12:05 05.06.2024

NBU links 41% increase in net demand for non-cash FX currency in May to increase in budget expenditures

4 min read
NBU links 41% increase in net demand for non-cash FX currency in May to increase in budget expenditures

Customers' net demand for foreign currency through non-cash transactions increased by 41% in May due to an increase in budget expenditures, which is associated with receipts of international assistance in March-April, the National Bank of Ukraine (NBU) said in a commentary to Interfax-Ukraine on Wednesday.

"In addition, during the last week of May there were significant situational surges in demand for foreign currency, which affected exchange rate dynamics," the regulator noted.

According to the National Bank, the exchange rate dynamics were also affected by the end in mid-May of the period when there was an overlap of two deadlines for settlement of agricultural exports.

"Against the background of the exhaustion of last year's harvest, this reduced the volume of foreign currency supply," the NBU explained.

"Such a change in market conditions - an increase in demand for foreign currency with a simultaneous reduction in supply - led to a corresponding weakening of the hryvnia exchange rate. For its part, the National Bank covered the structural deficit of foreign currency and smoothed out excessive fluctuations in the exchange rate," the central bank's response says.

It is noted that the average daily volume of foreign exchange interventions by the regulator increased to $134 million in May compared to $104 million in April and $86 million in March.

The NBU indicates that the situation in the foreign exchange market as a whole remains stable and controllable, and the level of international reserves is sufficient to maintain the stability of the foreign exchange market.

The Central Bank emphasized that further dynamics of the exchange rate will be determined primarily by changes in the balance of supply and demand for foreign currency.

"It is important for the NBU to maintain this connection between exchange rate dynamics and changes in market conditions. This increases constructive uncertainty, promotes awareness of risks, growth in trading activity, the depth of the foreign exchange market, and synchronization of its segments," the National Bank explained.

It added that since the transition to the managed flexibility regime, operations without the participation of the regulator have more than tripled, and their share has more than doubled.

The National Bank believes that progress in deepening the foreign exchange market and strengthening the ability of the exchange rate to adjust to internal and external shocks will increase the stability of the foreign exchange market and the Ukrainian economy. At the same time, maintaining exchange rate stability remains an important task of the NBU.

"We are talking about such dynamics of the exchange rate that will not threaten the maintenance of inflation at a moderate level in 2024 (despite the expected acceleration) with its subsequent reduction to the target of 5% on the NBU forecast horizon," the central bank clarified.

At the same time, the NBU noted that a significant level of international reserves, positive developments in maintaining U.S, financial support and the successful completion of the fourth review of the program with the IMF at the staff level strengthen the regulator's ability to ensure a controlled situation in the foreign exchange market.

Answering a question regarding the newly increased spread between the official and cash rates, the NBU indicated that the difference "is within completely acceptable limits, not exceeding 1.5%," which, according to its expectations, will remain in the future.

In addition, the regulator positively assesses the results of the new steps of currency liberalization adopted on May 3, 2024 to support business and in a constructive discussion with representatives of Ukrainian enterprises.

The Central Bank expects that businesses use the opportunities provided "responsibly" - to attract investment to Ukraine, develop their own activities, enter new markets and at the same time increase the flow of export revenue to the country.

However, taking into account the above, the NBU has strengthened foreign exchange supervision and control over the return of export proceeds.