Currency controls is strengthened as Ukraine's currency slump for economic fears

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Ukraine’s currency touched record lows Monday as continued violence in the rebel-held east fueled pessimism about the country’s economic future. The currency slump came as the Ukrainian military said it will not pull back its heavy arms from the front lines until attacks by pro-Russian rebels cease completely. Rebel leaders said they have agreed to begin a fuller withdrawal starting Tuesday.

A pullback of heavy weaponry is a key step in a cease-fire deal reached this month, but both sides have said that fighting is continuing, casting doubt on ­efforts to quell the 10-month-old conflict.

Less than two weeks after the International Monetary Fund announced a $17.5 billion bailout loan for Ukraine, the central bank tightened capital controls to prevent the country from running out of foreign currency.

In spite of what has been pledged, Ukraine hasn’t received a major injection of IMF cash since a $1.4 billion disbursement on Sept. 3, the lender’s website shows. With its foreign reserves dropping 61 percent to $6.4 billion in the four months through January, the country’s “cupboard is basically bare,” said Timothy Ash from Standard Bank Group Plc.

The Ukrainian central bank moved to impose currency controls as the hryvnia plunged another 10 percent against the dollar on Monday -- a move analysts said would do little to bolster the currency.

The hryvnia's decline came amid growing concern a ceasefire in eastern Ukraine will not hold. The currency has now lost half its value in 2015, after falling by 50 percent over all of 2014.

"We will not allow the situation to get out of control," the head of the central bank, Valeriia Gontareva, said at a press briefing. There were no fundamental reasons for the hryvnia to weaken further, she said.

The average hryvnia rate slid 10 percent on Monday to a fresh-record low of 30.55 to the dollar as of 1400 GMT, after Ukraine's military said ongoing rebel attacks were preventing it from withdrawing its heavy weapons from the front line in eastern Ukraine.

A trader at a large foreign bank in Ukraine said he was seeing market rates at around 31.3-31.8 to the dollar.

"For now, the market is weakening and there's no reason to see it stabilising so long as the war rolls on," he said.

The latest hryvnia level is nearly 30 percent weaker than the 21.7 rate foreseen in Ukraine' 2015 budget. If the weakness persists, it will upset the government's strict austerity plans.

"They plan to raise (energy) tariffs. But if hryvnia devaluation continues, they will have to increase tariffs again in two to three months," said Vasyl Yurchyshyn, the director of economic programmes at the Razumkov Centre think tank in Kiev.

The currency’s nose dive puts even more pressure on government finances, making it harder for the country to buy energy, military hardware and the basics necessary for a war-hit population. It also sends prices of imported goods skyrocketing, meaning that ordinary Ukrainians need to pay far more for their groceries.

The plunge calls into question Ukraine’s ability to repay money borrowed from global creditors. The central bank’s reserves of foreign currency are depleted, raising the prospect that the nation could soon go bankrupt. Ukrainian military officials said Monday that the ongoing violence means they cannot pull back their weaponry.