NBU says negative effects of hryvnia revaluation will be short-term

"In 2019, the hryvnia strengthened significantly against the U.S. dollar and the basket of currencies of major trading partners. Hryvnia revaluation, except seasonal fluctuations and short post-crisis episodes of exchange rate adjustments in the past, is a new phenomenon for Ukraine. The experience of other successful countries, which successfully reduced inflation after the introduction of the inflation targeting regime and passed through the period of strengthening their currencies, shows that the negative effects of revaluation the consistent macroeconomic policies are mostly short-term," the report reads.

At the same time, the benefits of revaluation are long-term and favorable for sustainable economic growth, according to the NBU.

On the one hand, the strengthening of the hryvnia has become a major factor in reducing inflation to the target level of 5% ± 1 percentage point, while stable and low inflation is a necessary prerequisite for long-term growth since it provides the necessary foundation for business planning and savings.

On the other hand, the strengthening of the hryvnia explains a decrease in the income of exporters in hryvnia equivalent and has led to the loss of budget revenues. However, such effects are also not unambiguous.

"The strengthening of the national currency has led to a decrease in the value of imported raw materials and, above all, investment imports, and this took place without the worsening of Ukraine's foreign trade. The competitiveness of Ukrainian companies in attracting labor has also improved, which is important in view of the large volume of labor migration," the NBU said.

The revaluation of the hryvnia, along with sound fiscal policies, was a factor behind a rapid decline in the debt-to-GDP ratio. This, in turn, influenced the assessment of the risks of investing in Ukrainian assets on the part of foreign investors, the country's sovereign ratings. As a result, the cost of servicing the new debt decreased and its currency structure improved.

According to Bloomberg, the hryvnia strengthened to the U.S. dollar by 19% in 2019, which is the best result among all national currencies.

In addition, consumer inflation in Ukraine in 2019 slowed a six-year low of 4.1%. One reason was the strong hryvnia.

op