The government and central bank announced on Feb. 21 that Ukraine would allow the hryvna to float freely in 2000 after years of trying to keep it within a trading band.
But the central bank promised it would continue to actively intervene on the currency market in order to prevent rapid drops in the hryvna's exchange rate, much as it did in the days of the trading band.
'Ukraine's Cabinet of Ministers and National Bank consider that under the current circumstances a floating rate will be the most realistic currency policy,' the central bank and government said.
Bankers and stockbrokers were nonplussed by the announcement, which was widely expected and which they said did not represent a radical change from the government's currency policy of the last six months.
'Although formally the trading band regime operated, the rate has effectively floated since last March,' said Roman Diakonchuk of Nadra Bank.
The National Bank, short on reserves, let the hryvna slip out of its formal corridor of Hr 3.4 to Hr 4.6 to the dollar in September last year. It never returned.
The day after the announcement, the hryvna's rate in trading among banks rose from Hr 5.564 to the dollar to Hr 5.547 to the dollar, continuing a slow rise that began earlier in the month.
On Kyiv streets, the hryvna weakened slightly. Exchange kiosks were buying dollars for an average of Hr 5.59 on Feb. 23, compared to Hr 5.57 on Feb. 18, the last working day before the announcement. Ukraine introduced the hryvna at 1.76 per dollar in September 1996, first set a trading band of 1.70-1.90 for the currency in 1997 and then steadily widened it.
Analysts said Ukraine's difficult foreign-debt situation and low hard-currency reserves, drained in previous years by efforts to keep the hryvna within declared limits, necessitated the adoption of a new policy. The National Bank spent more than $700 million on currency exchange markets in efforts to prop the hryvna up last year.
Prime Minister Viktor Yushchenko said on Feb. 21 he had 'profound confidence' in the new currency guidelines, adding that they were a 'demonstration of strong government policies.'
But requirements of international financial institutions, whose money Ukraine urgently needs to cope with the $3.1 billion foreign debt burden this year, also played a key role in the government's move.
The International Monetary Fund long has urged Ukraine to liberalize its currency market and, in particular, lift numerous trading restrictions that were imposed following the regional financial crisis in the fall of 1998.
Yuschenko said the new currency regime would not lead to a sharp hryvna devaluation, pending implementation of the recently adopted deficit-free budget and successful completion of talks with foreign lenders over restructuring debts falling this year and next.
'These two points will guarantee that the exchange rate will not be torpedoed by any budgetary or state problems,' Yushchenko said, according to the Interfax news agency.
The government has forecast the average hryvna rate for 2000 at Hr 5.78 to the dollar, and said it expected the rate to dip to Hr 6.02 to the dollar by the end of the year.
Many analysts believe the hryvna would stay stable in the short term, pointing to a set of factors ranging from a reduced trade deficit in 1999 to frequent central bank interventions this year.
'I expect the rate will be relatively stable in the near-term,' said a dealer at a Western bank. 'There are some reasons: the trade balance improved over last year and the overall economic situation is slightly better now.'
Many bankers, however, believe that Ukraine will be hard-put to keep the hryvna from trading at Hr 7 to the dollar by January 2001. But if that happens, it won't be due to the introduction of the floating rate policy, bankers said.
'[That decision] will leave no impact on the foreign currency market,' said Volodymyr Bezrodny of Mriya Bank. 'The market already has gotten used to work in the floating rate regime.'
Material from Reuters was used in this story.
