Burak Pehlivan: Will the hryvnia go up or down?

by burakpehlivan on 27/07/2018

The hryvnia, the national currency of Ukraine, has been exposed to two great devaluations against the dollar during the last 10 years. Before the first devaluation, one dollar used to be equal to five hryvnia according to the exchange rates. Due to the global economic crises in 2008, the hryvnia has lost value by 50 percent against the greenback and the exchange rate has first soared to 10 for a short time and subsequently, during approximately five years, the rate has been fixed at 8.

And, the second large devaluation has been sustained in February 2015, when 1 dollar has become equal to 35 hryvnia, due to annexation of Crimea by the Russian Federation following the Euromaidan Revolution that forced President Viktor Yanukovych from power in 2014, instability in the eastern Donbas, which then hosted 25 percent of the country’s industry, exports’ bottoming out because of a significant loss in the Russia market, which had a 35 percent share in the country’s foreign trade.

There was also a high loss in the value of Russian ruble which hryvnia used to be strictly connected to at that time, stagnation and as a result of all these developments, shrinkage suffered in the economy; and the decrease in the value of hryvnia has reached to 77 percent for some time.

However, by virtue of announcement of the financial support package by the West amounting to $35 billion, the backbone of which has been the agreement made by Ukraine with the International Monetary Fund for an amount of $17.5 billion; structural reforms implemented in the country, mainly in the banking sector; establishment of political and economic stability again; the exchange rate has rapidly fallen down from said levels and in April in the same year, the exchange rate decreased down to 1 dollar equal to 21 hryvnia. Although the exchange rate has gradually increased thereafter, the average exchange rate has been:

22.19 in 2015,

25.74 in 2016,

26.7 in 2017.

Ukrainian hryvnia is the best performing currency in 2018

Despite consecutive increases of interest rates in America, increasing petroleum, natural gas prices despite strong dollar and the fact that Ukraine depends on imports for a significant portion of its energy consumption; the hryvnia has not almost sustained any loss against the U.S. dollars during last one-year period. Last year in July, the exchange rate used to be one dollar equal to 26.2 hryvnia and today it is 26.6 hryvnia. Although the currencies of developing countries have suffered sharp falls against dollar due to the reasons we explain above, Ukrainian hryvnia has gained value by 7 percent against the dollar from the beginning of the year and has been the best performing the currency among those of the developing countries.

Ukraine couldn’t be able to receive any tranche from the IMF since April 2017, due to problems of the implementation of the agreement made with IMF, so how can be achieved a stable hyryvnia? Is it possible that the government may keep the exchange rate at these levels by using artificial methods only? Let’s together analyse the answers of these questions and at what level may the exchange rate reach in the future.

First of all, it shall be convenient to remind that the Ukrainian currency has been exposed to negative segregation compared to other currencies, in previous years; therefore we have a low base in hand. Furthermore, since the Ukrainian capital markets are not developed and sufficiently integrated with the world, this facilitates to keep the Ukrainian hryvnia unresponsive against changes in global markets.

Ratio of Ukraine’s exports to its national income, is 40%

We frequently encounter questions like “Ukraine is not producing anything, what does it export?”

This facilitates the impact of the lack of special consumption tax on luxury consumption, observing luxury cars of a small group in the capital Kyiv and the existence of expensive boutiques, elegant, pompous restaurants, places of entertainment in the center.

But on the other hand, the location of many production facilities in remote places causes a prejudice, especially for those who visit Ukraine for a short time, that Ukraine is a country with limited production, but high consumption. It amazes many people how the exchange rate is kept constant in such a country.

However, contrary to that popular belief, Ukraine has a significant level of production and significant exports compared to its national income.

Turkey makes exports equal to approximately 20 percent of its gross domestic product; on the other hand, as it can be seen in the table below, which I have prepared based on the information provided by SigmaBleyzer, said rates reaches to 40 percent in Ukraine.

 Macroeconomic Indicators of Ukraine
2012 2013 2014 2015 2016 2017 2018t
GDP USD billion 173 180 130 87 94.4 104 113
Real GDP Growth 0.2 0 -6.6 -9.9 2.3 2.5 3
Hryvnia Exchange Rate per USD 8.1 8.2 15.8 22.2 25.7 26.7 29
Current Account Balance % GDP -8.3 -9.2 -3.5 -0.2 -3.8 -3.7 -3.5
Merchandise Exports 64 59 51 35 34 40 43
Merchandise Imports 86 81 58 39 40 49 52
Merchandise Exports Imports Coverage Ratio 74.4 72.8 87.9 897 85.0 81.6 82.7
International Reserves, USD billion 24.5 20.4 7.5 13.3 15.5 18.8 21
FDI, Net Annual Inflow 8.4 4.5 0.4 3.0 3.3 2.3 5.0


Let’s continue to analyse this table which contains the macroeconomic data of Ukraine for the last six years. In dollar terms, national income has decrease by 50 percent after the EuroMaidan, due to high devaluation and sharp economic recession; but the decrease in exports remained far below the decrease in imports and the foreign trade deficit has fallen down and an improvement equal 5,5 percent of the GDP has been provided in the current account balance since 2013. Although there has been in an increase in direct investments, considering also the financial support provided from abroad, foreign exchange reserves of the country have been restored back to the level in 2013. Foreign support, reinstituted political stability, implemented structural reforms, increasing confidence to the economy and improving balance of foreign trade, have altogether had positive impact on the exchange rate.

In the following table, which I have prepared based on the data of the Turkish Statistical Institute, I compare exports imports coverage ratio, of Ukraine and Turkey. According to this criterion, between two countries, there has been significant improvement in favor of Ukraine, in the last six years and the difference has increased, and although not weighted, a difference of approximately 20 points has occurred on average.

 Merchandise Exports Imports Coverage Ratio of Turkey and Ukraine 
  2012 2013 2014 2015 2016 2017 Average
Ukraine 74,4 72.8 87.9 89.7 85 81.6 81.9
Turkey 64.5 60.3 65.1 63.4 71.8 67.1 63.3


IT exports of Ukraine have increased by 5-fold in the last 5 years

Turkey has a substantial amount of income from certain sectors such as tourism and transportation services, however in the income from services, compared to national income, Ukraine is in a much better position.

Ukraine is the 5th country with highest number of certified IT specialists on earth. Information technologies exports, which used to be at the level of approximately $1 billion annually, have increased to an amount of $3.5 billion last year.

This year, they are expected to realize$4.5 billion.

In 5 years time, IT services exports have increased by nearly five-fold. Income in the amount of $2 billion is earned from natural gas and oil transit, which is approximately 2 percent of the national income. However, after the exports, the highest sources of foreign currency revenues of the country, are the wages in foreign currency, earned by workers abroad.

Workers’ remittances exceeding 10 percent of the national income

Today, approximately 16 percent of the employable workforce of Ukraine works abroad at temporary works or as seasonal workers. Not long ago, just five years before, the number of Ukrainians who work in the neighbouring country Poland used to be 250,000. Today the number of those workers exceeded 1.5 million.

According to the National Bank of Ukraine’s data, Ukrainians who work abroad have transferred an amount of $2.6 billion USD to their country, through various ways, in the first quarter of the year.

Besides, considering the facts that money transfers with Russia are prohibited, and that the Ukrainians working in the neighboring countries, mainly in Poland, bring also foreign currency with them, it would be fair to estimate that the amount of foreign currency funds provided by the workers who work abroad, is minimum 40 percent higher than the figures shown in official statistics.

So, under these circumstances, we note that foreign currency funds provided by workers, in an amount of $10-$12 billion, which is equal to at least 10 percent of national income, have been contributed to the economy. Even this source shall be sufficient alone to meet foreign trade deficit of the country.

Continuity of the IMF agreement shall be the most important factor for stability of the exchange rates

Ukraine is making efforts to reactivate the IMF agreement, which is currently refrigerated and which shall expire in March 2019.

From the financial package which included a total amount of $17.5 billion in loans, only an amount of $8.4 billion has been received. The last tranche came 16 months ago. months ago.

In this context, at least two demands of the fund should be fulfilled.

The most important one among them is the amendment required to be made in the anti-corruption court, which has been ratified by the national assembly a short while ago, which, however, has failed to be fully consistent with the demands of the IMF.

Another demand required to be fulfilled, is, as undertaken by Ukraine, increasing the price of gas consumed by households, up to the market price level. Leadership of Ukraine shall strive to maintain the exchange rates low and stable, until the elections; as a matter of fact, they shall prefer to enter electoral period, with an electorate with high purchasing power and increased real income.

Unless an unfortunate situation is develops with the IMF, significant fluctuations may hardly be experienced in exchange rates, an agreement shall somehow be reached with the IMF or at least, efforts shall be put to keep the process active.

Due payments by Ukraine in high amounts for natural gas in winter months and the expenditures of the state at the end of the year, it shall be a true challenge for the government to try to prevent the loss of value of hryvnia, traditionally encountered at the end and beginning of each year.

Besides, there are some other additional factors which may oppress the exchange rates this year.

The law enacted last week relating to the exchange rates, foreign exchange regime which remained unchanged since the first years when the country gained its independence and which is in the nature of a revolution, shall have an implementation period of seven months.

The said law shall considerably facilitate the transfer of funds from Ukraine to abroad, making investment.

Likewise, the central bank has removed and will remove gradually the administrative measures relating to foreign exchange controls, which have been imposed after the crises. This shall also oppress the projections regarding exchange rates for one year, undoubtedly during the forthcoming six-month period. However, despite all these factors, it is a reality that there are sufficient parameters which shall justify the presumption that the exchange rates shall continue steadily. The focus shall be on the progress of IMF agreement.


Burak Pehlivan is chairman of the board of the Turkish-Ukrainian Business Association, known as TUID.

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