The International Monetary Fund (IMF) supports the decision of the National Bank of Ukraine to switch from a fixed exchange rate regime to a managed flexibility regime starting October 3, and believes that this will further support the stability of the economy and the foreign exchange market, said Natan Epstein, Deputy Head of the IMF Mission to Ukraine.
“The ability to manage the exchange rate in a way that minimizes fluctuations seemed to us to be an important step forward,” he said at a briefing in Kyiv on Wednesday.
Epstein reminded that as part of the program, the NBU in late June approved a strategy supported by the Fund to normalize its monetary and exchange rate policies, which includes a relaxation of exchange controls, as well as a gradual increase in exchange rate flexibility and, ultimately, a return to the inflation targeting system.
According to the deputy head of the mission, the conditions necessary for abandoning the fixed exchange rate have been met, primarily a decline in inflation, a stronger position of international reserves, and stability in the foreign exchange market.
In general, Epstein noted the trust that the NBU managed to gain in managing monetary and foreign exchange policy during the war.
The IMF representatives also expressed satisfaction with the existing dialog between the NBU and the Ministry of Finance and its results, which do not call into question the independence of the central bank.
The average rate of new hryvnia deposits for households in December was 10.6% per annum, which is by 0.6 percentage points (p.p.) higher than in November and by 4.9 p.p. than in May, when the historical minimum was reached.
According to the information from the National Bank of Ukraine (NBU) on its website, the rate on deposits in the national currency increased by 3.5 p.p. over 2022.
At the same time, the rate on loans in hryvnia to households in December remained at the level of November – 35.1% per annum, and for the year its growth was only 1.4 percentage points.
The rate on foreign currency deposits, which reached a historical low of 0.4% per annum in April, decreased from 0.7% to 0.6% in December, which may be associated with deposits for the purchase of foreign currency, the rate on which, as a rule, is close to zero.
As for the corporate sector, the rate on new hryvnia deposits in December increased by 0.8 p.p. – to 10.4%, while on foreign currency deposits it decreased by 0.1 p.p. – to 1.4% per annum.
The average rate of UAH loans to the corporate sector in December decreased by 0.7 p.p. – to 20.1%, whereas on foreign currency loans – by 0.2 p.p., to 5.2%.
During the year, hryvnia loans for corporate sector went up by 11 p.p., while currency loans went up by 1.1 p.p.
As earlier reported, on June 3, the NBU raised its key rate from 10% to 25%, in order to improve the attractiveness of the hryvnia, reduce pressure on international reserves and combat inflation, which totaled 26.6% for the year.
The National Bank expects that banks will also increase rates on deposits, and the Ministry of Finance – on OVGZ, while the increase in interest rates on loans will not be so significant. Since October, the Ministry of Finance raised rates on bonds with maturities of five to 24 months to 14-19.5% per annum, while in the secondary market they reach 20% per annum and higher.
The transition from a fixed to a floating exchange rate with a temporary limitation of daily exchange rate fluctuations within a narrow range is proposed by UC Berkeley economics professor Yuriy Horodnichenko in an article on the analytical platform Vox Ukraine.
“Because of the nature of a fixed exchange rate, potential price distortions and imbalances accumulate over time, and the economy eventually reaches a tipping point where an exchange rate adjustment is needed again. Consequently, another exchange rate correction during a protracted war will almost certainly happen,” he explained the need to abandon this regime.
According to Gorodnichenko, among the imbalances already visible are an increase in the real exchange rate, a gap between the official and cash exchange rates, a lack of attention to the euro (since the EU is Ukraine’s main trading partner) and the political postponement of necessary exchange rate adjustments.
“Given the high sensitivity of inflation expectations to the exchange rate in Ukraine, a free floating exchange rate could entail excessive macroeconomic volatility. Indeed, the hryvnia fluctuated sharply during 2014-2015 after the first Russian invasion. We need an intermediate solution,” said the economist.
In his opinion, limiting daily fluctuations in the exchange rate (for example, 0.1% on any day) could be an acceptable intermediate solution. Among the advantages of this option Gorodnychenko mentioned operational freedom of the central bank, the absence of sharp macroeconomic adjustments and shocks, the NBU’s management of the euro-hryvnia exchange rate during Ukraine’s accession to the EU.
He added that such a regime does not mean a mandatory devaluation of the hryvnia. “The experience of the hryvnia during the COVID-19 crisis highlights how useful this is for Ukraine: after the hryvnia weakened during the first days of the crisis, it eventually strengthened as demand for Ukrainian products remained high. Due to such flexibility the Ukrainian economy felt relatively well in 2020-2021,” reminded the economist.
Gorodnychenko stressed that this policy alone cannot solve all problems, such as the broken mechanism of monetary transmission, and to achieve the desired results it will need to be supplemented by other measures, particularly restricting capital flows, the alignment of interest rates on deposit certificates of the NBU and government bonds.
The economist pointed out that there are other options for intermediate solutions, but they are, in his opinion, less preferable.
The agreement between the National Bank of Poland and the National Bank of Ukraine, under which Ukrainian refugees could exchange cash hryvnia for zlotys from the end of March, is terminated on September 10.
According to the press service of the NBU on Tuesday, over more than five months of the program, Ukrainians in Poland exchanged about UAH 680 million for zlotys, including UAH 383 million in April and UAH 30 million in August.
On Tuesday, the hryvnia exchange rate in the cash market strengthened by more than 1 UAH/$1, to a level of about 39 UAH/$1, at which it stayed on the first day after the National Bank refixed the official rate from UAH 29.25/$1 to 36, 57 UAH/$1.
According to market participants, at present in some non-bank exchangers in Kyiv it is already possible to buy a dollar a little cheaper than UAH 39/$1, while most banks still offer a selling rate of UAH 39/$1 or worse.
According to the “Minfin” resource, on Thursday morning Raiffeisen Bank declared a selling rate of UAH 38.8/$1, Universal Bank – UAH 38.9/$1, while PrivatBank – UAH 39.15/$1, while the best buying rates are now do not exceed UAH 38.4-38.5/$1.
On the cash “gray” market on Thursday morning, according to the Ministry of Finance, the dollar was quoted: buying – UAH 38.4 / $ 1, selling – UAH 39 / $ 1, having won back UAH 0.1-0.2 after falling by 1.1 -1.3 UAH the day before.
Oleg Gorokhovsky, co-founder of monobank, said that in the first day after the launch on Tuesday evening, about $9 million were sold in the application for buying non-cash currency for placement on a deposit for a period of three months and 11.273 thousand contracts were concluded with a total number of bank customers of about 6 million.
The Central Bank of Malta and the National Bank of Ukraine (NBU) have launched a program for Ukrainian refugees to exchange hryvnia for euros since August 1, the NBU press service reported.
According to the report, Ukrainians who have a certificate of protection from the International Protection Agency in Malta will be able to exchange up to UAH 10,000 for one person.
Banknotes from UAH 100 to UAH 1,000 are accepted for exchange.
As reported, the hryvnia cash exchange program has already been launched in Poland, Germany, Belgium, Sweden, Italy, the Netherlands and Switzerland.
