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Bloomberg
Ukraine devalued the official hryvnia exchange rate to protect its foreign-currency reserves as Russia’s invasion ravages the economy.
The National Bank of Ukraine (NB) also held its main interest rate unchanged at 25% on Thursday and said that its monetary and exchange-rate policies are aimed at easing pressure on the local currency. It set the hryvnia rate at 36.5686 per dollar compared with 29.25, where it had been frozen for the past five months.
Ukraine suspended hryvnia trading and tightened capital controls after Russia’s attack in February to help the government import crucial goods and stem spiralling inflation. The currency will remain fixed at the new level, which the central bank called a 25% correction in the exchange rate.
“The reasoning behind the decision was the shift in the fundamental parameters†of Ukraine’s economy and the dollar’s strengthening, the NBU said in a statement. “This step will improve the competitiveness of Ukrainian producers, converge exchange-rate conditions for different groups of businesses and households, and support the resilience of the economy during the war.â€
The devaluation will have a “limited impact†on inflation, it added. The NBU said that inflation could top 30% by December but decline to about 21% next year. It said that the economy probably shrank about 40% in the second quarter, compared with a year earlier.
Keeping hryvnia strong in past months has taken its toll on Ukraine’s international reserves, as the war slashed the country’s foreign income. Exporters became reluctant to convert hard-currency inflows at the official rate, which didn’t take into account nearly half a year of economic deterioration.
“Improved attractiveness of hryvnia assets, coupled with the change in the official exchange rate and additional economic policy measures, will dampen demand on the FX market,†the central bank said. “Taking into account the planned inflows of official financing, this will help support the sufficient level of international reserves and thus maintain the macro
financial stability.“
The central bank expects the main rate to stay at 25% until at least the second quarter of 2024. It also said that Ukraine may reach a new deal with the International Monetary Fund as soon as next year.
The devaluation comes a day after Ukraine’s request to postpone foreign-debt payments won support from key creditors.
A group of governments in the Paris Club, including the US, agreed to suspend the nation’s debt payments
until the end of 2023 and urged other creditors to do the same.
Meanwhile, Ukraine’s Finance Ministry said it “received explicit indications of support†for the plan from asset managers including BlackRock Inc. and Fidelity International.