In Digest, Ukraine

By Roman Olearchyk, Financial Times, March 3, 2015

Ukraine has sharply raised its benchmark refinancing rate by 10.5 percentage points to 30 per cent, in a desperate move to temper spiralling inflation and halt its sinking currency.

The National Bank of Ukraine, photo from Trip Advisor

The National Bank of Ukraine, photo from Trip Advisor

The war in the east of the country has plunged Ukraine into financial crisis, and the central bank’s decision to raise its main interest rate from 19.5 per cent, announced on Tuesday [March 3], adds to a flurry of currency and capital controls it has recently imposed amid capital flight. It raised rates from 14 per cent just a month ago.

“Given the situation that the threat of inflation has risen strongly… in order to stabilise the situation, the Monetary Policy Committee recommended… to raise the rate,” Reuters quoted Ukraine National Bank governor Valeria Gontareva as saying.

Capital Economics described the move as a “desperate attempt… to regain control of the currency”, which has dropped more than 40 per cent since the start of this year, on top of a 40 per cent drop in 2014. “This comes against the backdrop of large-scale capital flight and the fact that the authorities have no FX reserves to speak of,” the research firm added in a note.

Ms Gontareva said the move was aimed at helping push the hryvnia back up to a level of 20-22 against the US dollar, around the 21.5 per dollar used to calculate the government’s annual budget.

Ukraine's currency as measured against the U.S. dollar, chart by Thomson Reuters

Ukraine’s currency as measured against the U.S. dollar, chart by Thomson Reuters

The currency has strengthened a little to 24.25 since hitting its weakest on record of 33.75 last week. It is the world’s worst performing currency so far this year, as it was in 2014.

The central bank’s move come as Kiev’s lawmakers this week rushed to adopt a package of austerity and reform legislation needed to unlock a new $17.5bn International Monetary Fund bailout.

Should the IMF board approve the bailout, some funds would be front-loaded to stabilise the state’s stretched finances and replenish depleted central bank reserves, both IMF and Ukrainian officials have said. Central bank reserves have fallen to around just one month of import coverage, compared with the three months that is considered the critical threshold.

Though the fresh IMF bailout is expected to keep Kiev financially afloat in the near term, continued fighting with Russian-backed separatists in breakaway eastern regions could deepen economic woes for a country grappling with double-digit inflation and which is expecting its economy to shrink by at least 4.5 per cent this year, following a 7.5 per cent contraction in 2014.

Col. Andriy Lysenko, a Ukrainian army spokesperson, said on Tuesday that three soldiers had died and nine had been injured since Monday in lower intensity but continued pro-Russian rebel attacks that were hampering the three-week ceasefire[sic]. Ukrainian forces suffered a similar amount of casualties and fatalities in fighting late last week.

Mr Lysenko accused Russia of continuing to funnel arms and fighters to the separatists, which he said were regrouping for future attacks.

Petro Poroshenko, Ukraine’s pro-western president, expressed concern about the development in a phone call on Tuesday with Donald Tusk, the European Council president. In a statement from Mr Poroshenko’s office, he urged the west to refrain from “premature optimism” over the strength of the ceasefire to end the one-year conflict that has claimed more than 6,000 lives.

U.S. President Barack Obama was scheduled on Tuesday to hold talks on the Ukraine crisis with European leaders via video conference, according to a White House statement.

Western leaders have threatened Russia with deeper sanctions should the ceasefire fail, but they are split over whether to provide lethal defensive weapons to Ukraine.

Watch a five-minute interview on the calamitous state of Ukraine’s finances with Martin Wolf of the Financial Times, at the original article weblink. He says a “restructuring” of Ukraine [a la an IMF plan] is a “matter of national survival” and that Russia must cease its support to pro-autonomy rebels in eastern Ukraine.


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