Ukraine’s gross domestic product will contract by 5.5% in 2020 but may rebound next year, the World Bank reported in its Europe and Central Asia Economic Update on Oct. 7.
The World Bank expects the Ukrainian economy to grow by 1.5% in 2021 and 3.1% in 2022. In comparison, GDP grew by 3.3% in 2019, according to the Economy Ministry.
“A significant contraction is expected for 2020 as a result of COVID-19,” the report stated. “However, domestic demand is rebounding and Ukraine has entered the crisis in better macroeconomic condition than in previous crises due to prudent macroeconomic management over the past several years.”
The leadership of the National Bank of Ukraine earlier credited Ukraine’s relative stability with the country’s ability to weather the pandemic better than many other countries.
GDP plummeted in the second quarter of 2020 but the blow wasn’t as harsh as expected. Real wages declined by 0.4% year over year in April but recovered by summertime, growing 4.8% year over year in June. This supported domestic demand.
The World Bank wrote that remittances have stayed “resilient” while private capital inflows also recovered. This helped reduce external financing needs and rebuild foreign currency reserves, which the NBU used to stabilize the hryvnia.
Falling revenues, COVID-19 spending, and large debt payments that are coming due will put the most fiscal strain on the country. The European Union and International Monetary Fund have provided some relief with $2.7 billion in financing as well as the $1.3 billion eurobond issue.
Ukraine still hopes to raise $2.9 billion before the end of the year. If it can’t, it will have to cut spending or borrow domestically.
Securing financing from the IMF is uncertain at the moment because of the fund’s concerns about the NBU independence after former governor Yakiv Smolii resigned for political pressure. The big staff upheaval at the bank, which followed Smolii’s resignation, means that the IMF will likely wait to see whether the central bank’s new direction satisfies its preconditions.
The World Bank stated that Ukraine has had a “recent loss in reform momentum,” meaning fixed investment will only recover to pre-crisis levels by the end of 2022. Low fixed investment hurts economic recovery.
The World Bank singled out structural weaknesses in the financial sector, resolving non-performing loans, agricultural market distortions, and an anti-competitive environment.
“Finally, political and governance risks are high and increasing due to the deep-rooted influence of powerful vested interests that could derail or reverse ongoing reforms,” the report stated. “Continued adherence to anti-corruption reforms and prudent macroeconomic policies is necessary to anchor investor confidence.”
