National Bank Ignor es Steel Mak ers
On the eve of important political events, the eternal argument between opponents and supporters of a stronger hryvnia typically gains momentum. Measures aimed at protecting domestic markets and expanding sales of Ukrainian goods on foreign markets were addressed at a Tuesday session of the governmental Council of Exporters. As expected, the Ministry for the Economy and Integration with Europe (supposedly, to avert a possible production slump, but actually to give a free ride to steel producers) proposed that the National Bank cash in on favorable economic situation and devalue the hryvnia.
True, as maintained by Economy Minister Oleksandr Shlapak, “We are not talking about radical devaluation, rather about absolutely moderate, balanced, and sensible steps.” He pointed out that the competitive value of Ukrainian goods on foreign markets is critical, adding that arguments for devaluation surfaced only after the world economy entered a recession, competition became more intense, and prices dropped. The ministry opts for a gradual hryvnia devaluation, in line with the UAH 5.60:$1 exchange rate envisaged by the state 2002 budget. For its part, Mr. Shlapak continued, the government will do everything in its power to make the devaluation gradual and keep it within projected indicators, not to allow the currency, which has shown six months of stability, to plummet within a couple of weeks. He expresses hope that the government and the National Bank will reach a compromise on pursuing a predictable currency policy that will enable entrepreneurs and housewives to be sure of hryvnia’s exchange rate tomorrow and the day after.
The National Bank of Ukraine is not going to take this lying down as NBU takes hryvnia’s stability more closely to heart than the worries of steel producers who are pressed by world price fluctuations. In his comments on the Economy Ministry’s proposals, NBU First Deputy Governor Anatoly Shapovalov said that NBU will continue the policy it has been implementing in 2000-2001 of maintaining hryvnia stability and preventing its excessive strengthening. According to him, the Ukrainian experience indicates that radical devaluation is followed by a drop in exports, while a stable hryvnia has caused a rise in exports in recent years. The assumption that the time is ripe for hryvnia devaluation cannot be shared, Head of the NBU governor’s group of advisors Valery Lytvytsky declared, believing that in the light of the rebounding world economy the prospects for Ukrainian exporters are becoming better.
Meanwhile, the international Fitch Ratings Agency has raised Ukraine’s rating for long-term obligations in local and foreign currencies from B- to B due to “the significant rebound of Ukraine’s economy in the wake of the 1998-2000 financial slump when the country was faced with default.” The forecast for Ukraine is stable, says the Fitch report. However, Interfax- Ukrayina quotes Fitch as declaring that financially Ukraine continues to be weak, with its economy vulnerable to considerable risks. Fitch says Ukraine is a poor country, with its per capita GDP at a mere $800. Simultaneously, Ukraine is faced with serious structural problems due to inadequate protection of property rights, widespread tax evasion, tax arrears, and barefoot enterprises with hitherto unstructured debts, as well as rampant corruption, low volume of direct foreign investment, struggling energy sector, and dependence on steel exports. Fitch further warns that Ukraine’s foreign financial position remains grave as the country could see its positive trade balance drop to 1.2% of GDP in 2002 (3.4% in 2001). Fitch experts predict that the outflow of capital from Ukraine will continue to exceed direct foreign investment.
In general, it looks that all this wrangling, so far ignored by the country’s top heavyweights, will favor the have-nots. There may soon be some feedback from the president. A Presidential Administration representative told The Day that Pres. Kuchma’s advisor cum NBU Board Chairman Anatoly Halchynsky is working on some fundamental document at his dacha, which will be made public after the general elections. Meanwhile, the far from poor politicians pulling the strings of participants in this argument are clearly set to win political dividends and, quite naturally, our votes. Only some of them are after the votes of miners, and others seek those of farmers and housewives. Hooked too much on its hryvnia stabilization policy, the NBU has recently found itself increasingly under fire from exporters. But grassroots voters are worried by prices, not the hryvnia exchange rate. When the hryvnia declines in value and prices go up, it calls forth their concern and questions.
COMMENTARY
Oleksandr RIABCHENKO, People’s Deputy of Ukraine:
The conflict between the desires to maintain the hryvnia exchange rate and export potential unchanged is only too natural. But these are contradictory notions. On the one hand, exporters want the hryvnia’s exchange rate to keep in line with inflation, or face a drop in profitability and run into losses. On the other hand, a stable hryvnia is the NBU credo. What is to be done? My personal opinion is that the currency policy should become more liberal. In this case the hryvnia rate will be dictated by the market.
