Ukraine’s gross domestic product will shrink by 5.5% in 2020, according to the latest report by the European Bank for Reconstruction and Development.
This shows that the Ukrainian economy suffers more than expected: The previous EBRD report released in May 2020 stated that Ukraine’s GDP would drop by 4.5%.
The pandemic has damaged the economy due to weaker demand for exports, collapse of the tourism industry and lower commodity prices caused by the lockdown, which came into effect on March 17, according to the EBRD report published on Oct. 1.
The contraction is steeper than anticipated as the lockdown goes on and the EU’s borders are still closed to Ukrainians, preventing the travel and service industries to work as they used to.
Beata Javorcik, EBRD’s chief economist, compared it to the 2008 financial crisis when the country’s GDP dropped by 8%. It will take at least a year for the economy to come back to its pre-pandemic level, she wrote.
“The speed of recovery is expected to be similar to the one observed in the aftermath of that crisis (in 2008), with pre-pandemic levels of GDP returning towards the end of 2021,” she wrote.
Job losses
The COVID-19 pandemic caused a sharp economic downturn worldwide and did not spare Ukraine. Since the beginning of the year, Ukraine’s GDP has already declined by 1.3%, according to the EBRD.
The unemployment rate has increased to 9.9% in July compared to 7.3% during the same period last year, a widespread trend in all eight developing economies studied in the bank’s report, including Belarus, Egypt, Serbia, Turkey and Greece.
Because of COVID-19, more people have lost their jobs and more businesses have closed in the region than during the 2008 crisis — 15% had to look for a new job and 15% of businesses had to shut down, according to the EBRD.
About 5% of those who remained employed had to work more in their existing jobs, and 5% reported they have taken on a second job.
Sluggish recovery
However, the bank noted that Ukraine’s economy already hit rock bottom in April, and since then, has been gradually recovering. This means that Ukraine could be back to a 3% growth as soon as in 2021.
The International Monetary Fund (IMF) program agreed upon in the midst of the pandemic — in June 2020 — has helped Ukraine’s economy to continue to attract investors despite the crisis, according to the EBRD.
The IMF agreed to lend up to $5 billion within the next 18 months to help Ukraine’s economy, which had been expected to shrink by 8.2% this year, according to the IMF report released in June.
The IMF disbursed $2.1 billion on June 11, while insisting on Ukraine taking several steps to mitigate the economic risks, including to better its fight against corruption.
Ukraine has been supported by international financial institutions such as the IMF and the EBRD for a long time. The EBRD, for example, has invested 15 billion euros since it started working from Ukraine in 1996, which makes the bank Ukraine’s largest international financial investor.
On March 13, the bank announced its second Solidarity Package, which is worth 21 billion euros and dedicated to the countries that need financial help, including Ukraine.
However, the EBRD noted that the biggest risk in Ukraine resides in uncertain financial policy and a lack of structural reforms, which could scare off potential investors. And the recent events in Ukraine have not made the country look like a less risky destination.
The resignation of Yakiv Smolii as NBU governor on July 1 sent a negative signal, because Smolii said he left due to “political pressure.” He resigned five years prior to the end of his contract term with the NBU.
“Risks to the downside remain considerable, reflecting uncertainty about future social distancing as well as policy and structural reform commitments during an extremely challenging time,” the report reads.
