If bound to domestic market, the hryvnia faces no threat
One of Ukraine’s nascent political parties was out on March 12 to score some campaign points picketing the government building, claiming “worsening economic situation in the country and a threat of currency inflation.” The organizers even promised inquisitive onlookers a symbolic display of the hryvnia’s burial. This year it is the second attempt on the Ukrainian national currency, albeit almost unnoticed by the local population.
The first attempt was made by former Prime Minister Viktor Yushchenko, once an avid proponent of the stable hryvnia which allegedly represented the moral basis for protecting little guy in Ukraine. With the kickoff of the election campaign, however, when economic and political interests of the election blocs clashed, Viktor Yushchenko did not miss his chance to thrash the Kinakh government, forgetting about his love for the little guy and former pledges of longtime hryvnia stability when he was governor of the National Bank. Quite unexpectedly, the Our Ukraine press service quoted Mr. Yushchenko as predicting that in the spring of 2002 the hryvnia exchange rate will fall.
Luckily, the forecast was actually flouted not only by Ukrainians, but also by the banking system. After a slight deterioration, the hryvnia soon recovered and remains firm despite all the spring sun, proving that Mr. Yushchenko’s forecast was merely a piece of political bluff.
Involved in its exchange rate game, the National Bank cannot disregard the needs and moves of its partners both in Ukraine and abroad. The bank’s policy of slow hryvnia devaluation declared early 2002 continues without any major problems. “So far, we are not backtracking on the policy of slow and balanced hryvnia devaluation,” NBU Department for Currency Regulation Director Serhiy Yaremenko told the Ukrayinski Novyny Agency. Undeniably, Ukraine’s foreign trade indicators favor such a policy. Moreover, one can imagine the amount of pressure put on the National Bank and the Kinakh government by exporters, primarily steel companies which found themselves in troubled waters due to deteriorating world market conditions. It looks, however, that the government is only pretending to succumb to such pressure. Recall that the hryvnia has dropped by only 0.45% since the beginning of 2002. Bankers believe that, even though there will be a surplus of hard currency earned by exporters on the market, the NBU will continue to keep the hryvnia at its month-old rate of UAH 5.32 to $1. The stable hryvnia might see its end soon, on March 31 (the date of parliamentary elections – Ed.) when the political motives for keeping the exchange rate in check are gone. However, another option is possible. Spurred by President Kuchma, the Kinakh government could take advantage of the hryvnia’s high rate and slowly growing gold and hard currency reserves to regulate the structure of Ukrainian exports, something the chief executive has repeatedly called for. Tellingly, industrial growth was reported in manufacturing at 4.8% for the first two months. The champion sectors include engineering (11.4% in January-February), woodworking (35.5%), and food (12.4%). By contrast, production in the steel sector was 3.3% lower than last year. The risk is apparently in the fact that, earlier, any growth in engineering had been a reaction to the growing demand in the steel sector. Now the government is faced with the task of developing domestic markets by raising the purchasing power of Ukrainians.
Yet, the government’s steps in this direction (the proposed 10% increase in pensions as of April 1), as well as its anti-inflationary measures (since the start of 2002 Ukraine has seen deflation) might well prove to be short-lived as some experts forecast hikes of consumer prices in the wake of the parliamentary elections. According to estimates by the Center for Social and Economic Research CASE-Ukrayina, during the election campaign the government will be tempted to resort to such popular but unsound measures like using administrative pressure to secure low prices on basic foods. (Notably, bakeries, clear favorites of local governments for their political aspirations, have already demanded 50% VAT tax breaks, something the obsolete bread plants desperately need to be able to modernize). Price regulation by the government could well build up additional inflation potential, resulting in price increases, as the case was in the wake of 1999 presidential elections, the center’s experts believe, forecasting a 6.4% rise of consumer prices and a 5.8% rise of wholesale prices in 2002 . This forecast, however, does not include the likely increases of electricity rates as the official policy on this issue is still unclear, the experts say.
