland’s Monetary Policy Council is also arguing in favor of a weaker currency and Poland has a similar balance of payments and inflation trends these days. So in an uncertain COVID-19 growth-challenged world, having a more competitive exchange rate may be no bad thing.
But I think the big red line in all this for the IMF is not foreign-exchange policy but banking reform. If the foreign-exchange policy is used as the rod or broom to sweep out reformers from the NBU board, which then exposes the soft underbelly of banking reform I think the IMF would have a problem. And I do think that opponents of reform in Ukraine are trying to use the exchange rate to cleanse the NBU board of reformers to change the course of banking reform. The exchange rate is just being used as a cover for this agenda.
Reflecting on the above, then perhaps the clever thing for the current NBU board to do now is give the new governor Kyrylo Shevchenko, and indeed President Volodymyr Zelensky, the win they want, and allow the hryvnia to weaken, maybe to 30. They will then show their loyalty or deference to Shevchenko and Zelensky, hopefully enough to win them a stay in office – still not sure if Oleg Churiy will get a second term which would greatly assure the market and the IMF over the independence of the NBU. But it feels like the knives are out for Kateryna Rozhkova, Churiy, et al, and again from the old guard banking lobby who are eager to seek revenge for the 2015-17 banking sector clear up – either getting their banks back or compensation but certainly not being held on the IMF hook for the $15 billion in losses suffered by the state in that cleanup process.
For me, banking reform remains the key litmus test for the Zelensky administration, not really exchange rate policy, as banking reform goes to the heart of key long term issues for Ukraine such fighting corruption, rule of law and improving the business environment. So if some compromise can be reached over exchange rate policy so as to sustain and defend the banking reform agenda, this would be a positive.
