The National Bank of Ukraine revised the country’s economic growth forecast for 2021 from 3.8% to 3.1%, head of the central bank Kyrylo Shevchenko announced on Oct. 21.
The downgrade is due to the lingering effects of the COVID-19 pandemic and increased gas prices, Shevchenko said.
“The impact of the pandemic was longer and more significant (than predicted). This, together with the consequences of the sharp rise in gas prices, led to weaker results in Ukraine’s economy,” he said.
The Ukrainian economy has been heavily impacted by the impact of rising energy prices.
Gas prices reached record highs this year, peaking at 162.13 euros per MWh earlier in October. Coal has also been in low supply in Ukraine, which is used for the production of electricity.
As a result, the Ukrainian economy experienced slower growth than predicted in the first half of 2021, the NBU said.
The central bank has also revised its forecasts for the years ahead. The NBU slightly lowered its gross domestic product growth projection for 2022, from 4% to 3.8%. In 2023, growth is now expected to be 4%.
Yuriy Sholomytskyi, head of the center of macroeconomic modeling at the Kyiv School of Economics, told the Kyiv Post that the downturn was driven by rising energy prices, but he downplayed the effects of the pandemic on the ongoing economy.
“I don’t think that COVID affects the economy like it did last year, but it certainly creates higher supply costs and negatively affects output,” Sholomytskyi said.
The energy crisis has also pushed up consumer inflation in Ukraine because Ukrainian businesses have adjusted their prices to deal with the rising cost of energy. This, in turn, has pushed the price of food and other consumer products skywards.
Inflation has been on the rise in Ukraine for months. In January, inflation was at just 6.1% and reached 11% by September. Despite these figures, the NBU announced on Oct. 21 that it would not increase its key policy rate, currently at 8.5%.
The key policy rate determines all other interest rates in Ukraine’s economy, which impacts economic growth and inflation. Increasing this rate is a measure that is often used to tackle inflation.
The cost of loans provided by the NBU to commercial banks affects the rate at which the banks give loans to their borrowers. The higher the rates, the fewer people seek loans, which slows down consumption and pushes down prices.
Sholomytskyi agreed with the central bank’s decision to keep the key policy rate at 8.5% because increasing this rate won’t affect gas prices.
“Increases won’t really help to fight with gas price increases… They can’t beat external prices, so further increases to the rate will mostly harm credit demand and make fiscal financing more expensive,” Sholomytskyi said.
The NBU now expects inflation this year to slow down to 9.6% and is ultimately sticking to its target of 5% in 2022, so long as energy prices fall and consumer demand stays steady.
