National Bank of Ukraine sets new currency corridor for hryvnia (02/14/99)

National Bank of Ukraine sets new currency corridor for hryvnia

by Pavel Polityuk
Special to The Ukrainian Weekly

KYIV - The National Bank of Ukraine and the government ended months of suspense over its 1999 currency policy by setting a new trading band for the hryvnia at 3.40-4.60 to the dollar (from the previous 2.50-3.50). They also pledged to liberalize the currency market.

Vice Prime Minister Serhii Tyhypko said the new corridor for the hryvnia, which has traded at an unchanged 3.4270 per U.S. dollar since early November, would be effective for 1999.

"In 1999 the Cabinet of Ministers and the National Bank strongly intend to follow an exchange rate policy in the range of 3.40-4.60 hryvni per dollar," Mr. Tyhypko said at a February 9 news conference attended by National Bank of Ukraine Chairman Viktor Yuschenko.

Ukraine had upped the band to the current range from 1.80-2.25 in September 1998, when international market turmoil spread to the ex-Soviet country. The 1999 budget is targeted at an average exchange rate of 4 hrv per dollar.

"We support the central bank - this should be a policy of a currency corridor and not a free-floating rate," Mr. Tyhypko said, ending months of dispute over the main principles of Ukraine's currency strategy. Both the government and the National Bank of Ukraine (NBU) are sure that only a currency corridor can provide stability for the country's stricken financial market and help Ukraine fulfill the main provisions of its state budget for this year.

Domestic debt traders and stockbrokers had been anxiously speculating whether the cash-strapped government would maintain the corridor policy or let the embattled currency float.

Ukraine - whose central bank chairman earlier this week had declined to reveal the level of foreign exchange reserves - had been supporting the hryvnia within its previous trade band via strict administrative controls rather than intervention. Economists who say the controls are unsustainable in the long run have long called for them to be lifted in the interests of keeping the economy stable.

"I am not so sure they have the means to support it (the hryvnia corridor) - whether they have the right policies, meaning the right budget, the right balance of payments development and external financial support," said one analyst.

"If we assume Ukraine works well under the existing IMF program, then they may be able to sustain the new exchange rate regime. But, if for any reason reforms slow again, it may not be sustained for a long time," he added.

Mr. Yuschenko did not exclude the possibility that the bank might raise reserve requirements for local commercial banks to 17-18 percent of their funds from 15 percent and boost its refinancing rate from 60 percent to reduce potential devaluation pressures on the currency market.

The National Bank of Ukraine announced on February 10 that reserve requirements for all Ukrainian commercial banks have to be raised to 17 percent.

Early this week NBU Chairman Yuschenko said Ukraine was expecting to receive a $167 million tranche of the three-year $2.2 billion Extended Fund Facility loan from the International Monetary Fund. The IMF had approved the loan for Ukraine in September of last year, but suspended the program after two monthly disbursements, worth a total of $335 million, due to the government's failure to implement its obligations.

"We expect a tranche worth $157 million by the end of the first quarter," Mr. Yuschenko, who held talks with the IMF in Washington last week, told a news conference. "The IMF board of directors will discuss the issue of Ukraine on March 5-10," he said.

Experts said the adoption of a tight budget maintaining fiscal debt of 1 percent of the gross domestic product (GDP) has boosted Ukraine's changes for renewed financing.

Finance Minister Ihor Mitiukov said that during the talks in Washington Ukraine had tried to persuade IMF representatives that Kyiv needs at least three tranches worth more than $200 million, while the IMF indicated that Ukraine could expect just two tranches.

"We believe that our arguments could persuade the fund and that we will receive these much-needed tranches," Mr. Mitiukov said. "Cutting down the tranches may cause negative consequences at the market," he added.

Mr. Mitiukov also said decreasing the loan's sum could cause a temporary reduction of the National Bank's currency reserves, which stood at $1.049 billion at the start of this year. Mr. Yuschenko also said the NBU's foreign reserves are expected to fall by some $90 million by the end of the first quarter.

But Finance Minister Mitiukov said he is sure that Ukraine will resume its cooperation with the IMF, which will allow the cash-starved government to repay its largest domestic and foreign debts, worth about 800 million hrv ($233.4 million U.S.) as of February. Ukraine's Finance Ministry has to pay a total of $1.17 billion in foreign debt obligations in 1999.

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