On November 3, 2014, the National Bank of Ukraine hosted a regular meeting with the senior managers of 40 major banks. At the meeting, the National Bank of Ukraine and banks reached an understanding on new coordination mechanisms to determine the equilibrium hryvnia exchange rate in the foreign exchange market.
Governor of the National Bank of Ukraine Valeriia Gontareva informed the meeting participants that the changeover to the new mechanism became possible primarily due to the improvement of macroeconomic situation. According to NBU estimates, in the first nine months of 2014, GDP contracted by approximately 3.5%. In 2014, Ukraine's GDP is expected to shrink by 7% rather than 9% as projected earlier.
In addition, following the elections to the Verkhovna Rada of Ukraine, the emotional pressure on the foreign exchange market has subsided. For the first time, the pro-European majority in the Parliament will be able to form the coalition and the government.
The agreement reached with Gazprom JSC over the gas supplies to Ukraine gives rise to hope for the smooth operation of Ukraine's economy in the upcoming winter period. On the positive side, the IMF has agreed that the National Bank can use its international reserves to pay for imported gas. "Although, on the one hand, this will result in a shrinkage in the reserves, but, on the other hand, this will enable us to avoid additional pressure on the foreign exchange market," explained Valeriia Gontareva.
The foreign exchange market has shown signs of stabilization, with a curtailment of growth in deferred demand for foreign exchange, an increase in deposits, and exporters stepping up selling of foreign exchange. These developments enabled the National Bank of Ukraine to ease the requirements applying to certain foreign exchange transactions, which were introduced by Resolution of the National Bank of Ukraine Board No. 540, dated August 29, 2014 “On the introduction of additional mechanisms to stabilize the money and foreign exchange markets of Ukraine”. In addition, starting from this week, the National Bank of Ukraine will cease to hold foreign exchange auctions to replenish banks' cash departments.
Considering the real and financial sector developments, drawing from international practice and experience, the National Bank of Ukraine has proposed this mechanism to determine the equilibrium hryvnia exchange rate. Starting from Wednesday 5th November 2014, the National Bank is to conduct auctions for the sale of foreign exchange on a daily basis over the next 3 - 6 months. Upon the results of these auctions, market participants will be provided with information on the cutoff price and a new equilibrium hryvnia exchange rate. She also noted that "given the fact that the National Bank would sell foreign exchange to Naftogaz of Ukraine NJSC directly, circumventing the foreign exchange market, the largest importer would be removed from the market. As a result, the foreign exchange market will see a surplus of foreign exchange, driven by the sale of export proceeds".
Governor of the National Bank of Ukraine Valeriia Gontareva noted that "the proposed auctions should be seen as a mechanism allowing to determine the equilibrium hryvnia exchange rate. What is at issue here is not whether the demand for foreign exchange will be met".