An idea worth billions: how the IMF wants to devalue the hryvnia, and the NBU resists
14 November 19:05
The Ukrainian budget for 2026 still has many bottlenecks and holes of varying sizes. Officials still have a few weeks to finalize and supplement everything. One of these budget gaps, which is causing a lot of discussion and debate in high offices, is described in "Komersant Ukrainian".
18.1 billion dollars – this is the amount of the budgetary needs for the next year that are still not covered by funds, as recognized by officials.
“This is the need that we are talking about with our partners, and the need that we see that we need to talk about, to look for ways to close it in 2026,” Finance Minister Sergiy Marchenko recently said.
Roksolana Pidlasa, chair of the Parliamentary Committee on Budget, confirmed this unfunded need when commenting on the recent adoption of the draft state budget for 2026 in the first reading.
Hopes of covering this amount are often associated with Ukraine receiving a so-called reparations loan from the European Council. Unfortunately, the decision to grant it has been delayed. And this only intensifies discussions about how and where to cover budget deficits.
A risky idea worth billions
The International Monetary Fund has an idea on how to support Ukrainian public finances. And this proposal, which involves the gradual depreciation of the hryvnia, has both supporters and opponents in Ukraine. The idea is simple: according to the IMF, a controlled devaluation can help strengthen public finances by increasing hryvnia revenues. The Ministry of Finance seems to be okay with this option. But the National Bank of Ukraine is not happy about such actions. They point to risks to inflation and public sentiment, which is sensitive to price increases.
Bloomberg called these discussions a “split in economic policy” and a potential risk in relations with the IMF. This is given that Ukraine is just negotiating a new financial assistance package with the Fund, which could amount to $8 billion.
Pro-Consulting calls the IMF’s position on hryvnia depreciation “partially understandable and justified” given the possibility of partially increasing budget revenues and export earnings. However, they state that “the weakening of the hryvnia could lead to a surge in inflation and higher import prices, which could offset the benefits,” continues Oleksandr Sokolov, CEO of Pro-Consulting.
“The main “plus” of the hryvnia depreciation, as emphasized by the IMF, is an increase in budget revenues in hryvnia. Also, Ukraine will be able to partially preserve its foreign exchange reserves by making fewer foreign exchange interventions. In addition, this will help increase budget revenues. For Ukrainian exporters, this is an opportunity to partially increase their revenues. The key disadvantage of the hryvnia depreciation is the acceleration of inflation, which is contrary to the NBU’s policy and will be one of the key challenges to Ukraine’s macroeconomic stability in the short term. Another downside is the increase in import prices, which may also create problems for Ukraine, as prices for key import categories such as petroleum products, chemicals, transportation and equipment will rise. In addition, a stable hryvnia exchange rate increased confidence in the Ukrainian currency and hryvnia-denominated financial investments. Moreover, the depreciation of the hryvnia will increase the cost of external debt in hryvnia equivalent,” explains the expert.
Financial analyst Andriy Shevchyshyn is generally favorable to the IMF’s proposal, but also reminds of its “disadvantages.”
“I tend to agree with the IMF’s position, which provides for a certain stimulation of the Ukrainian economy, export promotion, and import restraint due to the devaluation of the hryvnia. The government needs to finance the budget, finance expenditures, and generate revenues. The weaker the hryvnia, the more revenues will come from foreign economic activity, from excise taxes, from the conversion of foreign currency loans and interest-free foreign currency aid into hryvnia. And this supports the budget. But this is being opposed by the NBU, because it disrupts the NBU’s plans to curb inflation. Devaluation above certain levels will already have a negative impact on inflation and the attractiveness of hryvnia instruments. And the NBU speaks about this directly. At a recent meeting on the key policy rate, it was directly stated that the rate remained unchanged to maintain the attractiveness of hryvnia instruments,” the expert emphasizes.
Last week, the NBU kept the key policy rate at 15.5%. Financial analyst Andriy Shevchyshyn explains the motivation of the National Bank:
“More than 70% of the funds in the banking system are placed on current accounts. That is, these are so-called demand deposits, but in fact they are current accounts. So, 70% is free money that can be used to buy foreign currency at any time. This is a large liquidity overhang, a lot of money, and it will be difficult for the NBU to restrain its pressure and slow down. Although the NBU now has enough tools and reserves, as we understand it, to keep the exchange rate in check,” the expert said.
Exchange rate targets
The National Bank is under pressure. And, apparently, not only from the IMF. The Ukrainian government, given the average hryvnia/dollar exchange rate set in the budget bill, is also not averse to “playing” with the hryvnia, not really thinking about inflation. What these “exchange rate games” can lead to is the question. How serious can currency adjustments be and what exchange rate scenarios can we expect next year?
Financial analyst Andriy Shevchyshyn’s point of view:
“I would like to draw attention to the fact that the IMF proposes to set the exchange rate for the next year at 45.4 hryvnia to the dollar, while the government proposes an average exchange rate of 45.7 hryvnia to the dollar. That is, our government, the Ministry of Economy, has calculated this level in its macroeconomic forecast. And it is even higher than the IMF’s proposal. We are already seeing a gradual small devaluation, a weakening of the hryvnia in this direction. Therefore, in my opinion, at the level of 43-44 hryvnia, the NBU will actively intervene in the market to bring down demand. Or even earlier, if it sees that the market is going into a panic and starts to “rake in” the currency very actively. Or there is a threat of hryvnia outflows from bank accounts. This will be a compromise, an intermediate option,” the analyst believes.
Pro-Consulting emphasizes that the main goal of the NBU will remain the approximation to low inflation and financial stability through the implementation of a policy of managed flexibility, – continues CEO Alexander Sokolov:
“Ukraine’s available foreign exchange reserves of over USD 46 billion will allow the NBU to pursue a gradual policy of hryvnia depreciation to avoid high inflation. Therefore, we can expect a gradual devaluation of the hryvnia to the budgeted exchange rate at the end of 2026.”
The overall situation, according to Pro-Consulting, will be controlled by the National Bank: everything will happen without drastic changes, but with a possible weakening of the hryvnia.
Author: Sergey Vasilevich
