5 Jun 2024 17:04

NBU attributes 41% increase in net demand for non-cash currency in May to higher budget expenditures in Ukraine

MOSCOW. June 5 (Interfax) - Net customer demand for foreign currency with regard to non-cash transactions in Ukraine rose 41% in May due to higher budget expenditures, which is associated with international aid receipts in March-April, the National Bank of Ukraine (NBU) said in a statement to Ukrainian media on Wednesday.

"Besides, during the last week of May there were substantial situational spikes in demand for currency, which affected the exchange rate dynamics," the regulator said.

The NBU said that the exchange rate dynamics were also affected by the end of the period in mid-May, when there was an overlap of two deadlines for settlements for agricultural exports.

"This lowered the volume of forex supply amid the exhaustion of last year's harvest," the NBU said.

"This change in market conditions, namely, higher demand for foreign currency with a simultaneous reduction in supply, resulted in a corresponding weakening of the hryvnia exchange rate. For its part, the National Bank covered the structural shortage of foreign currency and smoothed excessive fluctuations in the exchange rate," the National Bank said in its response.

It is noted that the average daily volume of the regulator's currency interventions reached $134 million in May compared to $104 million in April and $86 million in March.

The NBU said that the situation on the foreign exchange market remains generally stable and manageable, while the level of international reserves is sufficient to maintain the sustainability of the foreign exchange market.

The National Bank said that further dynamics of the exchange rate will be determined primarily by changes in the balance of demand and supply of foreign currency.

"It is essential for the NBU to maintain this link between exchange rate dynamics and changes in market conditions. This makes constructive uncertainty greater, promotes awareness of risks, growth of trading activity and depth of the foreign exchange market, synchronization of its segments," the National Bank said.

It added that since the transition to the regime of managed flexibility, operations without the regulator's involvement have more than tripled, while their share has more than doubled.

The National Bank said that progress in deepening the foreign exchange market and enhancing the exchange rate's ability to adjust to internal and external shocks will make the foreign exchange market and the Ukrainian economy more resilient. At the same time, maintaining exchange rate sustainability remains an important objective for the NBU.

"This refers to such dynamics of the exchange rate, which will not jeopardize the maintenance of the inflation rate at a moderate level in 2024 (despite the expected acceleration) with its subsequent reduction to the 5% target on the NBU's forecast horizon," the National Bank said.

At the same time, the NBU noted that the substantial level of international reserves, positive developments in maintaining the United States' financial support and the successful completion of the fourth review of the program with the International Monetary Fund at the staff level bolster the regulator's ability to ensure a manageable situation on the forex market.

When asked about the newly widened spread between the official and cash exchange rates, the NBU said that the difference "is within quite acceptable limits, not exceeding 1.5%," within which it expects it would remain in the future.

"This will be facilitated by both the sufficient capacity of banks to meet customers' demand for cash currency and the ability of customers to buy currency in non-cash form. If needed, the NBU stands ready to take additional measures to minimize the multiplicity of exchange rates. We have required tools and resources for this purpose," the Central Bank said.

Furthermore, the regulator positively assesses the outcome of the new steps of currency liberalization, which were adopted on May 3, 2024 to support businesses and in a constructive discussion with representatives of Ukrainian enterprises.

"In the short term, the NBU expects to increase the volume of borrowed funds and, accordingly, commercial activity of Ukrainian businesses. In the medium term, it expects an inflow of investment capital to Ukraine," the statement said.

The Central Bank expects that businesses will make use of the provided opportunities "responsibly" in order to attract investment in Ukraine, develop their own operations, enter new markets and at the same time increase the inflow of export proceeds to the country.

"Any measures for currency liberalization at the first stages are also generating demand for foreign currency and only in the long run, when businesses and foreign investors are convinced that everything works, leads to an inflow of investment," the National Bank said.

"Given this, the recent steps to ease currency restrictions have expectedly resulted in a certain increase in demand for foreign currency, which, however, was not decisive for the foreign exchange market conditions. A large number of companies have not yet had time to reconfigure their own processes required to take advantage of new opportunities," the regulator said.

Nevertheless, taking into account the above-mentioned, the NBU has tightened currency supervision and control over the return of export proceeds.

As previously reported, the official hryvnia exchange rate dropped by 90 kopecks by the end of May from UAH 39.6370/$1 to UAH 40.5373/$1, having daily updated all-time lows in the last ten days of the month. On the cash market, the hryvnia exchange rate also fell by UAH 1.24 to UAH 41.05/$1 over the past month.

At the same time, in the first week of June, the official exchange rate rose to UAH 40.2938/$1, and on the cash market to UAH 40.85/$1.