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How the National Bank of Ukraine undermines Ukrainians’ trust in the national currency and in itself as an institution.

The National Bank of Ukraine “brought down” the official exchange rate by 25% to UAH/USD 36.57.

Many mass media (probably not without the participation of the National Bank of Ukraine) round up the new exchange rate to UAH/USD 36.6, obviously in order to inspire positive associations with the healthy body temperature. But it does not really work.

Business is in shock, the population is in shock. This is not surprising, because the National Bankof Ukraine has repeatedly promised society a completely different ‘temperature’. The question is fundamental, so it is worth going into more detail.

On April 9, Deputy Chairman of the National Bank of Ukraine Serhii Nikolaichuk told millions of TV viewers on the air of the telethon that until the end of the war, the National Bank of Ukraine would keep the official exchange rate frozen at 29.25 UAH per dollar.

This message was reprinted by almost all mass media and even by the official Telegram channel of the Verkhovna Rada of Ukraine.

On May 20, the Governor of the National Bank of Ukraine Kyrylo Shevchenko commented to the EP that then the fixed exchange rate policy had more advantages than disadvantages, so the National Bank of Ukraine would continue to keep the official UAH/USD exchange rate at UAH/USD 29.25.

The summary of Key Policy Rate Discussion of NBU Monetary Policy Committee published on June 13, says that “the MPC members concluded that maintaining exchange rate stability under current conditions would guarantee price and financial stability. Exchange rate stability remains the sole nominal anchor for expectations, a mechanism for subsidizing critical imports and thus the primary tool for curbing inflationary pressure and maintaining the stability of the financial system”.

Well, where is exchange rate stability now as an irreplaceable anchor for expectations, and exchange rate fixation at the level of UAH/USD 29.25 “at least until the end of martial law”?!

We can congratulate the management of the NBU on the fact that we live in Ukraine, and not, say, in Japan. There, after such a “fraud”, their career would end in one moment. But our traditions are somewhat different: you can fool the whole society and get away with it.

One way or another, since July 21 we all have been living in a new reality.

The National Bank of Ukraine changed the official rate according to the exchange rate in the cash segment of the FX market. In particular, according to the cash rate that we could see in the exchangers until July 20.

Сonsequently, our exchange rate policy is now determined by ordinary citizens and speculators, and the NBU simply “legitimizes” the exchange rate that was formed on the cash market not without the influence of panic.

Moreover, from time to time the NBU (perhaps out of boredom) itself provokes panic. In particular, we are talking about the statements of the Governor of the National Bank of Ukraine in May about the possibility of returning to the floating exchange rate, which provoked  a drop in the black market exchange rate by 9% to UAH/USD 37.54 in a matter of days.

Then there was some change, but the rate never returned to the previous level (below UAH/USD35).

After that, on May 21, the cancellation of restrictions on setting the cash rate by banks (10% of the official rate) approached it to the black market rate. Perhaps the lifting of restrictions was premature?

And finally, the last decision of the National Bank of Ukraine regarding the replacement of the “fixed” exchange rate accelerated the exchange rate to almost UAH/USD 40. If we follow the logic of the NBU, then this rate actually demonstrates the next level of the ‘fixed’ official exchange rate.

As already mentioned, the National Bank of Ukraine itself recognizes that exchange rate stability is “the primary tool for curbing inflationary pressure”. And if the hryvnia devalues ​​by 25%, how will prices react? Apparently, the answer is in general clear.

But not to the National Bank of Ukraine. In its comment dated July 22, the NBU convinces society that the impact of a sharp devaluation on inflation will be 2-3 percentage points in annual terms. Will there be those who will believe this calculation?

After NBU’s promises to fix the official exchange rate until the end of the war, one thing is clear: to believe the NBU is to disrespect yourself.

A sharp devaluation of the hryvnia is sure to increase the price of imports (first of all, fuel) and, with a certain time lag, domestically produced goods and services.

Under such circumstances, even taking into account the restraining effect of subdued consumer demand, the NBU’s forecast of inflation for 2022 at the level of 31% may be too optimistic.

Has the National Bank forgotten the Article 6 of the Law on the NBU? (the main function of the NBU is to ensure the stability of the hryvnia)

No one disputes that the problem with the growing gap between the official exchange rate at the level of UAH/USD 29.25 and the exchange rate of the cash market needed a solution.

But what should the NBU have done in order not to expose the economy to a devaluation-inflationary spiral risk and to maintain the remnants of confidence in itself?

First of all, the NBU should have apologized to the whole society for misleading it regarding the preservation of the fixed rate UAH/USD 29.25 until the end of martial law. It was not only about the regime of the exchange rate, but also about its absolute value.

Secondly, the change of the official exchange rate should have been much more moderate, for example to the level of UAH/USD 32-33. This could have given the cash market a new benchmarkand its reaction could have been the opposite of what we have seen on the exchange board in recent days.

Thirdly, to increase supply of the foreign exchange on the market, the NBU should have introduced a mandatory sale of a part of the foreign currency earnings by exporters. There is reason to believe that business would have accepted this step with understanding.

Fourth, to return the pegging of cash market exchange rate to the official one.

Together, this would have allowed reducing the gap between the official and cash rates, increasing the supply of currency in the cashless market, avoiding panic in the cash market and finally filling the concept of “fixed exchange rate” with real meaning.

There is another fundamental question, the answer to which the National Bank of Ukraine should have provided to society: why was the key policy rate raised to 25%?

It should be noted that one of the main arguments used by the NBU to justify its decision regarding the key policy rate at the beginning of June was the need to relieve pressure on the foreign exchange market.

As a result, we’ve got both a key policy rate of 25% and a devaluation of 25%. Something in this arithmetic does not add up.

However, the National Bank of Ukraine should be warned against the completely unacceptable practice of shifting responsibility for its own failures to the Ministry of Finance.

In the end, the National Bank of Ukraine should realize that the wartime economy requires the coordination of the actions of various authorities to achieve the main goal – victory. And victory requires sufficient and uninterrupted financing of military needs.

In this context, it is worth recalling once again the position of the US Federal Reserve System during the Second World War.

To keep war spending reasonable, the Treasury asked the Federal Reserve to set low interest rates. The Reserve Banks agreed to buy Treasury bonds at a rate of 3/8 percent per annum, which is significantly lower than the typical peacetime rate of 2-4 percent.

History has shown that it was the United States that came out victorious from that war, and the Fed became the main central bank of the world.


adviser to the Minister of Finance, founder of the GROWFORD Institute for EP