Flash Analysis – Impacts on Multi-Purpose Cash assistance from the devaluation of the UAH against the USD.

Summary

• The Central Bank of Ukraine (NBU) devalued the currency by 25% on July 23rd.

• As a result, the harmonised humanitarian multi-purpose transfer rate of 2200 UAH per person is now worth 60.16 USD per person per month, a reduction of 15.03 USD.

• This reduction will lead to cost savings for Humanitarian program teams that will need to be reprogramed to either increase the number of households reached or the number of months supported. 

• The Ukraine Central (NBU) Bank estimates the change will cause between 2 to 3% inflation. 

• It is not currently possible to determine if the transfer value in UAH needs to be adjusted.

• It is recommended for the Humanitarian CWG to engage with the MOSP on this issue. 

Overview

To stabilize the foreign exchange market, the central bank of Ukraine, the National Bank of Ukraine (NBU), imposed on February 25th numerous restrictions and locked the UAH/USD exchange rate to the rate of 29.5 UAH to USD. These restrictions prevent banks from selling or buying currency at a rate that cannot exceed the official rate by more than 1%.

However, on the open market, the UAH to USD FX rate has continued to lose value, as seen below. On May 22nd, the NBU allowed Ukrainian banks to use the floating inter-bank rate for transactions involving cash[1] purchases of dollars in Ukraine and overseas transactions by debit cards.

On July 23rd, the NBU devalued the currency by 25% to close the gap between the official rate and the market rate, with a new UAH USD rate of 36.560 UAH to 1 USD. It is highly likely that the UAH will continue to lose value in the coming months and that there will be additional devaluations in the future. 

Analysis of impact of change in FX markets on humanitarian cash programs.

There are currently two UAH FX rates. The first is the rate for purchasing cash, which is floating and regulated by market forces and competitive exchange between banks. This is used for purchasing hard currency cash inside Ukraine and also used for Card and ATM transitions outside of Ukraine. The second is the official rate fixed that businesses are required to use to purchase currency on the interbank market.

As humanitarian actors are understood to use the official rate when they move USD into the country, that is the rate that can be used to calculate the cost to agencies of making a cash transfer of 2200 UAH to one person, as per the MPCA guidance.

As such, for agencies budgeting in USD, the cost of making a transfer per person will have dropped from 75.20 USD per person to 60.16 USD per person. 

Potential Impact on Inflation 

Consumers may feel the price increase of imported goods. The central bank insists that the rise will not be steep, with the Deputy Chairman of the NBU Serhii Nikolaychuk asserting that the devaluation of the hryvnia will have an insignificant effect on the general picture of inflation, only raising it by 2-3 percentage points. 

Recommendation for the transfer value.

The MPCA transfer value is based on the actual subsistence minimum amount. The actual subsistence level in Ukraine was published every month by the Ministry of Social Policy (MoSP). It is calculated as the cost estimate of the Minimum Expenditure Basket (MEB), which includes the minimum essential food basket, set of non-food items (NFI) and essential services. The currently used MEB comprises a list of 296 items.

However, since February 2022, the MOSP has not published this data; as such, it is not currently possible to assess if the cost of the items in the basket have increased and if the transfer value needs to be adjusted up to reflect inflation. 

It is recommended that the CWG engage with the MOSP to request their support in examining this issue and to sense check the transfer value.