National currency again in for testing

The fall in the hryvnia exchange rate in the last few days brings up only one question: whether the weakening of the national currency we now see is it the beginning of its collapse or not.

To answer this question without a full set of special information is extremely difficult. And to obtain such information on the eve of a certain event is even harder. However, one can try to summarize the facts which cannot be concealed.

Thus, first, on October 11 the National Bank prohibited trading in hard currencies for restrictedly convertible and other currencies on the interbank money market. This points to the fact that the values of the foreign hryvnia and the local dollar have “deviated” from the market price, and there are certain persons wanting to make a profit on that margin. This is what the National Bank has decided to prevent. However, as the Ukrayinski Novyny News Agency reports, by evening October 19 the hryvnia quotations on the Moscow's and Baltic interbank markets reached the level of 4.71/4.77 UAH/USD compared to 4.64/4.69 UAH/USD on the local market. Recall that on the eve of the hryvnia's precipitous fall last autumn the nonresident market was the first to signal the beginning of the exchange-related problems for Ukraine.

Second, the National Bank announced it would hold on October 20 an auction to place certificates in hryvnia deposits among commercial banks. The NBU was to sell 12-day certificates with a maturity date of November 1. In the context we are examining, such an action means continuing to draw off the hryvnia from the money market, which according to the organizers' plans, should raise prices for critical commodities, expressed both in percent and in hard currency.

Third, the government and the National Bank have failed to hush up the topic of issuing the hryvnia in disproportionately large (in regard to desired prices for money and goods) quantities. At the moment the experts point to an almost 40% lag of the inflation rate behind money. In another time and place this fact might please the politicians. Indeed, the lack of inflation could be interpreted as an increase in investment. But this is not the case with us: bank lending has been declining, the number of enterprises and banks losing money has been growing, and profitable ones are not developing. In a word, GDP has been falling (be careful to not confuse it with the alleged industrial production growth — the results for this year will be negative anyway). Consequently, price increases are coming, which will only (as usual) catch up with the inflated money supply.

In sum, the current state of the national money economy shows that the National Bank still has some reserves to control the rate of exchange. Thus the next one or two weeks will not see its precipitous fall. The visible lag of the inflation rate, together with the expected seasonal rise in food prices, and not quite seasonal fuel prices, signals the hryvnia's inevitable fall below the limit of the currency corridor. In addition, it should be mentioned that the co-author of the Ukrainian monetary policy, the International Monetary Fund, will no longer insist on an inadequate (to the depressing state of the economy) rate of exchange. Hence, if the National Bank together with the government immediately after the elections fail to suck out the money issued through taxes and other payments, it will surely be swallowed up by devaluation and inflation.