Stability of the hryvnia remains a most dubious achievement

Weary of four months of smooth sailing and society’s indifference toward its efforts, the hryvnia now has decided to draw public attention. National Bank of Ukraine (NBU) Governor Volodymyr Stelmakh suddenly made a rather strange statement, in which he did not rule out that January through March Ukraine could see quite a high inflation rate. Putting this down to seasonal factors, he pointed out that “the cyclic seasonal nature of inflation is present” at the beginning of any year.

What strikes one most is not the sensational statement itself, even half of which would be enough in other countries to provoke a sharp dip of that nation’s currency exchange rate, but there was virtually stoic calm on the Ukrainian financial market, which showed no response to the statement of its most leading and influential expert. Despite the NBU head’s comments and the much- publicized dismissal of Vice Premier Yuliya Tymoshenko, i.e., the emergent element of political instability, the interbank hryvnia-to-dollar rate remains unchanged.

Bankers have noticed no fundamental changes on the currency market, with the only question being at what rate the National Bank will buy hard currency on any given day.

Chairman of the Azhio Bank Board of Governors and Chairman of the Board of the Association of Ukrainian Banks Stanislav ARZHEVITIN told The Day’s Petro IZHYK in this connection, “The currency market never saw the liberalization expected last year, and it is difficult to think up something still tougher than we have today.” Mr. Arzhevitin pointed out the NBU acted a bit uncertain (which might have caused him to make this statement —Author) because international financial organizations are beginning to accuse it of “artificially maintaining a stable national currency, i.e., of applying administrative, not market, methods.”

Indeed, on the next day after Mr. Stelmakh’s inflationary forecasts, the Cabinet of Ministers’ official website revealed information that the IMF board of executive directors, after consultations with the government of Ukraine, called on the NBU to plan no specific hryvnia exchange rate for 2001 and to be prepared for greater flexibility of the currency rate. The IMF notes that in 2000 the nominal currency rate in Ukraine largely remained stable, but, due to the yearly inflation rate exceeding planned targets (25.8% instead of the expected 25%), this country has lost, to some extent, its main 1999 achievements in competitiveness. The IMF is also worried that Ukraine’s positive foreign trade balance could be reduced (an artificially overrated rate for the hryvnia reduces the competitiveness of our exports - Ed.), which reflects the expected reduction of export growth rates and the increased import of energy resources.

Meanwhile, any citizen of Ukraine with even the slightest possible knowledge of financial matters will notice one more irregularity. The hryvnia-to-dollar interbank rate (the basis for setting the NBU official rate), varying a little around UAH 5.43 to the dollar, differs fundamentally from the spot rate which has now reached UAH 5.67 to the greenback. What does this mean?

As Deputy Governor of the Moscow’s National Reserve Bank Vyacheslav YUTKIN explained to The Day, “Previous years saw a constant tendency of abrupt rate fluctuations at the end and the beginning of a year, so the spot market operators, guided by this, hastened to raise the rate, although I think, with due account of economic results, it is somewhat overrated. But it is an open secret that the official rate is somewhat underrated.

“So the disproportion will remain for a month at most, and then I forecast that in middle or late February, the spot and clearing rates will begin to gradually level off, bringing the hryvnia down.

“The spot hryvnia will begin to catch up with the clearing one. No doubt, today’s behavior of the spot hryvnia also results from a certain mistrust in the official rate.

“I think the spot rate will inevitably fall even before February. Market operators have long thought the dollar should be bought for at least six hryvnias, which is why they preferred to deal in hard currency. This means the Ukrainian currency spot market does not believe in a strengthened hryvnia. And we must give credit to the ability of the National Bank and its currency-regulation department to maintain the rate on the current level under these conditions, even though this raises various comments... In particular, the IMF thinks that a tough monetary policy does not entail positive consequences.”

But what will the hryvnia-dollar sailing competition bring to ordinary Ukrainian citizens, who might never have held an American greenback in hand? First of all there will be the distorted purchasing power of the hryvnia. The Economist has drawn up a jocular index of correct currencies, based on the parity of their purchasing power against the Big Mac.

In theory, “correct” currency rates should level off the prices of these burgers all over the world. However, these prices differ from place to place. Thus a Ukrainian, who has eaten a Big Mac at the Kyiv railway station for $1.11, should know that this happened, according to the journal, due to Ukraine’s currency, the hryvnia, being overvalued by 43%. On the other hand, chief of the NBU governor’s advisory group, Anatoly DROBYAZKO, does not share this opinion. He told The Daythat the Big Mac’s cost “includes all tax-related expenses, including those on import duties, let alone our wages level which differs fundamentally from, say, the European indices.”