War to Cause Ukraine Economy to Shrink Nearly a Third this Year

Source: www.gulfoilandgas.com 5/10/2022, Location: Asia

Russia’s war on Ukraine will cause the latter’s economy to shrink by nearly a third this year, the latest forecast from the European Bank for Reconstruction and Development shows.

Ukraine’s GDP will suffer negative growth of 30 per cent in 2022, a downward revision of ten percentage points compared to the Bank’s projections released as recently as March.

The Russian invasion has brought to an abrupt halt an economic recovery that had begun in that country last year, the EBRD’s Regional Economic Prospects (REP) published today show.

GDP growth in Ukraine is forecast to bounce back to 25 per cent next year but this assumes that substantial reconstruction work is by then already underway. How long the hostilities last, the shape of any post-war settlement, the extent of reconstruction and how many refugees return home will also influence the recovery’s speed.

With the 3.4 per cent GDP growth recorded in 2021 no more than a distant memory, the war is putting Ukraine’s economy under enormous stress, with the heavy devastation of infrastructure and production capacities.

It is estimated that between 30 and 50 per cent of businesses have stopped their operations completely, causing about half of all employees to lose their jobs and income. Approximately 10 per cent of the pre-war population has fled Ukraine and an additional 15 per cent are displaced within the country. All this is severely weakening companies’ finances, thus exposing the banking sector to a drastic deterioration of asset quality.

To preserve macroeconomic stability, on 24 February, the day of the invasion, the National Bank of Ukraine fixed the exchange rate, limited cash withdrawals and introduced capital controls by preventing most cross-border transactions. However, huge production and logistical disruptions have caused inflation to rise 13.7 per cent year-on-year in March 2022, and it is likely that inflationary pressures will persist throughout the year.

Plummeting tax revenues, combined with government spending way above the budget, have opened a fiscal gap of at least US$ 5 billion a month. Yet, because the fiscal gap is accompanied by a substantial external gap as well, it is clear that war bonds purchased by domestic banks and monetary financing of fiscal deficit allowed under Martial Law could plug only a small portion of the gap.

In March, the external gap was largely covered by IFI lending, but more sustainable financing predominantly based on grants is needed. Several multi-donor accounts are being created in the IMF, World Bank and European Union. A Multi-Donor Administered Account created in the IMF is intended as a secure vehicle for donors to channel grants and loans for Ukraine. Funds will be used for balance of payments and budgetary needs.

The war on Ukraine also raises the spectre of worsening food security globally, because Ukraine is a significant food exporter, accounting for almost 10 per cent of global wheat exports, as well as 14 per cent of corn and 37 per cent of sunflower oil exports.

Wheat and sunflower are mostly grown in the south-east of Ukraine, where war damage is the most significant. The Kharkivska, Dnipropetrovska, Khersonska, Zaporizka, Luhanska and Donetska regions together account for 36 per cent of the country’s wheat production and 38 per cent of its sunflower seed output. Corn and soybean production is mostly concentrated in the north-east of the country which has also experienced large-scale war damage. These regions account for 28 per cent of the country’s corn production and 20 per cent of soybean production.

Aside from direct war damage, agricultural production is hampered by lack of fuel, access to seeds, fertiliser and equipment. According to estimates of the Food and Agricultural Organization, only 20 per cent of agribusinesses have sufficient fuel to start planting this spring, and around 20 to 30 per cent of agricultural land in Ukraine is expected not be planted or harvested this year. Significant damage to seaports and transport infrastructure, as well as limitations on ships operating in the Black Sea add longer-term logistical risks.


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