A lack of serious reform combined with a shortage of interest in the Treasury bill market have set Ukraine's hryvna currency on a downhill course for the first half of 1998, Western economists and bankers said on Monday. The hryvna slid to 1.9845 to the dollar on the Ukrainian Interbank Currency Exchange (UICE) on Monday from 1.9120 on Jan. 21, the day the central bank and government widened the trading band to Hr 1.80 to 2.25 per dollar. 'It will fall until mid-year,' said Rafal Antszak, an economist with the Harvard Institute for International Development. 'After that it is hard to say. With privatization the situation can improve, if they manage to do it.'
The rate was 1.8990 on Jan. 1, when a previously-announced band of Hr 1.75 to 1.95 per dollar was in place. 'There has been a 4.2 percent devaluation on the hryvna since Jan. 1,' a Western banker said.
'There has been an incredible effort by the National Bank. Without intervening every day it would have fallen out of the corridor,' he said, adding the bank had run out of net reserves defending the hryvna and keeping the T-bill market breathing.
Economists say the central bank has been the largest buyer of Ukraine's T-bills, which now fetch yields of about 50 percent, after foreign investors stopped buying late last year.
'The reserve situation is not dramatic,' Antszak said, estimating the bank has spent about $460 million since the beginning of the year on the UICE, interbank market and T-bills.
Central bank gross reserves are a modest $2.4 billion. Many analysts have blamed investor nervousness after turmoil on international markets late last year for the sudden lack of interest in T-bills – but others blame Ukraine's lack of structural reforms such as revamping the tax system and pushing privatization.
Antszak attributed an almost daily drop in the exchange rate to an agreement between the IMF and the government at the end of January.
Economists said Ukraine and the International Monetary Fund, in a move to promote monetary stability and protect central bank reserves, revised their program under the current $542 million stand-by deal. The revision pushes Ukraine to devalue the hryvna and also allows the central bank to buy Treasury bills.
The IMF, still to pay monthly tranches of $50 million before the stand-by expires in June, could not be reached for comment.
Antszak said the dropping exchange rate presented dangers of quickening inflation and declining wages, and provided little guarantee there would be increased exports. 'Since 1995 there has been a lack of fiscal reform,' he said. 'There is a vicious circle in fiscal policy and this is behind all the problems in Ukraine.'
Short of money at home, Ukraine has taken to borrowing abroad, including the issue of a DM 750-million three-year bond at an annual interest rate of 16 percent two weeks ago.
'There was that world record 16 percent bond, on which they made $450 million,' the banker said. 'That will last another one and a half months.'
Many Ukrainians – with memories fresh from 1993 when the interim karbovanets currency devalued at breakneck speed fear a repeat performance with the hryvna. Economists say politicians are too fearful to implement necessary reforms.
Ukraine faces parliamentary elections next month and presidential elections next year.
President Leonid Kuchma, whose economic reform program seems to have withered since it was launched in 1994, said the deficit in 1998 would be slashed to 2.5 percent of gross domestic product (GDP) this year from 3.3 percent of GDP approved by Parliament.
'Nothing has changed. Kuchma promised mass reforms, structural reforms and agricultural reforms in 1994. We're waiting for reforms. The Ukrainian economy has to pay the price for it,' the banker said.
