Wednesday, December 07, 2011

Experts calling on Ukraine to cancel hryvnia's pegging to US dollar

Source: Interfax-Ukraine; Published by Kyivpost

LONDON – Ukraine under conditions of instability in the financial and economic situation in the world, so as better to react to external shocks, should cancel the hryvnia's pegging to the U.S. dollar, experts have advised.

The topic was discussed at the Inside Ukraine conference organized by the Economist magazine with support of the Foundation for Effective Governance (FEG) in London on Tuesday.

"Ukraine should think of a floating exchange rate, especially when the country faces a deficit in the balance of payments… I'm sure that if the changes take place, we'll see a lot of export growth, and the growth model will change," Troika Dialog Senior Economist Evgeny Gavrilenkov said.

He said that the pegging of the hryvnia to the dollar was odd, especially when Ukraine's neighbors are members of the eurozone.

"It's good when the dollar is weak, but when it is strengthening, Ukraine faces a problem: the balance of payments gets broken, and the competitiveness of Ukrainian exporters falls," he said.

Gavrilenkov said that now the National Bank of Ukraine (NBU) has a chance to make the step that Russian Central Bank has already made: to set the exchange rate slightly free so as not to break stability, and better prepare the country for a future crisis.

The expert said that the hryvnia devaluation from Hr 5/$1 to Hr 8/$1 had not exhausted the chance of further falls.

He added that he understands all of the risks under conditions when the foreign debt of the state is 80-85% of GDP, although he took Argentina as an example, which in a similar situation gave up the pegging of the exchange rate.

"I'm sure that Ukraine's currency could fall first, but later it would revaluate," Gavrilenkov said.

The founder of Ukrprominvest Holding, Petro Poroshenko, who until recently headed NBU council, said that the NBU should consider the pegging of the exchange rate to a currency basket.

"Why should we peg to the dollar? Why not to the euro, the pound sterling or the Swiss frank or yen? Why shouldn't the currency basket reflect real fluctuations that protect the Ukrainian currency and depositors who keep their deposits in foreign currency? I think that this step is necessary, and the country always has such an opportunity," he told Interfax-Ukraine.

Poroshenko said that the task of retaining stability of the national currency are interpreted absolutely incorrectly by some NBU specialists, believing that stability means a fixed exchange rate to one currency.

"This does not mean that tomorrow the exchange rate should be set floating, but a certain transitive phases could be used. For example, Russia pegs to a currency basket," he said, adding that formally the central bank says that it had left a policy of fixed exchange rate a long time ago.

"If we close our eyes and put up with the sweepingly growing deficit of the balance of trade and balance of payments, not reacting to this with certain exchange rate positions, this would have led to the events that happened in Argentina or Belarus for sure," the expert said.
He said there are no grounds for a devaluation now, although the country should be protected from possible scenarios.

"If the trade in Ukrainian goods and exports worsens or talks on gas were ineffective, how will Ukraine protect its chance to provide for crucial imports? [Only with] a floating exchange rate," he said.

Poroshenko added that greater volatility of the hryvnia would teach individuals to take more responsible economic actions.

"People should get accustomed to this. If in Russia the ruble varies by 15%, this does not cause a panic. This promotes the stability of the banking system," Poroshenko said.