The depreciation of the national currency against the dollar is temporary and does not pose a danger to the Ukrainian economy. But we will not be able to avoid inflation.
The hryvnia exchange rate in January fell to a minimum for the year, which pretty much frightened the Ukrainians. As in the case of the collapse of Eurobonds, experts attribute this primarily to the aggravated conflict with Russia. Investors got scared and began to sell Ukrainian securities, the dollar began to rise in price rapidly. But the President’s Office assures that so far there is nothing to fear. Meanwhile, the NBU raised the discount rate again as part of the fight against inflation. Korrespondent.net tells the details.
The current weakening of the hryvnia is caused by a short-term fluctuation, declared Advisor to the President of Ukraine on economic issues Oleg Ustenko.
He explained that in the long term, “we are in a comfort zone,” since Ukraine’s gold and foreign exchange reserves amount to $30 billion, and “they cover four months of our imports.”
Gold and foreign exchange reserves are the most important indicator of the state’s financial stability, which determines its ability to repay debt obligations. In fact, gold and foreign exchange reserves are tangible assets with the help of which the government regulates currency quotes, international payments and a number of other economic parameters.
This includes not only stocks of precious metals, but also debt obligations of foreign companies and currencies of foreign countries in the form of cash. Gold and foreign exchange reserves are used by the government to maintain a stable exchange rate of the national currency, as well as to ensure external obligations.
The reserves are highly liquid, which means that they can be used at any time to pay off debts, investments, trade transactions, etc.
Ustenko stressed that it would be possible to worry if the stock of gold and foreign exchange reserves was enough for less than three months, while in our country it is “four months, even a little more.”
The NBU supports the exchange rate by selling dollars from reserves and restraining fluctuations in the foreign exchange market. In the previous week alone, the regulator was forced to sell about $300 million.
Having reached a peak on January 18, the value of the dollar in Ukraine has declined slightly over the past two days. The official rate of the NBU on January 20 is 28.40 hryvnia per dollar. On the interbank currency market, following the results of January 19, the price of the dollar fell by 8 kopecks: to UAH 28.31 in sales and UAH 28.29 in purchases.
Everyone will suffer
As for the growth in consumer prices, which also could not go unnoticed by our citizens, then, according to the presidential adviser, inflation is caused by external economic factors and has affected the whole world. And the indicator of 10%, with which Ukraine ended the year, is very good.
“There has never been such a difference between inflation in Ukraine and developed countries such as the United States. The differential is only three percentage points: ours is 10%, theirs is 7%,” he said and added that there had not been such an indicator in the United States for several dozen years.
The presidential adviser noted that in the state budget of Ukraine for this year inflation is planned at 6.2%, however, given the situation in the world, consumer price growth is likely to be higher.
“Because we have so-called imported inflation,” the adviser explained. “This is inflation that is not affected by the central bank of any country, in our case, the National Bank of Ukraine. It is imported into our country, it comes from the external circuit.”
Among the main causes of inflation in the world, Ustenko named the rise in energy prices and the likely rise in prices for agricultural products.
“A large rise in energy prices is the first thing. And secondly, the demand for agricultural products is significant. Harvest failures are expected in several Latin American countries. And if there is not enough supply, then prices may rise. We expect additional inflationary surges in this commodity market” he explained.
In such a situation, the task of the government is to develop a mechanism to protect the most vulnerable segments of the population, the presidential adviser added.
“Everyone will suffer from inflation. But those countries that belong to the group of so-called developing economies will suffer more than others. And Ukraine belongs to such an economy. Last week there was a warning from the International Monetary Fund that they expect such changes in general world. Therefore, I believe that we need to develop the right strategy in advance to protect our own population,” he said.
On January 20, the National Bank raised the discount rate from 9% to 10% as part of the fight against inflation. By raising the discount rate, the regulator raises the cost of money for end consumers, thereby limiting demand. As a result, the rate of price growth slows down, but along with it, the development of the economy also slows down. The previous increase took place on 9 December. About the motives of the NBU in detail in the article Money has risen in price in Ukraine.
The IMF warned on January 11 that emerging economies should prepare for a tightening of the Federal Reserve’s policy. In particular, the Fed’s rate hike, which is expected to be at least three times this year, will have an impact on many states that will have to use a range of political levers. This includes the devaluation of national currencies and problems with public debt. Read more about this in the material The Fed is raising rates. What should Ukraine prepare for?
Earlier, Ustenko said that due to high inflation, which Ukraine will not be able to avoid this year, the authorities are considering options to help vulnerable segments of the population. In particular, this could be the introduction of so-called food stamps – but not like in the USSR, but like in the USA.
A jump in prices for food commodities, he said, will lead to inflation in the amount of 8-10% – and this may already require anti-crisis measures. “Given that the food group in the Ukrainian consumer basket is more than significant – almost 50% – such an increase in prices could become a serious inflationary shock,” Ustenko said.
Read more about the American experience with food stamps in the article Ukraine prepares for a price shock.