Saturday, March 7, 2015

Ukraine's Economy Is Worse Than It Looks - Bloomberg View

The world's worst-performing currency this year, the Ukrainian hryvnia, has bounced back 47 percent since last week's precipitous plunge. It's tempting to conclude Ukraine has pulled back from the brink of financial disaster. In reality, the Ukrainian central bank and government are just sweeping their problems under the rug to make them less obvious to the International Monetary Fund as it prepares a decision on a rescue package for the country on March 11. After the IMF money arrives, Ukraine will probably resume its previous monetary policy -- the most disastrous and Soviet-like pursued anywhere in Europe since the early 1990s.

This chart of the hryvnia's exchange rate to the U.S. dollar may look depressingly like a dead bird lying on its back, but, in theory, it shows progress in recent days:


The hryvnia has now approached the 21.7 per U.S. dollar level stipulated by the IMF program. That would be great if it weren't just the meaningless official exchange rate. Though the hryvna was officially floated last month, it is propped up by Wednesday's refinancing rate hike to 30 percent from 19.5 percent and by currency controls. These include a ban on foreign exchange sales of more than 3,000 hryvnias to individuals and on foreign currency deposit payouts of more than 15,000 hryvnias, limits on currency purchases by banks for their own accounts, a requirement that exporters sell 75 percent of their foreign receipts for hryvnias and the ceaseless harassment of importers trying to make payments outside Ukraine.

These draconian measures might seem reasonable given that Ukraine's international reserves at the end of February were down to $5.6 billion, the lowest level since June 2003. There's also the fact that the National Bank of Ukraine spends about $1 billion per month despite all the present restrictions, half on debt servicing and half on interventions to prop up the hryvna's official rate. With the coffers running empty, National Bank governor Valeria Gontareva had to do something to convince the IMF that Ukraine would be able to repay it.

The problem is that the harsh foreign exchange regulation, which makes it nearly impossible to travel abroad or conduct cross-border business, and the interest rate, which pretty much precludes domestic investment through bank funding, are driving much of the economy into the shadow sector. Ukraine has long had one of the biggest shadow economies in the world. Before last year's "revolution of dignity," the IMF estimated it at about 50 percent of output, and it is probably bigger now, because private citizens' foreign exchange transactions have moved almost entirely to the black market, and the corporate ones have gone offshore.

Complete story at - Ukraine's Economy Is Worse Than It Looks - Bloomberg View

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