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regime and move to some degree of flexibility. The prospect of a managed float is also clearly articulated in the IMF Memorandum. We argue that this is unlikely to happen in 2023, and a move to a flexible exchange rate may happen no sooner than in 1Q24, most likely in March. We don’t think this move is possible until the second review of the IMF program, scheduled for October, is complete. The results of the review won’t be stamped by the IMF Board until November. Then comes winter, which is the most challenging period for the Ukrainian FX market. Heightened seasonal demand for FX may be reinforced by the negative sentiment of the population if russia repeats its massive missile strikes on energy infrastructure. By no mean is this going to be the best window of opportunity for a shift in exchange-rate policy by the central bank.
we now expect end-2023 official exchange rate to be unchanged at UAH36.6/$with the cash exchange rate remaining close to the official numbers. In 2024, we see a gradual depreciation of about 15% over the course of the year to about UAH42/$.
The National Bank says that currency restrictions are losing their effectiveness and restraining economic activity. According to Volodymyr Lepushynskyi, director of the Department of Monetary Policy of the NBU, the disadvantages of this mechanism has begun to exceed the advantages. He added that fixing the exchange rate in combination with currency restrictions was very effective at the onset of wartime conditions. However, over time this mechanism's shortcomings begin to prevail. Economic imbalances accumulate, and the possibilities of adapting to external and internal conditions changes are limited. Currency restrictions lose effectiveness over time because conditions change, and businesses find ways to circumvent them. In addition, their preservation can unnecessarily distort the business environment and restrain economic activity, he clarified. The NBU is convinced that moving to greater exchange rate flexibility is necessary, and further, it is necessary to gradually and carefully ease currency restrictions.
The NBU might allow a flexible exchange rate for the dollar even before the end of the war. According to the Deputy Chairman of the National Bank, Serhii Nikolaychuk, last week the strategy of softening currency restrictions, a transition to a flexible exchange rate, and a return to inflation targeting was made public. These actions indicate the prerequisites the NBU prioritizes when evaluating the possibility of returning to a flexible exchange rate. Among them: a manageable situation on the foreign exchange market, a sufficient volume of international reserves, the easing of several restrictions that allow the difference between exchange rates to be minimized, a steady decrease in inflation, and the effectiveness of monetary instruments that ensure the attractiveness of hryvnia assets. Flexibility will be increased gradually, and the NBU will continue to monitor the market and be prepared to intervene. As of July 20, the average dollar exchange rate in banks was UAH 36.97, and the official rate was UAH 36.56.
41 UKRAINE Country Report August 2023 www.intellinews.com