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Foreign Exchange

Ukraine considers abandoning currency peg

Ukrainian politicians and bankers are considering allowing the dollar-pegged hryvna to become a managed floating currency. A first reading of a draft law in the country’s parliament, the Rada, has led to expectations that such a change could be made within 12 months.

"Given Ukraine’s substantial foreign exchange reserves, this is in principle a good time for the country to move to a more flexible currency regime," says Martin Raiser, economic adviser in the World Bank country office for Belarus, Moldova and Ukraine in Kiev. "Assuming the current political uncertainty is quickly overcome, Ukraine has an opportunity to introduce more flexibility from a position of strength and so problems are less likely."

The hryvna is pegged to the US dollar and its value has been rigidly maintained in a narrow band between 5.00 and 5.06 since May 2005. The average January exchange rate was 5.0495. As a result, the hryvna has not been allowed to weaken against the dollar to the same extent as other eastern European currencies, such as the Czech koruna. Over the past five years, the koruna has gained 20% against the dollar, while the hryvna has risen by just 5%.

This has come at some cost to the country and has inevitably resulted in an accumulation of foreign currency reserves. By the end of 2006, these stood at more than $22.4 billion. However, there is debate about whether politicians are just paying lip service to recommendations of advisers, such as the World Bank.

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