Price of the Exchange Rate
The precipitous decline of the almighty dollar on international markets and a stronger euro call into question the NBU policy of supporting the dollar. As we know, in Ukraine the dollar remains stable no matter what.
In responding to such criticism, one should above all stress that the Ukrainian currency is tied to the dollar. And by supporting the dollar, the NBU is maintaining the stability of the hryvnia, since it is one way or another devaluating together with the dollar against the euro. Yet because the dollar seems stronger in Ukraine, the hryvnia is not devaluating relative to the euro too rapidly (as of today, the hryvnia lost 20.4% of its face value against the euro). On the face of it, this means that Ukrainian exports to Europe are stimulated by the hryvnia-to-euro exchange rate. But, unfortunately, they are still limited by quotas and tariff barriers, and this year additional limitations are on their way in connection with EU enlargement. Thus our exporters will not be able to make full use of the devaluation of the hryvnia against the euro. On the other hand, devaluation of the nation’s currency carries the risk of European imports going up in price, including the so-called investment imports (accounting for nearly 40% of European exports to Ukraine and consisting of machinery, equipment, and vehicles; Europe also accounts for nearly 60% of all machinery and equipment imported into Ukraine), which can in turn cause both declining imports in this sector and an export of inflation. And this trend is already becoming more discernible, although the exchange rate is not yet a determinant in this process. Suffice it to say that in January-November of 2003 machinery imports to Ukraine declined by almost $100 million from the previous year. Thus, one should not overestimate the positive influence of the declining hryvnia.
Simultaneously, many of the world’s leading financial analysts believe that a weaker dollar and stronger euro could boost American exports and will in the short term buoy up the US economy and strengthen the dollar. For Ukraine this will mean revaluation of the hryvnia relative to the euro. This will make imports from Europe cheaper but will somewhat depress exports to the EU. Under such conditions Ukraine will have only one option: to step up its anti-inflation measures to reach the European inflation rate of 1.5-2%. We have the major preconditions for this, since the dynamics of the prices of non-food items is already at this level (1.5%) in Ukraine. This will promote the real devaluation of the hryvnia-to-euro exchange rate without further reducing the face value of our currency relative to the euro.
Thus, all currency and financial problems stem from the inflation rate. Thankfully, in the last months of 2003 after the price surges in November, when annual inflation peaked at 1.9%, inflation reduced to the January level (1.5%). The annual inflation rate last year was 8.2%, thus exceeding government forecasts (7.2%). The man in the street, in particular the pensioner whose income increased by a mere 4% as a result of the pension reform, feels legitimate concern over such price dynamics. But for the economy in general, whose growth exceeded the preliminary forecasts almost twofold, such an inflation rate is a quite moderate price for the upturn.
What should be done to prevent excessive inflation this year? Some believe that a major step that would become a strong signal for the economy is to preserve the NBU bank rate of 7%, the lowest since independence. It is very important not to stop abruptly the growth of the money supply in the first months of the year, which are the most dangerous in terms of inflation, especially after the NBU had to increase the money supply in December. It is also important to regulate the work of the State Treasury to prevent uncontrollable growth of loans to refinance commercial banks and effectively counter inflation. In the first quarter the hryvnia exchange rate will face a few options, but in any case we must control inflation by means of reducing money emissions and even drawing extra cash out of circulation. Will we succeed? This will depend on many factors, in particular on the preservation of the current rates of industrial output and a positive foreign trade balance, which in turn depends on the situation in the global economy.
