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Ukraine

Ukraine

Population 41.7 million
GDP 3,707 US$
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Synthesis

major macro economic indicators

  2018 2019 2020 (e) 2021 (f)
GDP growth (%) 3.4 3.2 -5.2 2.5
Inflation (yearly average, %) 10.9 7.9 2.6 4.9
Budget balance (% GDP) -1.9 -2.2 -6.8 -5.1
Current account balance (% GDP) -4.9 -2.7 2.8 -1.0
Public debt (% GDP) 60.9 50.3 60.4 63.1

(e): Estimate (f): Forecast

STRENGTHS

  • Strategic position in Europe
  • Association and Free Trade Agreement with the European Union (2016), which enables a reorientation of foreign trade
  • Significant potential in agriculture, with 55% of arable land (wheat, maize, barley, rapeseed, sunflower, beet, soybeans), and in metals (iron)
  • Skilled and low-cost labour force
  • Low private debt levels
  • International financial and political support, although conditional on reforms

WEAKNESSES

  • Conflict with Russia and Russian-speaking populations in the Donbass region, which is affecting territorial integrity and preventing EU entry
  • Business environment marred by corruption, oligarchy and monopolies, weak property rights, a lack of competition and inefficient public services
  • Low economic diversification; sensitivity to weather and commodity prices
  • Declining demographics; regional inequalities featuring poverty and the informal sector
  • Credit constrained by doubtful loans and high real interest rates

RISK ASSESSMENT

Recovery driven by private consumption

The COVID-19 pandemic has come on top of the various structural weaknesses of Ukraine’s economy and contributed to the recession in 2020. A severe decline of economic activity was recorded in the second quarter of 2020. Private consumption, which had remained strong in previous years, recorded its first negative result since 2015. Its 10% year-over-year (YoY) decrease in the second quarter of 2020, during the first wave of pandemic, was detrimental to the economy because it accounts for 74% of GDP. Fixed asset investment dropped even deeper by more than 22%. Companies have been postponing their investments due to high uncertainty and a drop in demand. Indeed, the impact of pandemic led to negative growth in all sectors, with the deepest contractions experienced by restaurants and hotels, agriculture and transports.

As a response to COVID-19 from the monetary policy side, the central bank, in several successive steps, lowered the key policy rate from 13.5% at the end of 2019 to 6% in June 2020. However, considering that the inflation rate has remained relatively modest (2.6% in October 2020), real interest rates are not enough attractive to boost an increase in loans that could lead to improved economic activity. Moreover, corporates still face double-digit interest rates on loans. In addition to the monetary policy, support for the economy impacted by the pandemic has mostly consisted of tax deferrals and employment-related measures. Another wave of COVID-19 is a significant threat for the economy and its fragile health system, especially since official numbers of cases could not show the real scale because of a low number of COVID-19 tests. All these challenges will limit a fast recovery in 2021 and the economy will take more time to return to pre-crisis levels. Household consumption, supported by remittances and wage growth, will remain the growth driver, but investments’ growth is going to be limited due to the lack of progress in reforms.

 

External and fiscal vulnerabilities despite the support of the IMF

In the first eight months of 2020, imports decreased faster than exports. The latter benefited from rising global prices for grain and iron ore, which are the crucial export commodities of Ukraine. Remittances, which accounted for 8% of GDP in 2019, remain important, as they particularly support household consumption. Indeed, an estimated 5 million Ukrainians (or one-quarter of the labour force) work abroad, mainly in Poland, but also in Hungary, the Czech Republic and other countries. Remittances decreased (a 6.4% YoY drop in USD terms in January-August 2020) due to Ukrainians coming back to their homeland because of the pandemic. While the government is interested in limiting the international movement of Ukrainian workers, an inflow of remittances is still likely to affect positively the current account, which is expected to turn positive in 2021. Ukraine’s foreign exchange reserves have dropped to USD 24.5 billion in October 2020, after already a 9% slump a month earlier.

Ukraine’s access to external financing is threatened by the government’s inability in tackling corruption. In June 2020, the IMF approved the 18-month USD 5 billion Stand-By Arrangement with Ukraine, in order to help the country cope with the economic challenges brought by the COVID-19 pandemic and address balance of payments and fiscal financing needs. However, the lack of progress on reforms of the judiciary system, as well as the efforts to undermine the independence of the national bank and anti-corruption institutions, forced the IMF to put the next disbursements on hold. Similar postponements were implemented by the European Union and the World Bank.

 

Constitutional crisis resulting from key anti-corruption reforms

In 2019, Volodymyr Zelenskiy, an actor and TV producer, won the presidential election with over 73% of the vote, after entering politics four months earlier. Few months later, his Servant of the People Party obtained the absolute majority (251 seats out of 450) in the legislative elections. In October 2020, the constitutional crisis blew up when the Constitutional Court of Ukraine (CCU) cancelled key anti-corruption legislation, including a mandatory electronic income declaration and penalties for lying on the form, effectively decriminalising corruption. This move pushed Ukraine’s key donors, including the IMF, to suspend their financing. Neither the president nor the parliament have the power to sack or appoint judges of the CCU. Despite an absolute majority in parliament, Mr Zelenskyi's Servant of the People party is unable to push through the necessary legislation to resolve the situation.

 

Last updated: February 2021

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