What’s wrong with the currency exchange rate?

The AAU warns that the current double exchange rate of the hryvnia is harming the Ukrainian economy and increasing the share of its “black” part. The state loses tax revenues and the overall motivation to conduct business fairly decreases. Economic entities are logically looking for ways to avoid the official rate and the economy incurs unnecessary transaction costs instead of maximizing the overall social profit. The official rate is fixed at 36,5686 UAH per dollar, but the actual market rate is 41.1 UAH which is 12% higher than the fixed as of 6th October 2022.

 

In the interview for Latifundist, Dmitry Skornyakov, General Director of HarvEast Holding, noted: “Everything that enters us goes at the market dollar rate, but we sell it at a fixed rate. Basically, it’s a sales tax. We need to raise the salaries. But we can’t because we have this actual tax, which is not normatively fixed anywhere.”

 

The Ukrainian Club of Agrarian Business has the same opinion. At a recent meeting with First Deputy Prime Minister – Minister of Economy Yulia Sviridenko, Chairman of the Verkhovna Rada Committee on Finance, Tax and Customs Policy Danylo Getmantsev and Minister of Agrarian Policy and Food Nikolay Solsky, UCAB representatives stated that “a fixed rate for export operations, if the purchase of resources (seeds, fertilizers, plant protection products) occurs at a commercial rate, creates an additional tax burden on legal agribusiness and stimulates the black cash market”.

 

The BBC article “From fixed to market: who wins and who loses from currency misalignment” notes that those who generate the biggest part of foreign exchange earnings suffer the most from this situation: “Exporters say that for them, as well as for importers, due to the blockade of ports and the destruction of infrastructure, the cost of logistics has increased in 2.5-3 times, but now they will also lose about 20% of foreign exchange earnings due to the difference in exchange rates. Those who are still trying to export their products believe that the exchange rate should be equal for everyone.”

 

The presence of two exchange rates caused fair indignation among IT specialists, because they, together with agriculture and metallurgy, were and are the main source of foreign exchange inflow into the country. The Ukrainian IT Association and the European association of software engineering unanimously say that due to the decision of the NBU, the income that IT specialists receive on their FLP accounts is converted at a fixed exchange rate, and then they are forced to buy currency at the market rate. And the such situation in the long-term perspective will lead to the inevitable departure of specialists from the country (those who can leave) or force them to change their tax residency.

 

Experts are more and more inclined to the conclusion that the exchange rate should be “released”. For example, Oleg Ustenko, economic adviser to the President of Ukraine, is convinced that Ukraine already has the prerequisites for returning to the market exchange rate. “It seems to me that it is time to abolish the fixed exchange rate – we must move on to the market one. What’s the point of having two exchange rates? Moreover, we need to support our exporters and the Ministry of Finance, which collects taxes, including from the import. The National Bank has already done both the possible and the impossible – the financial system withstood the first days, weeks and months of the war. Now we need to make an indulgence, ” Ukrinform quotes Ustenko.

 

AAU, together with the entire business community, insists on the abolition of the fixed hryvnia exchange rate. This will enable key sectors of the economy to work more efficiently in our difficult realities, and for many export companies, this is generally the only chance to survive.