Economy in for a rough ride ahead as currency droops.
Ukraine’s currency, the hryvnia, is under renewed pressure and tough negotiations lie ahead to keep cooperation with the International Monetary Fund on track. But with presidential elections fast approaching in January, the country’s politicians are already holding the economy hostage to their ambitions.
While political leaders were busy heaping blame on each other for the hryvnia’s recent slump to almost nine to the dollar, the IMF said the main reason was uncertainty about Ukraine’s future. The president’s office this week accused the government of putting cooperation with the IMF in doubt by failing to carry out obligations, including raising gas prices for households.
To compound matters, opposition Party of Regions lawmakers are blocking parliament with demands to hike social spending. With parliament paralyzed, the authorities will struggle to push through measures required by the IMF to release the next loan tranche in October.
Nearly $11 billion in IMF aid received from a $16.4 billion package granted last fall has helped stabilize Ukraine. Additional support is considered vital.
The hryvnia has been sliding. It approached nine to the dollar at the end of last week. That was almost a 15 percent drop since the end of June. It has strengthened since Sept. 8 after the National Bank of Ukraine announced it would spend $1 billion supporting the currency in September and began making stronger interventions. The currency closed Sept. 10 at Hr 8.41/$1 on the interbank exchange rate.
The hryvnia rate against the dollar is a barometer used by the population to judge the country’s economic health, making it a key battleground for the presidential elections. Following the hryvnia slump, consumer confidence also tumbled in August to the December 2008 level, according to a study by the International Centre for Policy Studies.
The weaker the hryvnia, the more difficult it is for the population to pay back dollar-denominated loans on cars and houses. The stability of an already shaky bank sector is also at stake.
“It’s a fine tightrope between economic and political necessity. It’s a fight between the brain and the heart,” said Peter Vanhecke, CEO of Renaissance Capital Ukraine.
The heart, it appears, is thus far winning out.
President Victor Yushchenko has been determined to pin the blame on Prime Minister Tymoshenko. He has accused the government of putting pressure on the hryvnia with its “weak budgetary policy.” As revenues have plunged, the National Bank has had to print money to cover the budget deficit.
But Interior Minister Yuriy Lutsenko, a Tymoshenko ally, accused Yushchenko on Sept. 8 of using the hryvnia and his influence on the central bank as a weapon to destabilize the political situation. Under Ukraine’s constitution, it is the president who appoints the central bank chief.
Lutsenko also said his ministry has started criminal probes into the reasons behind the fall of the hryvnia. “We have reliable facts about concrete actions of particular officials among the top management of the National Bank during all these financial machinations,” he said.
While politicians squabbled, Ceyla Pazarbasioglu, the IMF mission chief to Ukraine, said it is this very infighting that is one of the root causes, as there are few reasons for the currency to depreciate to correct a macroeconomic imbalance. “If the public don’t have any certainty as to what the policies will be and the implications for inflation, then people may elect to go into foreign currency,” she said.
National Bank figures released this week showed that the population bought $800 million in foreign currency more than they sold in August. This coincided with a peak of foreign-debt payments for government and private companies, and demand from state natural gas company Naftogaz, for dollars to pay a monthly import bill to Russia.
The hryvnia isn’t the only concern. In comments posted on his web site, Yushchenko last week accused the government of putting cooperation with the IMF in doubt by not sticking to commitments made to the fund. “We must preserve the program of cooperation with the IMF at any price. Unfortunately, of the six conditions, five have not been carried out by the Ukrainian government,” Yushchenko said.
The government rubbished talk of difficulties with the IMF in a statement, saying collaboration was on track and accused Yushchenko’s office of “fuelling hysteria over cooperation.”
The IMF confirmed that cooperation is going well and that it will continue to support good policies in Ukraine. However, the fund expressed concern, along with Yushchenko, that parliament’s decision to overturn his veto on a bill forcing the National Bank to print Hr 9.8 billion to fund preparations for the Euro 2012 soccer tournament could put more pressure on the hryvnia and fuel inflation.
The government has also failed to deliver the promised rise in domestic gas prices after trade unions blocked the move in court. The IMF has called upon Ukraine to stabilize the finances of Naftogaz, which is deep in debt due to subsidized gas prices for households. Pazarbasioglu said she was confident that the government would push the rises through in coming weeks.
However, the authorities look set to struggle to meet the conditions for the next disbursement scheduled for November. The fund this week listed a number of measures that will need work from Ukraine’s deadlocked parliament. Among them, banks need to be recapitalized further, the state budget deficit controlled, and more transparency and independence is needed at the National Bank. With Party of Regions lawmakers stubbornly blocking parliament, it will be difficult to achieve.
“It looks unlikely Ukraine will manage to comply with the fund’s requirements by the end of the month,” said Olena Bilan, a macroeconomics analyst at Dragon Capital. “Although the fund’s disbursement of [more than] $10 billion to Ukraine so far this year signals its loyalty, the approval of the next $3.8 billion tranche will most likely be postponed.”
Bilan added that she still expected the money to be disbursed before the end of the year, as the government needs more funds to cover the budget deficit.
