We are all used to the hryvnia falling during a crisis. That is why when the dollar fell, the people’s reaction was the same: they rushed to change dollars for other currencies. Regardless of what the government says about the benefit of revaluation, people are worried all the same. They still do not expect any good of the government.

The National Bank of Ukraine (NBU) gave up the tight hryvnia-to-dollar peg. Since 2000, the hryvnia-to-dollar exchange rate has remained at the level of 5.3. In 2005, the Ukrainian currency has been gradually revaluating, from 5.3 to 5.19 hryvnias to the dollar. The first dramatic fall of the dollar - down to 5.03 - 5.1 hryvnias per dollar, at the interbank exchange took place on April 8. The National Bank, however, did not take part in the auction then, and to the change was blamed on speculators. But during the second trade session on April 20, it was the NBU who bought the remaining currency supply at a price of 5.05 hryvnias per dollar, and immediately raised the official exchange rate by 2.7%.

There was an even more visible fall in the commercial exchange rate: last Thursday the dollar was sold at 4.8 - 4.97 hryvnias and bought at 5.09 - 5.17 hryvnias. Those wishing to close their currency accounts lined up at the banks. Based on experts’ estimation that dollar savings by the population make up 10 billion dollars at the least, it is easy to calculate that Ukrainians lost 250 - 300 million dollars in one day.

A number of experts believe that the NBU decision came in response to foreign investors, who actively purchased state bonds. This week a record-breaking sum of 2.16 billion hryvnias (426 million dollars) was spent on Ukrainian state bonds, with 60% of this sum coming from foreigners. Under such conditions, a high exchange rate would cause a rapid growth of liquidity in the money market, which, in its turn, would increase the risk of speeding up inflation.

Foreign experts welcome the decision to strengthen the hryvnia. For example, Lars Krstensen of Danske Bank spoke about the undervaluation of the hryvnia relative to the Russian ruble and other currencies of the former Soviet countries. He believes that in 2005, the value of the Ukrainian currency should be increased by 15% (at a level of 4.5 hryvnias to the dollar) to keep the level of inflation lower than 10%. However,Ukrainian experts interpret such foreign support as lobbying for imports and an attempt to decrease the competitiveness of Ukrainian goods abroad.

Import enterprises and foreign investors who buy Ukrainian state bonds will benefit from a sharp decrease of the dollar to hryvnia exchange rate, experts of Aval Bank believe. In fact, they take all reverse changes as negative signals. Aval forecasts that changes in the exchange rate will affect the character of people’s savings: dollar deposits will become less attractive, whereas hryvnia deposits will not increase because of high inflation expectations (experts at the bank predict that in 2005, inflation may reach a level of 12 - 16 %).

Bankers are critical mostly of the revaluation’s haste, rather than its mere fact. The Ukrainian Bank Association believes that “any abrupt changes on any market,” including the financial market, will destabilize country’s economy.

Ukrsotsbank board chairman Borys Tymonkin believes that without the right decision by the NBU council (which has set up an average annual exchange rate of 5.27 - 5.32 hryvnias to the dollar) such a revaluation would break the system of financial levers in the state. “A series of measures aimed at restricting the money supply will slow down inflation. Most likely it will not exceed 8-10% by the end of the year. But nobody works wonders in the economy, which means that this will happen at someone’s expense. Whose expense? The light and food industry, machine building and all businesses that work for export with a small margin. Highly profitable metallurgical and chemical enterprises will survive, yet they will significantly lose profits. In the long run, all large businesses, who pay the lion’s share of taxes, will suffer,” Borys Timonkin believes.

And what about the National Bank? It says that the increase in the hryvnia exchange rate accords with “actual market tendencies,” since it will have “an important macroeconomic effect” consisting in “relief of inflation pressure.” Also, when it formulates its exchange policy, the NBU “considers the interests of all economic agents” and “especially the interests of the population.”

Volodymyr Stelmakh, the NBU governor, cites curbing inflation as the major reason for the current revaluation of hryvnia at a parliamentary meeting last Friday. “Inflation causes a loss of purchasing power by the population, whereas an increase in the value of the national currency has the opposite effect,” he said. He also stated that the State Budget of Ukraine provided for the 5.1 hryvnias to dollar exchange rate (by the year’s end), but in fact it has not changed since 2005. “We were behind in this issue, so we made adjustments,” Stelmakh said.

And now, attention! According to the NBU, the currency exchange rate has great significance for Ukraine due to the openness of its economy. During the last two or three years there have been economic conditions for the increase of hryvnia’s value, so revaluation will continue. According to Stelmahk, its value could grow significantly, up to 3.8 hryvnias per dollar, whereas experts estimate that the actual hrvynia to dollar exchange rate should be 1.3 to 2.6!

It’s a good thing the NBU leadership realized that “such a decrease in the dollar exchange rate could bring about negative consequences.”