Ukraine’s central bank drops official hryvnia rate dramatically - what’s next?

From the very beginning of Russia’s full-scale invasion, the National Bank of Ukraine kept the official exchange rate fixed at UAH 29.25. Only nearly 150 days later did the regulator decide to revise it and allow the hryvnia to drop to UAH 36.60.

This step will allegedly help increase the competitiveness of Ukrainian manufacturers and support the stability of the economy in wartime conditions, Kyrylo Shevchenko, head of the central bank, said during a press briefing on July 21.

Read also: Hryvnia strengthens against the euro, holds steady against the dollar

Economists mostly approve of such a move — the reserves to maintain the status quo are limited.

"The decision is painful, and it will impact Ukrainians, but it was impossible not to take it," says Maria Repko, deputy director of the Center for Economic Strategy. At the same time, this will contribute to a decrease in imports, or at least they will not grow at such a crazy pace, she adds.

What is the use of devaluation 

A decrease in the official exchange rate of the hryvnia will make imports less attractive, should improve the inflow of foreign exchange earnings from exporters, and reduce the outflow of capital, Olena Bilan, director of the analytical department of the investment company Dragon Capital [Dragon Capital owns NV magazine, NV.ua website and Radio NV], explains in a comment to NV.

Read also: The war economy. Five lessons for Ukraine from the World War II

"The National Bank of Ukraine will spend less reserves to support the exchange rate, because since the beginning of the year, the gold and foreign reserves have already decreased by almost a third," says Bilan.

Also, the devaluation of the national currency will help to fill the budget, because import taxes will increase in the hryvnia equivalent, and will make Ukrainian goods more competitive abroad, compared to importers.

An increase in the fixed exchange rate of the dollar will help Ukrainian creatives and tech workers in their desire to bring export revenue to the country and remain in the tax residency of Ukraine, believes Lyubomyr Ostapiv, a financial planner at iPlan.ua.

This step has already been welcomed by representatives of the IT industry, which is mainly export-oriented, although this correction of the official rate will support not only them, but all export industries, which lost 20% of income due to the difference between the official rate of the NBU and the conditional market rate. These include, for example, farmers and the steel industry.

Slow price growth

Consumers may feel the price increase of imported goods in their basket.

But the central bank insists that the rise will not be steep. Today's devaluation of the hryvnia will have an insignificant effect on the general picture of inflation — it will only raise it by 2-3 percentage points, Deputy Chairman of the NBU Serhii Nikolaychuk asserted at a daily briefing.

Read also: Credit rating agency Fitch lowers Ukraine’s rating to pre-default level

What will happen to fuel prices, though? Ukrainian fuel is completely imported. The previously forecasted price reduction at gas stations is no longer on the cards, said the director of the A-95 consulting company, Serhiy Kuyun. However, prices may well stay at the current level without a further increase. Fuel price rises will lead to a general inflation hike of 0.6-0.8 percentage points, Nikolaychuk from the NBU estimates.

According to the central bank, inflation was 21.5% year-on-year in June, but by the end of 2022 it may skyrocket above the 30% mark, Nikolaychuk predicts.

If we assume that prices have long taken into account exchange rate expectations, because everyone was waiting for this decision from the National Bank of Ukraine sooner or later, then business has already oriented itself towards the commercial rate of UAH 36-37, believes Peter Chernyshov, ex-president of Kyivstar.

Read also: Ukraine to continue preparations for grain exports despite Russian missile attack on Odesa sea port

"We really have a lot of imports on the supermarket shelves, and even among the ingredients in Ukrainian-made goods,” points out Andrey Zhuk, co-founder of the Retailers Association of Ukraine.

“That's why we depend on the exchange rate.”

At the same time, he says that the chains will restrain the increase in prices so that it does not grow stressful for customers.

"Now the chains, suppliers or importers, or distributors will partly take on these currency risks," Zhuk adds.

Meanwhile, prices will change gradually, depending on the exchange rate. Besides, an active review of price tags is restrained by competition.

"We have 150 grocery store chains in Ukraine,” he said.

“The market is quite competitive. ATB (the country's largest food retailer. — Ed.) has a share of up to 20%.”

At the same time, if the supply chain in grocery retailers can range from a week to two months from the moment of production to consumption, among other goods, such as, household appliances and electronics, this can reach 6−12 months. This further stretches the rise in consumer prices due to the exchange rate effect.

Suppliers who have a certain margin of safety can take advantage of the situation.

"They will try to keep the old price — those for whom this is feasible — in order to grow their market share, attract as many new buyers as possible," says Zhuk.

The service sector will be one of the last to respond to price increases, he argues: "Recall 2014-2015,” he says.

“For example, all materials for repairs grew more expensive, while the cost of the work itself remained unchanged for another year or two."

Read also: Real change needed. Postwar Ukraine and its economy

At the new level, the official rate can be maintained until the end of the year, believes Yevhen Dubohryz, Case Ukraine expert on banks and banking supervision and ex-deputy director of the NBU's financial stability department.

In his opinion, the new rate already accounts for all the negative expectations of the dollar's appreciation, rate hikes in the U.S., and other factors of "creeping devaluation". But if the situation at the front does not change significantly in Kyiv's favor, or the volume of international aid does not increase significantly, then perhaps the central bank will have to repeat today's steps and review the official rate upwards again, suggests Repko from CES.

At the same time, the cash market appears to have swiftly recovered from the initial shock. According to the KIT Group, which owns a network of currency exchange points in all major cities of Ukraine, on the morning of July 21, the selling rate of American currency in Kyiv jumped from UAH 37.15 to UAH 40, but in the evening it fell to UAH 38.8.

Read the original article on The New Voice of Ukraine