National Bank of Ukraine seeks to control value of national currency (01/18/98)

National Bank of Ukraine seeks to control value of national currency

by Pavlo Politiuk
Special to The Ukrainian Weekly

KYIV - The National Bank of Ukraine and the government soon will announce a new yearly currency corridor, which should guarantee foreign investors predictable conditions in 1998.

Ukraine's authorities declared that the future one-year projected delineation of the value of the Ukrainian hryvnia against foreign currencies marks a continuation of government efforts to support the hryvnia as the base for long-awaited economic and structural reforms.

"All our measures, including the corridor for 1998, are aimed at stabilizing and strengthening the Ukrainian currency," said National Bank advisor Viktor Lysytskyi.

The bank had previously announced a trading range for only the first half of 1998 - a range that most believed the bank couldn't defend. It was widely expected that a broader range for the currency would be announced, along with pledges to defend that range until the end of the year.

The National Bank of Ukraine (NBU) was unable to support the hryvnia within its declared corridor in November 1997, when panic selling in emerging markets worldwide sparked a flight from the Ukrainian currency. In interbank trading, the hryvnia fell as low as 2.0 hrv to $1 (U.S.), well below the lower limit of the bank's corridor, at 1.90 hrv.

Before the New Year, NBU Chairman Viktor Yuschenko said the Ukrainian treasury market, after an autumn collapse, needs a stable currency for 1998 and that the full-year corridor can guarantee this stability. Mr. Yuschenko said the bank has already had some success stemming the exodus of investors, money from the treasury bill market, a key source of budget financing whose troubles influenced the hryvnia scare.

He said domestic buyers were returning, if not the foreign investors frightened off first by decreasing yields and then by fears of a hryvnia collapse.

According to Mr. Yuschenko, a single corridor throughout 1998 will show that the NBU can protect the hryvnia and return foreign investors' faith in Ukraine's future economic prospectives.

"We are not rejecting our policy of supporting the Ukrainian national currency," said Mr. Lysytskyi.

But experts said the new corridor will mean softer conditions for the bank and the government in their support of the hryvnia. They expect that it will be between 1.75 and 2.2 hrv to $1.

"The National Bank needs a new corridor, a wider corridor, whose upper limit may be about 2.2 hrv to $1 because it provides room for maneuvering and protection against pressure from Parliament and ministers," said National Deputy Vadim Hetman, former chairman of the NBU.

Mr. Hetman added that announcing a new corridor is not admitting defeat of the currency policy Ukraine has pursued during the past several years. He said the hryvnia remains strong and the NBU has more reserves than at the beginning of 1997.

"The NBU spent about $800 million for supporting the hryvnia in the last two months of 1997, but I hope that in 1998 Ukraine will not be touched by the heavy consequences of the world's financial crisis," he said.

On the other hand, a leader of the Reforms faction in the Verkhovna Rada, Serhii Teriokhin, thinks that Ukraine has perspectives for 1998 and that inflation may jump soon, because the large state deficit and heavy wage debt again are seriously undermining the country's economy.

"We can return to the time of hyper-inflation," Mr. Teriokhin said. His opinion is supported by Oleksandra Kuzhel, vice-chairperson of the Parliament's Economic Committee, who said the new corridor can mean only that the government cannot support the hryvnia in the future.

The bank already has shown that it can protect the national currency, however. The hryvnia strengthened and rebounded within the corridor in December 1997, after the bank announced a package of measures to defend the currency, including higher interest rates and reserve requirements on banks.

But investors remain skeptical that the bank can hold the hryvnia within its earlier announced currency corridor for the first half of 1998. At the end of 1997 the bank promised to hold the currency at between 1.75 and 1.95 hrv to $1.

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