September 25, 2009

Ukrainian Hryvnia's Plunge

The Ukrainian hryvnia is the worst performer against the dollar at present moment. The hryvnia has already lost more than 80 percent against the US dollar since September 2008. It was traded at 4.50 per US dollar last September in Kyiv, Ukraine's capital. Now it is traded at 8.50 per dollar. These pictures taken on the streets of Kyiv show a depreciation of hryvnia against dollar between September 2008 and September 2009.

From UkraineWatch

The main source of hryvnia's depreciation is a rampant inflation. The Tymoshenko government printed money at a steady rate since the start of recession. Ukraine's inflation rate was 26% a year ago. Now it's 16% that still leaves the Ukrainian economy with one of the highest inflation rates in the world. I am afraid that the government will print much more money closer to the presidential elections. She would pull the inflationary stunt to increase her constituency in the public sector by raising and paying wages and pensions of public sector employees. Does she understand that a majority of Ukrainians hold their savings in hryvnia and making dollar-pegged credit payments? Thus, most Ukrainians are getting screwed big times by the Tymoshenko government. Here is a funny cartoon that shows how hard prime-minister Tymoshenko works at the money printing machine. The cartoon's caption says "She Does Work!" by making a sarcastic reference to her presidential ads featuring the same caption.

From UkraineWatch

I just don't understand why the National Bank of Ukraine didn't lower the interest rate to boost the national economy instead of running a money printing machine. It would still have the depreciation effect though with a lower inflation.

But there are some bright spots in a quite gloomy picture of Ukraine's economy. The Ukrainian economy has been export-driven since the late 1990s. Steel industry was the major exporter with a 40% share of the total exports. A double-digit depreciation of hryvnia significantly boosted the industrial exports. According to the State Statistics Committee of Ukraine, the steel output grew by 16% in July and 10% in August. Moreover, Ukraine is also one of the world's top ten exporters of grain, sunflower, and corn. Did hryvnia's depreciation make export-oriented agro-producing firms better off? Yes, it did.
Agricultural output demonstrated a 4% growth in Q2 of 2009.

14 comments:

  1. Weird country, weird policy. I wouldn't be surprised.

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  2. Leo, do you think it is at all likely that the Hryvnia will eventually be replaced by a new currency just as it replaced another currency in the 90s? Also, did you notice that 21 days before this posting, the Hyrvnia value dropped to 8.93/1 USD? Additionally I have noticed that the Hryvnia is currently (seemingly) stabilized at around 8 to the dollar? Is there a policy that is causing this or is the Hyrvnia playing to the markets now with a lack of new legislation?

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  3. So the political agenda of winning over constituents- once again took presidence over getting the economy back on its feet.
    Printing money didnt get rid of inflation rates whatsoever, but how did depreciation help the steel industries as well as the agro-producing firms?
    I'm curious to see how Ukraine's progressed since last september.

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  4. Onon EnkhtuvshinMay 5, 2010 at 9:13 PM

    This is crazy. Just to think of when you said in the lecture how Ukraine changed their monetary system so many times and the inflation is still high. Could this possibly due to international competition from several low wage countries? I am just curious because if Tymoshenko were to increase wages and pension which lowers the tax revenue, of course it would guarantee inflation. I hope under new president Yuschenko, Ukraine will have lower inflation rate than before.

    Onon Enkhtuvshin

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  5. Denis Vorozhko.

    I think that interested point was brought up in the article. Inflation of hryvnia resulted in positive outcome for agriculture and manufacturing sector, as it lowered costs of production.

    Ukrainian economy have shown signs of recovery in 2010. According to vice-prime minister of Ukraine, economy of the country has shown a growth of 6.8% in March of 2010. Speaking about inflation it should be said that Ukraine faced deflation of 0,3% according to National Bank of Ukraine.

    As a result NBU is raising talks on lowering interest rates, actually it has been done so for a particular type of credits.

    New federal budget is described by the government as 'realistic', which means that there are no increase in government spendings and social benefits.

    Current economic performance of Ukraine might be persuasive enough for the IMF in terms of 12 billion USD loan, but, however, political instability might serve as an barrier.

    Despite first recovery signs NBU insists on not weakening monetary policy, as "it will remain main factor for price stabilization" - head of the NBU.

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  6. Denis Vorozhko.

    I think that interested point was brought up in the article. Inflation of hryvnia resulted in positive outcome for agriculture and manufacturing sector, as it lowered costs of production.

    Ukrainian economy have shown signs of recovery in 2010. According to vice-prime minister of Ukraine, economy of the country has shown a growth of 6.8% in March of 2010. Speaking about inflation it should be said that Ukraine faced deflation of 0,3% according to National Bank of Ukraine.

    As a result NBU is raising talks on lowering interest rates, actually it has been done so for a particular type of credits.

    New federal budget is described by the government as 'realistic', which means that there are no increase in government spendings and social benefits.

    Current economic performance of Ukraine might be persuasive enough for the IMF in terms of 12 billion USD loan, but, however, political instability might serve as an barrier.

    Despite first recovery signs NBU insists on not weakening monetary policy, as "it will remain main factor for price stabilization" - head of the NBU.

    May 6, 2010 2:46 PM

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  7. With such inflation, the hyrvnia is bound to depreciate by a hefty percentage which is of no help to their weakened economy. So why did the government choose to do so?
    Is it because they thought that a weakened hyrvnia would further boost their growing export sector? But then wouldn't depreciation also lead to a decrease in investor confidence thereby hurting economic development in Ukraine? Which one has the bigger effect on the economy, the loss in confidence or the growth in the export sector?

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  8. Its incredible how political agenda always wins over the greater good of the economy. I think that with the presidential elections in 2009, the Tymoshenko government probably did print more money so that they looked better in the public sector. But by printing more money the government probably increased the 16% inflation rate to be even higher.

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  9. I'm confused about why the government chose to do so. Didn't the government realize what hurt it would bring to the economy? When running a money printing machine didn't work, why didn't her find another way to save the economy? Though export industries are boosted, the economy cannot be saved in the long term by printing money which will result in inflation and depreciation.

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  10. The depreciation may also lead to less foreign investment withing the country if the banking system proves volatile; for instance banks would lend inflation goes up and NCO>0 (flowing out)... this can lead to economy recessions within the coutry as you also mentioned it aided exports inflation would also make domestic material more expensive

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  11. Aleksandra MelnikovaMay 7, 2010 at 5:49 AM

    By having tasted the Ukranian sunflower oil, it is the best in the world. I did not realize that depretiation can work in such ways but now it makes sence. Others can buy more of it. And that is exactly what Ukrain and other ex Soviet countries need expand on their economy. Ukrain has a huge advantage it can be the Bread Basket of Europe once again!

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  12. I agree with you in the fact of that lowering the interest, perhaps making it zero for a short period of time, would help the economy and make people spend. However Do you think that maybe those booming sectors have not felt the full on effects of the depreciation yet? Especially if you are correct and the government does print more money.

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  13. In Ukraine, the greatest economic concern is the high and rising inflation, as consumer prices rose by 16.6 percent 2007. As a consequence, there was a tightened budget by balancing it out. According to Tymoshenko, she said that she has learned not to commit any price or export controls from her tenure in 2005. Isn’t this a contradiction to her present actions in Ukraine at the moment? With the elections coming around, the possibility of her controlling the market through an increase in local currency…therefore allowing the elections to sway towards her, this seems like a very uneasy issue. The Ukrainian economy has rippled back and forth and action needs to be taken in order for the nation to be stabilized once again.

    ReplyDelete
  14. In Ukraine, the greatest economic concern is the high and rising inflation, as consumer prices rose by 16.6 percent 2007. As a consequence, there was a tightened budget by balancing it out. According to Tymoshenko, she said that she has learned not to commit any price or export controls from her tenure in 2005. Isn’t this a contradiction to her present actions in Ukraine at the moment? With the elections, the possibility of her controlling the market through an increase in local currency…therefore allowing the elections to sway towards her, this seems like a very uneasy issue. The Ukrainian economy has rippled back and forth and action needs to be taken in order for the nation to be stabilized once again.

    ReplyDelete