Sensations of Ukrainian burger economics

Ukrainian hryvnia came in the lead of the world’s most undervalued national currency ranking. According to the Big Mac Index, published by The Economist in July 2016, our currency is undervalued by 68.8 percent against the US dollar and by 62.6 percent against the euro.

The estimated exchange value of world currency against the hryvnia, according to the study, should be 7.74 UAH/USD (the current rate is 24.8) and 10.21 UAH/EUR (at the current rate of 27.3).

According to the study, three more countries, except Ukraine, have their national currencies undervalued by 50 percent or more: Malaysia, Russia, and South Africa. The most “overvalued” currencies are in Switzerland, Norway, and Sweden. The Swiss franc in particular, according to the study, should cost by almost 30 percent less relative to the dollar.

Sketch by Viktor BOGORAD, special to The Day

In general, the Big Mac Index is a very interesting indicator. It has been conceived by The Economist in 1986. It was a kind of a joke on behalf of the magazine – to measure monetary policy around the world by a sandwich. But now The Economist has continued to publish this study for 20 consecutive years. And many economists worldwide are making quite serious reports and evaluations based on this rating. Some researchers have gone even further, proposing the Big Mac as a universal measure for gross domestic product and GDP share per capita. Thus, a new section of tongue-in-cheek economics was born – the burger economics.

Financial analyst Eric Naiman said in an interview to The Day, that despite a playful name, the Big Mac Index is a fairly accurate indicator. Although it is assumed that a country with the most undervalued currency according to this ranking should be export-oriented, the expert believes this statement to be not applicable for the current situation in Ukraine. According to Naiman, the reason for the record downfall of hryvnia is “total corruption and kleptocracy.” And everyone is to lose, with common citizens suffering the bulk of it.

Actually, Yurii Prozorov, chairman of the Center for Market Economy Development CMD-Ukraine, offers the following interpretation of this year’s Big Mac Index: it is the first time in history of the study when McDonald’s Corporation has recognized Ukrainian consumers to be the poorest in all the countries that have the network of their fast-food restaurants. And there are 44 countries in the world with the McDonald’s chain. Among them are not only rich countries such as the UK, UAE, Switzerland, the US, and Singapore, but also much poorer ones – Pakistan, Peru, Philippines, etc.

“The Big Mac Index is an indicator of purchasing power parity in the country. In every country, McDonald’s Corporation sets their prices according to the buying capabilities of potential consumers. So, a cup of coffee in Switzerland costs as much as every menu put together in Ukraine,” explains the expert. Prozorov is convinced that McDonald’s had to go for such low prices for their burgers in Ukraine, because otherwise they would not have been competitive. “Should Big Mac in hryvnia cost as much as, for example, in the US, nobody will buy them. The company, in fact, is forced to increase the localization of menu ingredients: beef, rolls, vegetables, and more are produced in Ukraine.”

Prozorov is convinced that the 70 percent undervaluation of hryvnia is the result of extremely faulty monetary policy on behalf of the authorities. Because of unprofessional and sometimes outright unlawful actions by NBU, hryvnia went in on a steep decline as the citizens’ welfare plummeted to an extreme low. “Even earlier, the Big Mac Index had recognized hryvnia to be undervalued: even when the dollar was worth 8 hryvnias, even when it was worth 5. But it is the first time The Economist has recognized our currency to be devalued to such a great extent,” said the expert.

According to Prozorov, the authorities should have stopped the decline of the national currency on the mark of 18 hryvnias per dollar. “Then the banking system would not have collapsed as much, we would not have the inflation and poverty we have seen last year,” concludes the expert.

The Day’s FACT FILE

The Big Mac Index has been calculated by The Economist magazine since 1986. The index is based on the theory of purchasing power parity and uses the cost of hamburger in McDonald’s fast food restaurants across the world as the reference. The basis is the price of Big Mac in the US, and if any country has the price cheaper, the currency of that country is considered to be undervalued – thus, the dollar in this country should have a lower exchange rate. Undervalued currencies are most characteristic for export-oriented countries, which include Ukraine.