MWith this monetary policy triad, Ukraine is trying to arm itself against the financial policy consequences of the Russian attack: devalue the currency, keep interest rates high, pause in servicing foreign debt.
After the state-owned company Naftogaz approached its creditors for a moratorium on payments, the markets interpreted this as a prelude to a request from the Ukrainian government. That followed this Wednesday, but that wasn’t all. On Thursday, the central bank devalued its hryvnia, which had been frozen since the outbreak of war, by 25 percent against the dollar. Since then, the exchange rate is no longer 29.25 hryvnia per dollar, but 36.57 hryvnia. In addition, the central bank left the key interest rate at 25 percent. It will remain there until the second quarter of 2024.
Low revenue, high cost
The war has hit Ukraine’s businesses and state budget hard. Economic activity has contracted sharply, with a slump of a third or more expected. Tax revenues are correspondingly low. But the running costs caused by the war are all the higher. They are partly covered by grants from Western governments and financial institutions.
The rest comes from bonds issued by the government and bought by the central bank. This financing from the printing press is already reflected in the inflation rate of 18 percent. The central bank expects 30 percent at the end of the year and warns the government to reduce the budget deficit, take out loans on the market, limit or tax imports in order to promote local producers.
The devaluation, also due to the appreciation of the dollar, is now intended to “improve the competitiveness of Ukrainian producers, level exchange rate conditions for different groups of companies and households and support the resilience of the economy during the war”. In addition, dwindling foreign exchange reserves are to be spared.
Ukraine’s international reserves are sufficient to ensure exchange rate stability, said central bank governor Kyrylo Shevchenko. However, he also mentioned the conditions attached to this hope: “the prospect of international financial aid, the gradual development of export logistics, the increase in sales by exporters and the expected decrease in demand for foreign currencies after the exchange rate adjustment”.
Payment moratorium as international support
International financial aid remains essential for Ukraine with a monthly budget deficit of $5 billion. The decision of Western countries to comply with the request for a payment moratorium of one, possibly two years should be seen against this background. According to Kyiv, large Western financial funds have also agreed to participate.
Experts estimate the outstanding debt on Eurobonds at 20 billion dollars, another 10 billion dollars went to the account of private and state issuers from the economy – see Naftogaz. Payment moratoria can now also be expected from companies, which have not asked for it so far.