Kenneth Rapoza Contributor - Forbes Magazine
Opinion 8/15/2014 @ 9:00AM
“Ukraine’s Currency Hits a New Low” blared a Wall Street Journal headline earlier this week. The hryvnia’s woes are attributed to Russia’s none-too-subtle efforts to annex, Crimea-style, a piece of eastern Ukraine and force the rest of the country into becoming a de facto Kremlin satrap. Putin believes wealth and power come from conquest.
The pressure on Ukraine is all too real. However, its woes are unnecessarily compounded by misbegotten economic policies foisted on it by the IMF , with the blessings of the U.S. and the EU, in particular, imposing higher taxes and “floating,” i.e., devaluing, the hryvnia to “spur” exports. Both policies are utterly counterproductive. The IMF is Putin’s unwitting ally.
Ukraine should immediately implement a currency board, under which the hryvnia would be tied directly to the dollar. The nice thing about such an arrangement is that the process operates automatically, and market confidence is enhanced precisely because there is no central bank discretion. Every hryvnia would be backed by dollars at a fixed rate. Ukrainians would be willing to hold hryvnias knowing they could easily turn them in for greenbacks.
This is not theory. Currency boards have been used successfully for more than 150 years. When Hong Kong fixed its dollar to our dollar in 1983, it did so with a currency board. Today such countries as Bulgaria and Lithuania use this mechanism to tie their monies to the euro. Estonia did the same thing for years before it switched to the euro itself.
A stable hryvnia would do wonders for the beleaguered Ukrainian economy. It would be a stark and enticing contrast to Russia’s wobbly ruble.
Israel has demonstrated that a country can devote considerable human and monetary resources to defending itself and still possess a vibrant, innovative economy amidst deadly threats and all-too-frequent acts of terror.
Alas, such a crucial and sensible move seems remote. As evidenced by the EU, the IMF, the Federal Reserve and every other economic body, ignorance about monetary policy is the greatest threat to our future.
http://www.forbes.com/sites/steveforbes/2014/08/15/saving-ukraines-currency-will-help-save-ukraine-from-putin/
