Why is the dollar rising in value, and what can we expect for the exchange rate in 2025? Here's our forecast.

The National Bank of Ukraine currently has the ability to set the exchange rate of the hryvnia against the dollar at any level. However, given the central bank's current policies, a 10% devaluation is expected again this year.

This was stated by Vitaliy Shapran, former member of the NBU Council, in a comment to RBK-Ukraine.

"The main issue in predicting the dollar exchange rate today is the incorrect paradigm of regulation or influence on the monetary circulation in Ukraine that the NBU has chosen. Last year, we were told about a flexible exchange rate and inflation targeting. We saw a rise in the dollar exchange rate of about 11% and official consumer inflation of 12%," he said.

As Shapran noted, the situation has once again rewarded us with record foreign exchange reserves (as of January 1, 2025 - $43.79 billion).

"If the NBU's 'achievements' are repeated in 2025, the dollar exchange rate to the hryvnia and official consumer inflation will fluctuate around 10%," the expert believes.

The former NBU Council member pointed out that transferring devaluation to inflation has never been a certainty in Ukraine, but dependency on imports has increased during the war.

"Therefore, when we devalue the hryvnia, we still set off an inflationary spiral because prices react to devaluation. Subsequently, the NBU initiates a 'fight against inflation' and raises the discount rate, then collects liquidity from banks through NBU deposit certificates (as of February 3, 2025 - 482 billion hryvnias)," he said.

In his view, through NBU deposit certificates, we pay a triple price in the form of: (1) reduced profits for the NBU, (2) increased expenses for the Ministry of Finance on government bonds that constitute public debt, and (3) tax losses due to decreased economic activity from poor lending conditions.

"Then, at the end of 2024, we will have fiscal authorities raising taxes to close the financial year. Due to the tax increases, along with devaluation, prices will rise," he stated.

Shapran believes that the practices of 2024 should be stopped. "We should not carry out devaluation to allow the Ministry of Finance to earn more from excise duties and import taxes. Because devaluation leads to inflation, which prompts the NBU to raise rates, negatively impacting budget revenues," he explained.

According to him, with international reserves of $43 billion and net reserves of $29 billion, "the exchange rate can be whatever the NBU wants it to be."

"But its current paradigm of influencing monetary circulation in Ukraine keeps the market in constant tension. Due to devaluation, the population and businesses buy foreign currency 'in reserve' because the NBU does not provide exchange rate forecasts, keeping everyone in suspense. In peacetime, such approaches worked reasonably well in the market. During wartime, unfortunately, this does not work. Ukrainians, without the 'exchange rate secrets of the NBU,' have enough worries. The consequence of the flexible exchange rate regime is that the NBU spends more on interventions," the former NBU Council member is convinced.

In his opinion, modifying the monetary regime and changing approaches to exchange rate formation in 2025 will automatically make deposits in hryvnias and government bonds more attractive even at current rates. "However, if there are no changes, we will see in 2025 what we saw in 2024, with minor adjustments depending on the development of relations between Ukraine, the USA, and the EU," he added.

Recall that in 2024, the official dollar exchange rate rose by 10.7% to 42.03 hryvnias. According to State Statistics, consumer inflation accelerated to 12%. The government has projected an average exchange rate of 45 UAH/dollar in the state budget for 2025.