FX restrictions and exchange rate policy

The NBU was forced to fix the official exchange rate and introduce strict FX restrictions on 24 February 2022. The central bank was consistently emphasizing that these decisions were temporary and justified.

These decisions made it possible to prevent panic and ensure the stable operation of the financial system. They helped businesses and households adjust to the full-scale war. However, the fixed-exchange-rate regime and FX restrictions come with both benefits and costs, and over time, the costs begin to outweigh the benefits.

Most Ukrainians remember well the currency crises of 2008 and 2014–2015, when the domestic currency depreciated significantly. The depth of these crises was substantially aggravated by the yearslong exchange rate peg. Keeping the exchange rate at the same level for many years usually results in the accumulation of FX imbalances, the depletion of international reserves, a forced deep devaluation, and a significant economic downturn. This is precisely why most countries do not use fixed-exchange-rate regimes and tight restrictions, and why the NBU switched to managed flexibility of the exchange rate in October 2023 and is planning to continue to ease the FX restrictions.

Ukraine had already had a positive experience operating a floating exchange rate. Specifically, the NBU had transitioned to such an exchange rate regime after the 2014–2015 crisis. In the following years and up until the full-scale invasion, the hryvnia’s exchange rate fluctuated in both directions, weakening and strengthening in line with market developments. The NBU only smoothed out excessive exchange-rate fluctuations by selling or buying foreign currency in the market. Those interventions neither counteracted nor fortified the underlying exchange rate developments.

Thanks to such flexibility, Ukraine did not accumulate FX imbalances and no longer experienced FX crises. Despite some fluctuations, the exchange rate remained relatively stable throughout the entire floating-exchange-rate period. In addition, the NBU steadily accumulated international reserves during that time.

The October 2023 shift to a more flexible exchange rate has also helped reinforce the economy’s and the FX market’s resilience against external and domestic changes.

Yes. The floating exchange rate regime is the NBU’s strategic goal. At first, the NBU moved to managed flexibility of the exchange rate. This is due to the specifics of how the economy is functioning amid the full-scale war.

Because the country’s export capabilities and investment inflows have been restrained by the war, the FX market is constantly experiencing a significant shortage of foreign currency. In view of this, it is too early to return to a floating exchange rate whereby the NBU would only have to reduce excessive fluctuations in the market.

NBU instead uses managed flexibility of the exchange rate to cover the market’s structural shortage of foreign currency. This will allow the hryvnia to both weaken (when the shortage widens) and strengthen (when it shrinks). In addition, the NBU smooths out excessive exchange-rate fluctuations.

The strategy envisages that this process will take three stages to complete.

At present, most of the first-stage steps have been completed. In particular, the multiplicity of exchange rates has been minimized: it has been a long time since the spread between the official and cash exchange rates last exceeded 1%.

Possibilities for trading transactions by businesses have been expanded. As early as mid-2022, businesses were allowed to pay for any merchandise delivered from abroad, and in May 2024, for imports of works and services.

In addition, the NBU relaxed a number of restrictions to facilitate investment inflows into Ukraine. So, businesses were given the opportunity to repay "new" foreign loans  and partially transfer abroad "new" dividends . However, some of the transactions are subject to limits. The implementation of stage one is therefore still underway.

In parallel, the NBU in May 2024 began to implement the second stage of the loosening of restrictions, as the necessary prerequisites had been put in place. In particular, the regulator enabled businesses to partially service "old" external loans  and repay "new" loans, as well as transfer funds abroad under leasing and rental agreements.

Overall, the NBU’s plan for the second stage of loosening the FX restrictions includes:

• liberalizing trade finance
• unlocking more opportunities for banks to manage FX risks
• removing the caps on interest payments on "old" external loans, meaning the loans not covered by stage one.

As far as principal amounts of debt are concerned, it will be possible to repay or transfer them only at stage three.

The NBU does not set any specific dates for the easing of the restrictions. Any steps in this field will be taken only when the appropriate sustainable preconditions are put in place.

The NBU will take into account the following indicators:

• consumer price growth: inflation should be moderate
• expectations of households, businesses, financial institutions, and analysts about future inflation
• level of international reserves: the NBU must have sufficient reserves to maintain the sustainability of the FX market
• interest rates: bank deposits should ensure protection of household savings from inflation
• financial stability parameters: the banks should remain resilient.

Once all indicators are at required levels, the NBU will continue to ease the FX restrictions. At the same time, the NBU will act gradually and cautiously to maintain the sustainability of the FX market.

Before every step, the NBU will analyze whether all the necessary preconditions have been met, and will also estimate the impact on the market from both previously approved and planned easing measures. This will help minimize the likelihood of having to reimpose the restrictions.