Publication: Monitor Volume: 6 Issue: 183

The recent weakness of the hryvnya provided another visible and telling example of the need for additional funding from the IMF. The currency fell from 5.43 against the dollar in early September to 5.57 on September 28 (Bloomberg, September 28). The drop forced the Ukrainian National Bank (NBU) to intervene heavily to prop up the currency. Although the main cause of the downward pressure on the currency is the increased demand for foreign currency for purchases of fuels (summer time fuel shortages are a common occurrence in Ukraine; last year the currency fell 20 percent for the same reason), the currency weakness is further exacerbated by relatively low foreign currency reserves at the central bank. These reserves amounted to a mere US$1.1 billion in late September.

Despite low reserves, NBU decided to intervene strongly and managed to stabilize the hryvnya at close to 5.5 against the dollar. Short-term actions, however, will not solve the real problem. Although the bank has declared that it is ready to spend as much as needed to strengthen the currency, it is also working under serious limitations set by the IMF. The Fund made it clear that keeping a certain minimal level of reserves is necessary to make sure that Ukraine is current on all of its foreign financial obligations. The NBU has to walk a fine line between allowing the currency to depreciate rapidly due to seasonal factors, with obvious negative consequences for inflation, and keeping its promises to the IMF. It seems that in the short term the hryvnya will remain extremely volatile, with the continued pressure forcing the currency down to around 5.8 against the dollar by the end of the year. In the medium term, additional funding from the IMF and the World Bank will provide much-needed support for the Ukrainian currency.