The transition to a fully floating hryvnia exchange rate, which is a critical demand of the IMF, will only be possible after the Rada race, runs an article on the No 8 issue of Kyiv Weekly.
We have long argued that Ukraine as an exporter of raw materials with an economy that is relatively open to capital inflow needs a more flexible exchange rate system. In the current conditions with the increasing uncertainty and pressure on external funding, Ukraine’s monetary and currency policy must be more flexible in order to quickly react to shocks and at the same time ensure protection of its currency reserves,” reads a letter of IMF Resident Representative in Ukraine Max Alier to former First Premier Andriy Klyuyev.
As things stand, however, it looks as though this demand of the IMF and the issue of tariff formation for housing utilities services will be ignored. “Transition to a mechanism of a fully floating exchange rate that implies potentially high mobility is highly unlikely, at least, until the parliamentary elections,” believes Oleksandr Pecherytsyn, Director of the Financial Market Analysis Department at ING Bank Ukraine. In conditions of current instability on world financial markets and potential currency hunger in Ukraine, such a measure could lead to a considerable devaluation of the hryvnia.
This will inevitably cause problems in the banking sector, which the NBU will not likely be too pleased with. Weakening of the national currency could result in an increase in bad loans in the banking system. “In addition, due to the existing regulations banks hold a short position in hryvnia to the tune of US $8 bn. Therefore, every percentage point of the hryvnia devaluation will be an immediate loss of US $80 mn for the banks. A 60% decrease in the hryvnia value as it was in 2008 will “evaporate” 25% of the total volume of regulatory capital in the banking system,” say analysts at Erste Bank.