Big Mac Index again showed something that Ukrainians have long felt in their wallets: the hryvnia is greatly undervalued. This humorous, but at the same time visual indicator of the purchasing power of currencies, which has been in the infospace since 1986 with the light hand of The Economist, allows you to look at economic reality through the prism of the price of a world-famous burger.
How the Big Mac Index works
The principle is simple: if a Big Mac is cheaper in one country compared to another, this may indicate an undervalued currency of that country, and vice versa. For example, according to the data The Economist, this year in January, a Big Mac in Ukraine cost UAH 120, while in the USA – $5.79. This means that the Ukrainian hryvnia is undervalued by 50.7% compared to the US dollar. This puts the Ukrainian currency in sixth place among the most undervalued in the world.
Every year the situation with the hryvnia remains similar Yes, in January 2023 there was a hryvnia underrated by 53.1%, which meant a “fair” rate of about UAH 17.16 per dollar, while the official rate was much higher. A year later, the underestimation decreased to 48.4%, while the “fair” exchange rate was determined at the level of UAH 18.8 per dollar. Finally, the hryvnia is currently undervalued by 50.7%, which indicates a “fair” rate of about UAH 20.73 per dollar, while the actual rate is about UAH 42 per dollar.
A clear trend that indicates that the actual exchange rate of the dollar against the hryvnia is largely determined not only by economic realities, but also by factors of speculation, financial policy and geopolitical risks.
Of course, the hryvnia is not alone in this “underrated club”. Currently the most underestimated currency is the South African rand, which is undervalued by as much as 67.4%, because the country is facing economic difficulties and a high level of unemployment. The Egyptian pound is under pressure due to political instability and economic challenges, resulting in it being undervalued by 66.6%, the Malaysian ringgit is undervalued by 62.9%. Also to the list of the most underrated currencies of the world included the currencies of Taiwan, Indonesia and India.
On the other hand, some currencies “soared” above their real value. Thus, the Swiss franc is traditionally considered a “quiet haven” for investors, which makes it overvalued by 35-38%. Argentine peso overrated by 20.1% due to high inflation and economic experiments the leader of the state. High inflation in Argentina leads to to the fact that the peso’s nominal exchange rate is not keeping pace with rising prices, making it overvalued.
Due to the stable economy of the Eurozone and relatively low inflation, the euro is overvalued by 2.8%. The Norwegian krone, in turn, is supported by strong oil exports, which also contributes to its revaluation. This means that in these countries the purchasing power of the local currency is higher than the official exchange rates indicate.
Currency imbalances strongly affect the world economy. Undervalued currencies make goods cheaper to export but raise the cost of imports, which can fuel inflation. Overvalued currencies, on the contrary, make exports more expensive and less competitive, but make imports cheaper, which can negatively affect local production.
Should we trust the Big Mac index?
So the Big Mac Index not only shows fast food prices, but also helps us understand the complex economic processes that affect our wallets and global markets. But should this index be taken seriously? Actually, no. After all, this indicator does not take into account many economic nuances: taxes, standard of living, cost of rent, trade barriers, salary level, etc. However, its essence is simple and clear: if the same burger in Ukraine costs much cheaper than in the USA, it means that the Ukrainian currency is worth less in the international arena than it should be.
The Big Mac Index, while not a strict economic indicator, provides a simple and visual understanding of how unevenly distributed global currency balances are. For Ukraine, this is another signal about the need to strengthen the economy, attract investments and form a stable financial policy. And, perhaps, that one day a Big Mac in Kyiv and New York will cost approximately the same.
The Big Mac was chosen because of its versatility and standardization. This burger is like a global currency that has circulation everywhere, allowing you to compare its value in different currencies. Thus, it becomes a kind of “gold standard” or “basket of goods” that reflects the level of prices in the country.
Economists warn that the Big Mac Index should not be taken literally. It does not take into account the difference in economic conditions between countries – the level of development and the structure of the economy. Therefore, while this index can give a general idea of the value of currencies, it should be used with caution and in conjunction with other economic indicators.
There are also IKEA index (cost of Billy bookcase in different countries) or Starbucks index (cost of a cup of coffee in different cities). They are also designed to assess purchasing power, but have similar limitations and do not always accurately reflect the real economic situation.
What does the undervaluation of the hryvnia mean
When we hear that the hryvnia is undervalued, the question arises: is our national currency really worth less than it should be? Why the official exchange rate differs from the calculations for purchasing power parity? Is this a sign of economic weakness or a consequence of fiscal policy?
Purchasing power parity assumes that the same consumer basket should cost the same in different countries if prices are translated into a common currency, so to speak, leading to a common denominator. However, the real exchange rate depends on a number of factors, in particular, economic crisis and inflation, military conflicts and political instability, deficit of the balance of payments.
Undervaluation of the hryvnia does not always mean that the economy is weak. This may be part of a plan to make domestic goods cheaper and more attractive to other countries. But if the hryvnia remains undervalued for a long time, this may indicate economic problems that need to be addressed.
The hryvnia exchange rate is not just a number on the exchange board; it is a barometer of a nation’s economic health that responds to a multitude of factors. First of all, inflation, foreign debts and currency reserves, economic structure, war and geopolitical risks.
Inflation in Ukraine traditionally exceeds the indicators of developed countries. Yes, inflation in Ukraine in 2022 constituted 26.6%, while in the USA – 6.5%. This means that the hryvnia depreciates faster than the dollar, which puts pressure on its exchange rate.
Ukraine takes many loans from abroad. To pay off these debts, foreign currency is needed, which weakens the hryvnia. According to the Ministry of Finance, from the beginning of the war to the middle of 2023, Ukraine received from Western partners about $98 billion. These funds help maintain the stability of the economy and keep the hryvnia from devaluation. But despite much aid, the economy is still threatened by the war and uncertainty about future financial inflows.
The National Bank of Ukraine can maintain the hryvnia exchange rate using its foreign exchange reserves. NBU in 2022 spent 3.4 billion dollars to support the hryvnia
An important nuance is that Ukraine mainly exports raw materials – grain, metal, and imports finished products, in particular, machinery and energy carriers. The low purchasing power of Ukrainians means that domestic prices are lower than world prices, which affects the hryvnia exchange rate. Of course, investors are deterred by military actions and political instability in Ukraine, reducing the inflow of foreign currency.
Forecasts regarding the strengthening of the hryvnia and whether Ukraine should strive for a “fair” exchange rate of 20.73 hryvnias per dollar
Economists point out, that in the current year, the hryvnia exchange rate will be affected by the intensity of hostilities, the stability of the energy infrastructure, and the regularity of the receipt of international aid. According to forecasts, the average annual exchange rate may reach UAH 45 per dollar.
Although the Big Mac Index shows that the hryvnia is severely undervalued, real economic conditions and external factors continue to put pressure on the national currency. The prospects for its strengthening depend on the end of the war, the recovery of the economy and stable international support.
The idea of strengthening the hryvnia to a rate of 20.73 hryvnias/dollar may seem attractive. But the reality is more complex, and such a move can have both positive and negative consequences for the economy.
On the one hand, a stronger hryvnia will make imported goods and services cheaper for Ukrainians. This means that people will be able to buy more, raising their standard of living.
On the other hand, a strong hryvnia makes Ukrainian goods more expensive abroad, which reduces their competitiveness. This may lead to a decrease in exports and loss of jobs in such important industries as metallurgy and agro-industry. In addition, an excessively strong hryvnia can reduce production and investment, which will negatively affect economic growth.
Strengthening the hryvnia is impossible without attracting investments, ensuring financial stability and ending the war. It is important to develop infrastructure, support small and medium-sized businesses, and create favorable conditions for investors. Necessary conditions for economic recovery are inflation control, reduction of the budget deficit and effective management of the public debt. And, of course, the key factors without which a strong hryvnia will be unattainable are peace and stability.
Tetyana Viktorova
