National Bank of Ukraine implements free-floating exchange rate… once again

2015-02-05 15:08:26

According to the information, provided by the Head of the National Bank of Ukraine (NBU), Valeriya Gontareva, starting Thursday, February 5, 2015, NBU will no longer be using old Holland intervention system to set the exchange rate of national currency of Ukraine. Instead, NBU will be using interbank rate, which is supposed to reflect market value of Ukrainian Hryvnya (UAH) against foreign currencies.

How did it come to this?

Previously, National Bank of Ukraine was setting exchange rate after daily sale of USD 5 million to commercial banks of Ukraine. At the same time, NBU was setting highest limit on the rate, which could be offered to purchase USD. Such system led to pseudo-free-floating rate, and created large black market in the country. While market rate of reached 21-22 UAH/USD, NBU was determined to keep the rate around 16.70 – 16.95 UAH/USD, which did not reflect the real market rate. As exporters were obliged to sell 75% of their foreign currency revenue upon reception, such state led to forex losses, which benefited no one, but Ukrainian banks (for more information, see our article “Games of Currencies: Who is sponsored by agrarian sector of Ukraine”).

How will exchange rate be affected?

National Bank of Ukraine has already made an attempt to set exchange rate free in the beginning of 2014. At that time, UAH take a hit of approximately, 63%, declining from 8 UAH/USD to 13 UAH/USD in 6 months. This time, exchange rate is expected to fall by 26% - from official 16.72 UAH/USD to real market rate of 21-22 UAH/USD. The main difference between current decline and the one in the beginning of 2014 is existence of the black market, therefore lower negative impact on all of the businesses.
How long will it last, what will be the impact?
UkrAgroConsult experts view given change as a positive one as it brings more transparency in business operations. Such change also lifts the burden from exporters, including those working with agricultural commodities. Step is aimed at companies to show their actual revenues from exports, as more contracts are signed and carried out abroad to avoid forex-related risks. Most banking sector experts are not thrilled regarding the change: on one hand, there were no clarifications regarding the new exchange rate measurement procedure. On the other, it may lead to heavier devaluation of UAH as the result of postponed demand on behalf of commercial banks. Either way, NBU top-management stated that they reserve the right for implementation of administrative measures in case situation with exchange rate gets out of hand again.

UkrAgroConsult issues quarterly report “Agrarian Business in Ukraine”. Report covers quarterly operating and financial results of Public Ukrainian Agrarian companies. January Q1 2015 issue will include summary of 2014 results, as well as our forecast for 2015. You can subscribe to the report to receive it on a quarterly basis.