As Ukraine’s economy shows fresh signs of stabilization, the Ukrainian central bank announced on May 5 that it would further relax its foreign currency controls.
The National Bank of Ukraine imposed controls on the movement of the capital in and out of the country in August 2014 and strengthened in February the following year to counter a rapid collapse in the value of the hryvnia. However, the controls have also depressed business activity and shut off foreign investment.
In its latest relaxation of exchange rules, the central financial regulator canceled the mandatory sale of foreign currency funds received to make investments in Ukraine.
The financial regulator also reduced the verification term for foreign currency purchases by authorized banks on behalf of their clients. Earlier, they could exchange foreign currency for hryvnias on the fourth day after depositing the necessary hryvnia funds. Now, importers will have to wait only three days.
When imposed in February 2014, the NBU’s currency controls also put limits on cash withdrawals by the population, and imposed the obligatory automatic sale of 75 percent of exporters’ revenues on the domestic ForEX market to replenish the supply of foreign currency on the market. The country’s importers had to go through a tedious procedure of preordering hard currency and undergoing checks in order to conduct cross-border transactions.
The stabilization of the ForEx market since then has meant the NBU is now able to relax its controls slightly.
This chart shows exchange rate of Hryvnya versus U.S. Dollar in April and May. Hryvnya has been steadily strengthening on foreign exchange market last month on higher supply of hard currency. The NBU has purchased $676 million to fill foreign currency reserves in April. Source: Minfin.ua
According to Vitaliy Shapran, deputy director general at Expert-Rating agency, the key factor behind the stabilization of the hryvnia was the improvement in global prices for Ukraine’s key export commodities.
“The foreign currency inflow will depend on the pace and extent of the increase in priсes for iron ore and ferrous metals,” Shapran told the Kyiv Post. The correlation between the two factors is quite tight, but there is a big lag from three to six months between the price hike and arrival of currency in the country.”
This chart shows price of steel on London Exchange in the past three years, the y-axis shows the amount of U.S. Dollars per ton. January-February rise in steel prices was one of key factors for the influx of foreign currency on Ukraine’s ForEX market, experts say. Source: Quandl.com
The second factor, according to Shapran, was the end of restructuring of state foreign arrears and some progress in restructuring private debts.
“The less outstanding debt the private sector has, the less pressure it will exert on the foreign exchange market,” he told Kyiv Post.
Although the NBU’s latest ForEx liberalization is a positive sign, it will not make life for businesses much easier.
“The steps announced on May 5 are largely symbolic, as the NBU will maintain controls ‘at the entry points,’ ultimately having the final say on whether to allow importers to purchase foreign currency,” Alexander Paraschiy analyst from investment firm Concorde Capital.
However, one encouraging sign that could boost investment is that the NBU is preparing to allow investors to buy foreign currency to repatriate their dividends.
Repatriation of dividends will be allowed for foreign investors, issuers of shares, and depository institutions that service the securities accounts of a foreign investor and carry out the payment of dividends using overseas securities.
The banks have to collect information on which of their clients want to repatriate funds, and the value of these funds, and provide this information to the NBU by May 20.
The financial regulator is planning to lift the ban on repatriation of dividends after the completion of the second review of the Extended Fund Facility program with Ukraine’s key creditor, the International Monetary Fund. A delegation from the IMF is expected to come to Ukraine on May 10-18.
The NBU is next scheduled to review its currency controls in June 2016.
On March 3, the NBU increased the limit on cash withdrawals for the population amid signs of rising public confidence in the banking system.
Kyiv Post staff writer Olena Savchuk can be reached at [email protected]
