The National Bank of Ukraine (NBU) should retain its tactics for exchange rate formation in a slow devaluation regime, as this could provide for a "smooth landing" of the exchange rate and prevent destructive surges hitting financial stability, according to Valeriy Lytvytsky, the head of the group of advisors to the NBU governor.
“I would not advise a thorough revision of the present exchange rate
formation policy. Since the start of the year, the exchange rate has
weakened only by 25 kopecks against UAH 2.60 in 2008,” he told
Interfax-Ukraine on Tuesday.
Lytvytsky said that the deficit of the consolidated balance of
payments is growing, although a sharp hryvnia devaluation, as happened
in Q4, 2008, can be avoided, as there is a program of credit
cooperation with the International Monetary Fund (IMF) and experience
in conducting interventions.
“The proper choice is to stick to and improve the tactics of
exchange rate formation in a slow devaluation regime. Its effectiveness
could be reinforced by a fundamental revision of budget policy,” he
said.
He said that a transfer to exchange rate formation in a free
floating regime, as proposed by some experts, would be unwise in the
light of the high outflow of foreign currency in the balance of
payments, the expected record deficit of the national budget, the
downward pace of GDP and high inflation.
Exchange rate formation in a fixed exchange rate corridor regime is inadvisable too, Lytvytsky said.
“Those who propose the corridor option for the exchange rate do not
take into account the fact that a fixed exchange rate does not mean
stability of money, as it cannot be a reliable barrier for inflation,”
the expert said.
Commenting on the situation with the balance of payments, Lytvytsky
said that he does not believe that the deficit of the current account
would be zero or see a surplus.
“It’s likely that a slight deficit would be registered,” he said.
The expert said that the danger of the sharp worsening of the state of the financial account in August has been underestimated.
“It would be a mistake to blame all problems on panic in the
population. Over the first eight months of 2009, the public withdrew
$5.7 billion more from banks that it deposited, while year-over-year it
was $5.8 billion more, so the level of confidence in banks remains
stable. The destructive thing for the balance of payments is the
outflow of capital via the returning of debts, which is dominating over
loans,” Lytvytsky said.
He said that from June until now, a second wave of growth in the
deficit of the balance of payments has been seen: in August it grew by
2.8 times compared to July, to $2.6 billion.
“In September, a certain calm has been seen on the currency market.
It’s unlikely that it is linked to the trend of the balance of payments
going downwards. It’s likely that the NBU’s measures to tighten
monetary policy had an effect. In August, the government also expanded
its treasury account. This is enough for the devaluation pressure to
start falling in September,” he said.
