On Thursday, the central bank of Ukraine decided to devalue its hryvnia currency against the US dollar by 25%. The goal is to assist the country in coping with the growing impact on the economy because of the military invasion of Russia.
New hryvnia rate
According to a statement from the National Bank of Ukraine (NBU), the new rate for hryvnia against the US dollar is 36.5686. Five months ago when the Russian war had first begun, the Ukrainian currency had been valued at 29.25 against the dollar.
The bank said that they had made the change after taking into account the fundamental characteristics of the country’s economy in the war and the fact that the greenback has also strengthened against other major currencies.
It further stated that taking this step would come in handy for improving the competitiveness of producers in Ukraine, boost the resilience of Ukraine’s economy during the ongoing war and converging conditions of exchange rates for various groups of households and businesses.
Kyrlylo Shevchenko, the Governor of the NBU, said that the new exchange rate they have established would help keep the economy stable and would also improve its resilience in uncertain situations and environments.
He said that the NBU would also be able to keep some control over inflation by keeping the exchange rate fixed. Moreover, they would also be able to ensure that the financial system continues to function smoothly and without any interruptions. He said that this was a must for keeping the economy stable, which is essential to do with the ongoing war.
He also added that changing the exchange rate would also keep speculation from market participants to a minimum and also allow exporters to bring in more foreign currency into the country.
Request to creditors
A day earlier, Ukraine had requested a payment freeze from its creditors for two years on its international bonds. This is because the country wants to use its financial resources, which are already dwindling, to repel Russia.
According to data from the World Bank, the external debt of Ukraine stood at $130 million by the end of 2020. The country has earmarked international euro and dollar-denominated bonds of almost $20 billion that have a maturity date between 2022 and 2030 that it wants frozen.
The economy of Ukraine is expected to see a contraction in this because of the impacts of the war and between the range of 35% and 45%. According to the country’s estimates, there is a fiscal shortfall of about $5 billion, which is about 2.5% of the GDP before the war. This has occurred because of reduced tax revenues and the cost of the war.
As per economists’ calculations, this means that the annual deficit of the country is about 25%, while it had been 3.5% before the war started. Research shows that it would take at least $100 billion for Ukraine to rebuild its infrastructure and the European Investment Bank says that this could turn into trillions.