Ukraine’s economy will grow by 3.5% in both 2021 and 2022 spurred by rich grain harvests and high business activity, the European Bank for Reconstruction and Development said in an updated economic forecast.
This is calming news for an economy that has suffered greatly due to economic shocks caused by the global COVID-19 pandemic, Russia’s 2014 occupation of Crimea and subsequent waging of an eight-year war in the Donbas, Ukraine’s far eastern industrial heartland.
Following a lengthy lockdown at the start of 2021, Ukraine’s economy contracted by 2.2% in January-April compared to the same period the year before. But the economy recovered quickly, rebounding by 5.7% from April.
Strong household consumption, foreign investment and high prices for products such as cereals and iron help stabilize Ukraine’s financial outlook and assuage international investors.
Fundamental changes to Ukraine’s governance structure could help accelerate growth.
Ukraine has been struggling to implement the necessary reforms to its banking and financial sector, which currently lacks transparency and institutional robustness.
According to the EBRD, Ukraine needs to make progress in developing transparency, disclosing owners of non-bank institutions, protecting consumer rights and increasing financial oversight and supervision.
A report published by the EBRD entitled “The Governance Dividend” suggests that if Ukraine were to improve the quality of its economic institutions, halving the gap between the country and the G7 average over the next 10 years, it could increase its yearly GDP growth by an average of 1.2% per year.
Ukraine has already undertaken many reforms and improved investment conditions. The EBRD still notes that there are factors that threaten future growth.
Low vaccination rates and stalled reforms were listed as possible hindrances to further growth.
“The slow speed of vaccination amid surging Covid-19 cases as well as the erratic progress of reforms remain the main downside risks,” the report noted.
Vaccination, which is an important part of Ukraine’s economic recovery, is no easy task. A recent survey found that around 55% of unvaccinated Ukrainians do not want to get jabbed.
This hesitance is bad for investments and economic mobility, which relies on healthy citizens for the free movement of human capital and consumer spending.
On Oct. 22, the National Bank of Ukraine downgraded its own forecast for GDP growth in 2021 from 3.8% to 3.1% citing high gas prices and a protracted pandemic.
Inflation remains at high levels, the second highest in Europe. In September, inflation accelerated to 11% due to rising food and energy prices. The NBU has now tightened its monetary policy, increasing its key policy rate to 8.5%.
This is driving prices up and strangling potential growth.
According to Ukrainian publication Ekonomichna Pravda, the EBRD stated that it expects inflation in Ukraine to decline at the end of 2022, falling back to the NBU’s target of 4-6%.
