Ukraine abolished the fixed dollar exchange rate: NBU announces new currency regime

Starting tomorrow, October 3, Ukraine will effectively abolish the fixed dollar exchange rate. However, the country is not moving to a fully floating exchange rate. The new system is a "managed exchange rate flexibility regime". The official value of the dollar in this regime will be determined by transactions in the interbank foreign exchange market with the active participation of the NBU, and the cash exchange rate will not be affected.

This was reported by the National Bank of Ukraine (NBU). "Managed exchange rate flexibility differs from the floating exchange rate regime that was in effect in Ukraine until February 24, 2022. Under the current regime, the NBU will continue to closely monitor the situation in the foreign exchange market and will remain a key player in it," the statement said.

This will allow the exchange rate to move in both directions - up and down. In particular, the NBU will:

• compensate for the structural currency deficit;
• significantly limit exchange rate changes, preventing both a significant weakening of the hryvnia and a significant strengthening.

New dollar exchange rate for Ukrainians: what it will be like from October 3

The exchange rate in those market segments where citizens can buy and sell foreign currency will be set according to the same rules as in the past year and a half.

That is, the rules for setting the cash and card exchange rates will remain unchanged. It is in these market segments that foreign currency is bought and sold.

These rates have not been fixed for almost a year and a half. During this time, they have both risen and fallen. For example, in July of this year, the cash exchange rate fell below 37.2 UAH/USD.

Now, the difference between the cash and official exchange rates is likely to narrow. This is the official goal of the NBU. The regulator can take measures to increase the ability of banks to meet customer demand for cash currency and to expand the ability of customers to buy currency on the cash market and online.

Why the fixed exchange rate was dangerous for Ukraine

"Ukrainian and global experience shows that a prolonged fixation of the exchange rate leads to imbalances and causes serious problems in the future. This can not only weaken the economy and financial system now, but also complicate the recovery of business activity at the stage of Ukraine's recovery," the NBU explained.

As an example, the NBU experts cite the currency crises of 2008 and 2014-2015, when the national currency weakened significantly. The depth of these crises was largely exacerbated by the long-term fixation of the exchange rate, experts explain.

"Keeping the exchange rate at the same level for many years usually ends in the same way. We are talking about the accumulation of currency imbalances, the exhaustion of international reserves, forced deep devaluation and a significant economic downturn. the harder it would be to get out of it," the NBU explained.

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