Ukraine’s 13-year-old currency, the hryvnia, lost nearly 15 percent of its value in recent weeks before regaining some strength in recent days. The slide was the biggest since last fall, when the hryvnia plunged by some 40 percent in the last four months of 2008, hitting banks, hard-currency borrowers and importers hard.
Last year’s slump was triggered by a sharp fall on the global market for steel, Ukraine’s main export and source of hard currency. The National Bank of Ukraine was forced to drop its longstanding peg to the dollar and allow the currency to float. It depreciated.
As the global economy pulls out of recession, demand for steel is picking up, but the hryvnia remains under pressure. Ukraine’s government and companies still have nearly $100 billion in external debt obligations, and natural gas payments to Russia are also denominated in dollars. The National Bank has $29 billion to keep the currency stable. But it is limited, in part by conditions set by the International Monetary Fund, in the scope of interventions it can make.
Depreciation was expected, but not this month’s drastic fluctuations. Why did it happen? Macroeconomic factors are the big reasons. But confidence in the currency and economic future has also been undermined by Ukraine’s politicians. Kyiv’s main lender, the IMF, is trying to talk sense into the elite, urging pragmatic consensus on unpopular but crucial measures, such as hiking the price of gas to households and curtailing the budget deficit. These steps are needed. But Kyiv’s leaders are not listening, nor do they care about the repercussions their shenanigans pose. Should the currency keep sliding, more banks could fail, more deposits could be frozen and lending could cease.
Ceyla Pazarbasioglu, IMF’s mission chief in Ukraine, said last week: “I am not asking for people who are running for president to be friends. But when you are in a crisis there is at least some minimum understanding of what must be done. This is not the case here. Everyone is trying to cripple the other person.”
Elections come and go, but the country needs to regain a stable footing. Hopes rest now on the IMF forcing constructive compromise in return for more lending. However, Ukrainians should not expect their politicians to change anytime soon. As difficult as it is, Ukrainians should tune out the political noise. It will be hard, but avoiding panic will make the rough economic road ahead more bearable.
