National Bank of Ukraine utilises compulsory currency conversion powers

By bne IntelliNews November 20, 2012

bne -

The National Bank of Ukraine (NBU) is set to use its new powers to force exporters to convert part of their hard currency earnings, a spokesman said on November 19. The move signals the central bank's increasing need to bolster the country's national hard currency reserves in order to allow it to support the hryvnya.

The legislation handing the NBU the power to order exporters to sell it hard currency earnings was passed on November 6, just days after the results of the parliamentary elections were revealed, reinstalling the pro-presidential Party of Regions. The authorities now need to deal with Ukraine's dangerously deteriorating economic and fiscal position.

With the slowing economy putting increased pressure on the hryvnya, the state's hard currency reserves have been siding sharply, and the population has bought some $4bn of hard currency in recent months as expectations of devaluation grow. The NBU's reserves plunged 8.5% last month to $26.8bn, the lowest since May 2010.

The hryvna is also under pressure from the current account deficit, which widened to $9.3bn in the first nine months of the year from $5.9bn in the same period of 2011. That is the result of dwindling demand for exports - especially steel, with prices slumping on world markets - and rising energy import costs.

Ukraine's currency lost 44.61% against the dollar between September 2008 and September 2009, but was stabilized at about UAH8/$1 in the following two years by central bank support. However, the pressure has resumed this year, and the hryvnya has declined 1.6% so far in 2012. This has left the NBU scrambling to find fresh sources of cash to shore it up. The mandatory conversion rule is a throw back to the chaos of the 1990s, and was abandoned by Ukraine in 2005, but it is now back in play.

The NBU has now ordered companies to convert half their foreign-currency revenue to hryvna, spokesman Oleksandr Kutereshchyn told Bloomberg. Individuals receiving more than UAH150,000 ($18,342) from abroad will also be required to sell half of it to the central bank. The mandatory conversion rule will be in force for six months and the objects of the law will have 90 days to meet their obligations.

The use of the invasive power illustrates that Kyiv is determined for the moment not to concede to IMF demands to hike domestic gas tariffs and carry out other unpopular measures in order to unfreeze its stalled $15.4bn Stand By Agreement. The NBU suggests that the move is designed to buy some breathing space in which to thrash out a new deal with the IMF.

Party of Regions deputies also submitted a bill to introduce a 15% tax on individuals' foreign-currency sales on November 16 the proceeds of which will be paid into the pension fund, the government website says.

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