A leading member of Prime Minister Yulia Timoshenko’s revived “Orange” alliance in Ukraine has called for a stronger exchange rate to combat inflation. Viktor Pynzenyk, who was finance minister in 2005-2006 and is leader of the Reforms and Order Party, said he hoped the recent indications from National Bank of Ukraine (NBU) governor Volodymyr Stelmakh would be followed through.
“The governor appears to have announced the appropriate policy, which is a shift from exchange-rate targeting to inflation targeting. I hope he will stick to his word,” Pynzenyk told a recent teleconference organized by Ukrainian investment house Condorde Capital.
At present, Ukraine retains a tightly managed exchange rate against the US dollar, with the hryvnia trading in a very narrow band of 5.0 to 5.06 per dollar. As a result, the currency has been dragged lower by the greenback’s depreciation in 2007, contributing to inflationary pressures in the economy – CPI reached 14.8% year-on-year in October 2007.
“The hryvnia has been strengthening slightly for several years, but not by a natural amount. Inflation cannot be controlled by exchange-rate targeting, this is leading to a policy full of different surprises, which is not good for financial planning,” Pynzenyk said.
He added that the only alternative would be for the government to adopt a strongly disinflationary policy based on a fiscal surplus, but argued that “this option cannot be exercised in Ukraine for political reasons.”
But Petro Poroshenko, the chairman of the NBU council and a former chair of the parliamentary budget committee, cast doubt on whether the central bank should move as far as a full currency float in the near term.
“We believe a stable exchange rate is justified, as fluctuations could be too severe if the currency floated,” he told a teleconference.
Poroshenko confirmed that the NBU had begun to allow a slightly wider exchange rate band since September 2007, and was targeting a range of UAH4.95 to UAH5.25 per US dollar in 2008. He suggested that the monetary authority may continue to set a pre-defined corridor beyond 2008, but that it “might not publicize” the exact range, to prevent speculative activity.
He also indicated that a full inflation-targeting regime was the long-term objective, but warned that it would need a number of major prerequisites, including a “deficit-free budget”, lower trade deficits, and monopolies legislation for the utilities and other sectors, “as these contribute significantly to the acceleration of inflation.”
“We also need the cash participation of the Ukrainian people in stock market floats of state companies, together with proper pension and insurance funds,” he added, to create channels for monetary policy.
Finally, Poroshenko said restrictions on the sale of land must be removed, to allow the agricultural market to develop and respond more effectively to demand. Food prices are a significant contributor to inflation in Ukraine.
Given this lengthy shopping list, “Ukrainian politicians should not make dangers statements that don’t reflect reality,” Poroshenko argued. He acknowledged that moving to an exchange rate target based on a basket of currencies, instead of the dollar alone, was a possible interim solution, but pointed out that this would require legislative changes in any case.