Ukraine Can Stabilize the Hryvnia

Op-ed in the Kyiv Post

February 26, 2015

This week Ukraine was hit by currency panic. The exchange rate of the hryvnia plummeted and Ukrainians rushed to buy whatever they could for their hryvnias. The popular reaction is understandable, but salvation is near.

The hryvnia is already sufficiently cheap by any standard. Imports have fallen drastically, and Ukraine's prices are highly competitive. The current account is in reasonable balance. Any further depreciation will only result in inflation.

The good news is that substantial funding could soon be at hand.

The fundamental problem is that Ukraine's international currency reserves have dwindled too much—to $6.4 billion at the end of January and presumably $6 billion remains right now. Anything below $10 billion is too little. Ukraine needs more reserves to be able to stabilize its currency. Ideally, friendly nations should give a substantial bridge loan instantly, but that is not likely.

The good news is that substantial funding could soon be at hand. The Ukrainian government has already concluded a $40 billion four-year stabilization program with the International Monetary Fund (IMF), which will be heavily front-loaded since Ukraine needs to reinforce its reserves now. On its own, the IMF will contribute credits of $17.5 billion, presumably $10.5 billion this year.

The United States has committed credits of $2 billion for this year, the European Union $2.4 billion, the World Bank $2 billion, China $2.4 billion, and a number of countries together some $2 billion more, not counting the European Investment Bank and the European Bank for Reconstruction and Development. Furthermore, private bondholders are expected to accept to have payments of $14 billion delayed for the next four years. Altogether this exceeds $40 billion, and the United States and the European Union are likely to contribute more because they have only made their commitments for 2015 as yet.

But Ukraine needs money as soon as possible. The current panic must be stopped by giving Ukraine more liquidity. This can actually be resolved by March 12. The IMF has announced its intention to decide on the Ukraine program at an executive board meeting on March 11. But the IMF board can only do so after the Ukrainian parliament has adopted the amendments to budget, energy, and tax laws that the government has agreed with the IMF. Otherwise the board meeting and the IMF funding would be delayed. But Russia cannot block or delay the decision.

After the IMF board has decided, the IMF can disburse money the next day. The first IMF disbursement will be very large, about $5 billion. In addition, the United States can issue its first $1 billion credit and China its $2.4 billion in March. Ukraine has no particular foreign payments coming up, so by the end of March its reserves could have risen to as much as $14 billion. Then, the hryvnia should recover.

Only two actions are required of Ukraine. First, the parliament must adopt the legislation the IMF requires as soon as possible. Its merits may be discussed, but this is not the right time to do so, because any delay may cause the country's economy to really collapse. Adopt the legislation now and leave other discussions for later.

Second, the National Bank of Ukraine (NBU) must stick to its guns. In this situation of minimal reserves, it is impermissible to waste reserves on currency intervention, as the NBU apparently did on February 25. Instead, the NBU must maintain a strict monetary policy so that hryvnias become scarce and the exchange rate rises when employers have to pay wages and inflation will be contained. The pressure on the chair of the NBU will be great, but she must not give in. Both to defend itself and reassure the population, the NBU should start publishing its international reserves weekly as many other central banks do. Transparency is the best cure against panic.

All this can and should be done. Then, the hryvnia can stabilize within two weeks.