Economist Vitaliy Shapran emphasizes that the volume of currency purchased by the population in July broke a 12-year record. Despite this, he is confident that the National Bank of Ukraine has all the necessary tools to prevent a sharp fall in the hryvnia and rising inflation.
The volume of foreign exchange purchased by the population in July broke a 12-year record. Net foreign exchange purchases amounted to $1.117 billion.
Friends, what did you want?
First, global inflation has been going on for 3 years in a row. Let me remind you that in the US, inflation reached 4.7% in 2021, 8% in 2022, and 4.1% in 2023. That is, the purchasing power of $100 at the beginning of 2021 is now equal to approximately $118 in the US. Of course, this also affects global prices, because the EU is not far behind the US in terms of inflation.
Secondly, there is a series of unsuccessful decisions by the regulator in the foreign exchange market. Here, briefly, the situation is aptly reflected by the popular proverb: “There is no peace behind a stupid head (foreign exchange policy) and legs (foreign exchange reserves).” Let us recall October 2023, when the NBU hastily switched to a floating exchange rate: this transition cost Ukraine several billion dollars of ZVR in 2023, so this “free market game holiday” continued in 2024.
Understand that in the current war situation, the market is under the constant influence of a complex of factors that irritate the population and business. Every month, our market is attacked by “black swans”. The stabilization of the front line and the operation of the grain corridor are to some extent offset by the effect of the power system outage and the increase in imports, for example, of energy equipment. And the blackouts themselves do not add optimism to the population. Therefore, the NBU’s October step towards a floating exchange rate was premature, as I have repeatedly said.
Talk that, they say, international partners are against a fixed exchange rate seems like children's fairy tales. Central banks have the ability to send the national currency rate floating in various ways. For example, you can set an anchor rate, as an option - 40, and let the rate float around this mark, or set a corridor of exchange rate fluctuations. The monetary authorities should give the market a clear signal and make sure that the population and business have confidence in the stability of the market. Instead, the market was hit by the grumbling of experts under the influence of the CMU forecasts and the accounting rate, at which we calculate the budget. Therefore, the devaluation guidelines and the passive communication policy of the NBU in the foreign exchange market lead to the washing out (expenses) of the reserve funds for extinguishing exchange rate fluctuations.
That is why we are now observing an anomalous situation when the NBU supposedly supports the market, the NBU's foreign exchange reserves are at the level of $37.89 billion gross and $26.3 billion net (as of July 1, 2024), and partner support will come to us in the amount of $3.9 billion in the near future, but the market is nervous. Under the existing market algorithm, we will from time to time face regular periods of exchange rate instability, which the regulator will close with interventions at the expense of the NBU's foreign exchange reserves. Of course, the NBU will cope with the situation, but due to the unproductive use of the ZVR. The catalyst for the National Bank's fundamental mistake in October 2023 was the so-called foreign exchange liberalization. I am not at all an opponent of it, but in the implementation of the NBU, like the transition to a floating exchange rate, it brought more negativity than benefit.
The traditional question: what next? The NBU has all the capabilities to maintain the exchange rate. The negative balance of payments in the first half of the year cannot be the reason for devaluation. The growth of the dollar exchange rate from 36.6 to 42 (now this is the upper limit on the cash market) is a considerable inflationary impulse of 14.75%. The situation will be mitigated by the fact that many importers used to include an exchange rate of 40 in their calculations. But further devaluation is guaranteed inflation, so it is unlikely that the regulator will decide on such a step. However, if the NBU gives in to tactical budgetary advantages, the public will have a legitimate question: what about the “movie” that was shown to us in the NBU monetary cinema, telling us about the importance of a high discount rate and high rates for the NBU’s DS, but what about the NBU’s independence from the government and the unchanging “sacred” inflation target of 5%?
The government and the NBU should draw two conclusions from the July situation on the foreign exchange market:
In Ukraine, it is impossible to sharply lower the exchange rate, even +1 UAH leads to concern for the population and even greater concern for business. And if these actions are not explained and at the same time play into the market, then stakeholders have a feeling of “turbid water”, which becomes a catalyst for concern.
Chatter about how profitable it is for the budget to have an exchange rate of 42, 45, 50, etc. should be stopped. What the budget will be in 2025-2030 will be - time and the confiscation of Russian assets, which, by the way, have already begun, will tell. But the NBU’s foreign exchange reserves are already dwindling from such “songs” today.
So I have not changed my forecast for the foreign exchange market since February 2024: the exchange rate will be the way the NBU wants to see it. All the powers, opportunities and tools to maintain stability in the foreign exchange market are in the hands of the NBU.
