The National Bank of Ukraine (NBU) due to the blockade of trade with the separatist-held areas of Donetsk and Luhansk regions and the improvement of conjuncture in foreign markets has revised macro indicators for 2017 and 2018, in particular, worsening the forecast for the growth of the country’s gross domestic product (GDP) for 2017 from 2.8 percent to 1.9 percent.
According to an NBU report, with reference to the decision of the extraordinary meeting of the monetary policy committee on March 20, the assessment of Ukraine’s GDP growth for 2018, on the contrary, has been improved from 3 percent to 3.2 percent.
At the same time, the National Bank confirmed the forecast for inflation for the current year at 9.1 percent and next year at 6 percent.
In connection with the blockade, the forecast for the deficit of the current account of the balance of payments for 2017 deteriorated from $3.5 billion to $4.3 billion, and for the next year from $3.4 billion to $4.3 billion.
The NBU also lowered the forecast for Ukraine’s international reserves as of the end of this year from $21.3 billion to $20.8 billion, and the next year from $27.1 billion to $25.9 billion.
“The influence of the blockade on the hryvnia exchange rate would be restricted. The worsening of the situation with the balance of payment would first impact the volumes of net foreign currency purchase on the market to replenish forex reserves,” the central bank said.
The NBU recalled that recently the bank bought currency on the interbank market if there was extra supply aiming to replenish forex reserves.
“The NBU plans to reduce the volume of foreign currency purchased on the interbank market, leaving more currency on the market and helping to narrow hryvnia exchange rate fluctuations. This is aimed to mitigate the influence of the trade blockade on the currency market,” the central bank said.
Deputy NBU Governor Oleh Churiy told reporters that despite the increase in the expected deficit of the current account, in general, the NBU projects the surplus of the balance of payment in 2017 of $600 million.
The regulator said that on March 20 the NBU presented the revised indicators to the International Monetary Fund (IMF) within the revision of the macroeconomic forecasts of the EFF program of the fund.
“The National Bank expects that the Ukrainian economy would feel the largest effect from the trade blockade this year. Due to the seizure of enterprises operating under Ukrainian legislation by militants, breaking the production chains and supplies of finished products metal goods production, mining production, coke and electricity output would fall,” the NBU said.
The central bank said that the effect of the blockade would slow GDP growth by 1.3 percentage points. However, this negative factor would be partially compensated by growth of 0.4 percentage points thanks to the more favorable situation for Ukrainian exports (metals, iron ore and grain) on foreign markets than it was expected earlier.
The partial compensation would be seen in the balance of payment where the negative effect from the blockade in the amount of $1.8 billion would be smoothed by the improvement of the situation on the foreign markets resulting in $1 billion of growth.
“The NBU expects that by late 2017 enterprises on the Ukrainian government controlled territory would be able to reorient to alternative raw materials and energy and next year would be able to load their production facilities as much as possible. This, and the comparison base effect, would result to the quicker growth of the economy in 2018 than it was predicted in January,” the central bank said, explaining the revision upwards GDP growth to 3.2 percent in 2018.
As for inflation, the regulator said that the effect from growth of prices of food on the global commodity markets would be compensated by slow growth of regulated tariffs and the reduction of the pressure on prices by total demand, the NBU said.
The final approval of the revised macroeconomic forecasts and making the decision on the monetary policy would be at the next meeting of the NBU board devoted to the monetary policy scheduled for April 13.
