The National Bank has lifted all restrictions on the sale of cash currency, which raised questions about the possible impact on the hryvnia exchange rate in exchange offices

The National Bank has lifted all restrictions on the sale of cash currency by banks and exchange offices in order to reduce the gap between exchange rates in the cash and non-cash markets, which recently exceeded 1 hryvnia. How the process of buying foreign currency in cash will change, and what to expect from the exchange rate.

From December 1, the NBU allowed banks and exchangers to trade cash currency without any restrictions.

Before this, they could sell clearly defined volumes of currency. Why did the regulator relax the rules again right now, and how will this affect the retail exchange rate of the hryvnia?

What the NBU changed and for what purpose
Until today, it was possible to sell cash currency in Ukraine using the system that the NBU introduced on April 14, 2022. Then the regulator allowed banks to trade in cash, provided that sales would not exceed purchases. Exchange offices worked according to the same scheme, says Vladimir Sechevoy, deputy director of one of the largest players in the exchanger market, the financial company Alfa-Invest Group.

Over time, the NBU softened these restrictions, allowing large volumes to be sold. The last update occurred in September of this year. The system has become much more complex. Banks and non-banks could sell currency in an amount calculated as the sum of three components:

the amount of cash balances as of April 13, 2022;
the volume of excess purchases of cash currency over the volume of its sales.
Calculated starting from April 13, 2022 and during subsequent operating/working days; 120% of the volume of purchases of non-cash currency from individuals.
Calculated for the same period as in the second paragraph. From December 1, the National Bank lifted any restrictions. Now banks and exchangers can sell cash currency in the volumes they see fit.

“This will help minimize the difference between cash and non-cash rates,” says the NBU release.

The decision fits into the NBU's strategy to ease currency restrictions. The roadmap contained in the document consists of three stages. One of the first stage measures is to minimize the multiple exchange rates.

This phenomenon is that on the interbank market the dollar costs significantly less than in cash. Thus, on November 29, the selling rate on the interbank market was 36.39 UAH/$, while on the cash market the median selling rate was 37.57 UAH/$. The difference is 1.18 hryvnia. On October 29, the difference was even greater: 36.44 UAH/$ versus 37.94 UAH/$ (a gap of one and a half hryvnia).

On the evening of December 1, when the new rules came into effect, the gap was reduced to 1.02 UAH – 36.45 UAH/$ and 37.47 UAH/$, respectively.

What is the problem of multiple rates?
The NBU foreign exchange strategy notes that minimizing multiple rates will help stabilize exchange rate expectations and increase the stability of the foreign exchange market.

How exactly? Different rates influence each other, even if there are no direct flows between the interbank market and the cash segment, notes Emal Bakhtari, director of the financial instruments sales department at Raiffeisen Bank.

During the war, the exchange rate on the interbank market almost always remained lower; the difference reached 10% in the summer of 2022. And although the cash market is on average 10 times smaller, it has a peculiar psychological impact on the interbank market, Bakhtari adds. This is exactly the case when they say that “the tail wags the dog,” says the banker.

Last year, this situation not only demotivated sellers - some of them began to hold the currency in the hope that the NBU would be forced to revise the exchange rate corridor, Bakhtari notes.

A plurality of courses, as a rule, appears under forced conditions (in our case, this is war), but it cannot exist permanently, because it is chaos in the economy, agrees ICU group analyst Mikhail Demkiv. It reminds us of a big problem due to the multiplicity of exchange rates that existed last year - foreign exchange tourism.

Then Ukrainians abroad withdrew currency from their cards at a non-cash, that is, lower rate, brought it to Ukraine and sold it here at a much higher price. The NBU paid for this from reserves, since Ukrainian banks transferred hundreds of millions of dollars to foreign banks for the corresponding volumes of cash withdrawn.

Why now and what will happen to the exchange rate next
? Will the NBU’s new measures allow us to minimize the multiplicity of exchange rates? Four surveyed analysts and financiers consider the NBU’s decision to be logical and predict a convergence of cash and interbank rates.

Banks will have more opportunities to sell currency, supply will increase and will push the rate on the cash market down, says Alexander Pecheritsyn, director of the analytical research department at Raiffeisen Bank.

The NBU's decision has already contributed to the decline in the cash exchange rate on December 1, states Sechevoy from Alfa-Invest Group.

Another consequence of this decision may be the flow of clients from exchangers to banks, says Demkiv from ICU. Because banks will be able to offer large volumes.

For exchangers, the NBU decision is also good news: before this, they could not use their entire resource due to restrictions, notes Sechevoy. For example, Alfa-Invest Group will be able to “unfreeze” about 15% of the total assets, and some on the market - even 50%, says the financier.

Why did the NBU lift the restrictions now? The regulator was well prepared for this by stabilizing the market after the transition to managed exchange rate flexibility, says Pecheritsyn from Raiffeisen Bank.

Demkov from ICU agrees with the assumption that the NBU chose this period because the hryvnia remains stable. “If there was a devaluation trend, this could provoke additional excitement in the market,” he notes.

Will the courses meet in full? No. With the war, the cost of importing and selling cash has increased significantly, which means cash objectively should be slightly higher than non-cash on the interbank market, says Bakhtari from Raiffeisen Bank.