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Ukraine to Drop Dollar Peg, Add Euro to Reflect Trade With EU

Ukraine to Drop Dollar Peg, Add Euro to Reflect Trade With EU

March 16 (Bloomberg) -- Ukraine plans to replace the hryvnia's peg to the dollar with a more flexible exchange-rate system that includes the euro, reflecting the former Soviet state's growing trade with Western Europe, Economy Minister Serhiy Teryokhin said.

The policy will raise the share of Europe's common currency in Ukraine's $9.5 billion of foreign exchange reserves to about 25 percent and may involve a ``managed float,'' in which the hryvnia will trade more freely after being linked to the dollar since 1998, Teryokhin said.

``The strict peg to the dollar should be replaced by a basket at a first stage,'' Teryokhin said in an interview during a London investment conference yesterday. ``It is too early to say how'' the exchange-rate system ``will look.''

President Viktor Yushchenko, who won an election in December, wants the nation to join the European Union to boost growth and raise living standards. Easing limits on the hryvnia would help move the $60 billion economy closer to the EU and follow similar moves by regional peers including Poland and the Czech Republic, which ousted communism in 1989 and joined the EU last year.

Ukraine, with a population of about 47 million, is sandwiched between Russia and the EU and is the main transit territory for delivery of Russian natural gas to Europe. Russia supplies about a quarter of Europe's gas.

Strengthening Currency

The hryvnia may strengthen to as high as 4.8 against the U.S. dollar by the end of the year, Teryokhin said. It traded at 5.2765 per dollar at the close of trading yesterday, little changed from the day before, according to Bloomberg data.

``We already started to strengthen the exchange rate,'' he said. ``We'll see. If budget revenue increases it is clear that we won't be changing the exchange rate sharply.''

Central banks of countries including China, Japan and Russia are mulling increasing their holdings of currencies other than the dollar as they seek to raise returns in their foreign-exchange reserves, said Alex Patelis, head of G-10 currency strategy in London at Merrill Lynch & Co. on Feb. 3.

Dollars accounted for 63.8 percent of the world's currency reserves at the end of 2003, down from 66.9 percent two years earlier, according to International Monetary Fund figures released in April last year.

Boosting Trade

The 25-member EU accounts for 42 percent of Ukrainian trade, including exports of metals and chemicals, Teryokhin said. Poland and the Czech Republic ship three-quarters of their goods to other EU nations.

Ukraine's exports to Europe as a whole rose to $11.3 billion in 2003 from $8.6 billion in 2002, according to Deutsche Bank AG. Imports from Europe rose to $13.9 billion in 2003 from $10.7 billion in 2002.

The changes would involve removal of controls on ``non- capital'' foreign-exchange transactions and restrictions on investing in foreign securities markets, the minister said. The government also plans to remove a 1.5 percent tax on repatriation of profits for foreign investors, he said, without giving a time- frame.

The proposals will need to be outlined in draft budget proposals to parliament on March 21, he said. The measures don't require parliamentary approval, he said.

At the same time, the government and the central bank are discussing how to prevent an increase of ``speculative'' investments, especially in Ukraine's stock market, he said.

Higher Growth

The central bank has been buying foreign currencies from exporters, increasing the money supply and adding to inflation, to keep the hryvnia from strengthening. Demand for the local currency is rising as exporters are bringing home more revenue because of high prices for metals, chemicals and grain.

Prime Minister Yulia Timoshenko's government has raised its forecast for economic growth this year to 8.6 percent from 6.5 percent to 436 billion hryvnia ($83 billion), Teryokhin said. The economy grew 12 percent last year.

The government is seeking to bring down the inflation rate to 9.8 percent in December from 12.3 percent in 2004. Consumer prices rose 2.7 percent in the first two months of the year, he said.

To rein in inflation, the government plans to curb spending, end tax exemptions, raise excise alcohol and tobacco taxes and rent payments for natural resources, coal, power, oil and gas. It will also cancel tax exemptions on energy tariffs, to collect a total of at least 8 billion hryvnia, he said.

Budget, Assets

The government plans a balanced budget for this year and an average exchange rate of 5.1 hryvnia per dollar, he said.

Ukraine also is seeking to accelerate sales of state assets, including, phone company VAT UkrTelecom, to raise 5.4 billion hryvnia, he said. That sale won't happen before the second half, he said.

Separately, Yushchenko plans to discuss with Russian President Vladimir Putin contracts for shipping Russian gas to Europe, Teryokhin said. Yushchenko said on Oct. 27 he planned to review the contracts, if elected. Putin will visit Kiev March 19.

``This is a very sensitive'' issue, Teryokhin said. ``The Kremlin doesn't want at all to discuss this issue and is threatening us with all sorts of sanctions if we continue this discussion.''


LINK: http://www.bloomberg.com/apps/news?pid=10000085&sid=aVDSmAb1fe.o&refer=europe