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Where there is no law, but every man does what is right in his own eyes, there is the least of real liberty
Henry M. Robert

Repaying dollar debts with currency bought at auctions...

The Finance Ministry proposes that the National Bank sell forex at special auctions to Ukrainians for debt repayment
29 April, 2014 - 11:17
Photo by Ruslan KANIUKA, The Day

According to the ministry’s experts, it will help reduce the negative impact of devaluation on the public. “In addition, the Finance Ministry will keep insisting on the need to stop forex lending, as currency risk is actually passed on to people who do not have these risk management tools,” the ministry said in a statement posted on its website in response to media criticism.

It is common knowledge that Ukraine used the mechanism of forex auctions to support individual borrowers before. It was first used in early 2009 to mitigate the impact of the hryvnia collapse. The exchange rate fell then by 37.2 percent in a year. The hryvnia has now fallen by 28.9 percent, from 8.285 hryvnias to 11.65 hryvnias per dollar.

The mechanism of 2009 had banks transferring to the National Bank of Ukraine (NBU) their lists of borrowers, indicating information about individuals, credit agreements, loan amounts, maturity dates and monthly payment amounts, covering both interest and principal repayments. In the case of purchase of foreign currency by an authorized bank, the purchased amount of currency was deposited on the borrower’s sub-account according to the register and sent on to effect the loan repayment. The minimum value of application for forex auction was 1,000,000 dollars. It was formed on the grounds of necessity to enable borrowers to make their monthly loan payments. “Thanks to these auctions, we were able to drastically reduce the demand for foreign currency in just a few weeks by eliminating the need to purchase it in advance before the actual scheduled payment. More to it, there was a gradual strengthening of the hryvnia on cash and interbank forex market segments: it strengthened against dollar by 10 and 6 percent, respectively, in the second half of May, 2009” the NBU reported on its auction activity later.

The Day asked experts about how effective and appropriate mechanism for selling forex to Ukrainians for debt repayment at special auctions can be in today’s environment.

Oleksandr SUHONIAKO, president of the Association of Ukrainian Banks:

 “During the crisis of 2009, a similar proposal coming from the NBU was implemented by selling forex to the public at an official exchange rate that was lower than the market one. With the official exchange rate now set equal to the market one, these interventions are meaningless.

“If the NBU reduces the official rate, it would mean that it will operate at a loss. They can afford it, because the NBU received nine billion hryvnias in revenue over the first two months of 2014. In this case, half of these funds can be thrown at lowering the exchange rate on the cash market. It would be better, though, to do it targeting those people who have taken forex loans when the dollar was still around eight hryvnias. Now they are in a very difficult position. The NBU can allocate a billion to cover their needs. However, the 2009 mechanism is overall no good for 2014.

“We must show the prospects – how we will build factories, provide employment and credit (at rates far lower than 40 or 20 percent), decrease imports (given the fact that we are currently waging a trade war), and build up domestic production. Without such prospects, it would be very difficult to talk about anything else. Manipulations will not help.”

Viktor LYSYTSKY, former head of the NBU chairman’s advisory group, economic expert:

“I am actually surprised that these proposals come from the Ministry of Finance at all. Exchange rate issues are not its special responsibility.

“It is not clear what mechanism would be used this time. If forex will be sold to people who have taken foreign currency loans, they are too many. Every one of them has their own justification to get the money. If a person has taken a loan when the exchange rate was 8 hryvnias per dollar, and now it is 11, I think that these clients must address these issues directly with the bank: there may be some relief, restructuring and so on.

“We need to look into the activities of the previous governments. Because, in fact, this devaluation has been caused by all the governments that have worked since 2005. It was then that a stable trade deficit in goods and services formed. Year after a year, we bought more goods and services from abroad than sold there. Experts said before that we needed to do a moderate devaluation, and the IMF also insisted on the need to move to a free-floating exchange rate.”

By Maria YUZYCH, The Day