Ukraine’s GDP will suffer negative growth of 30% in 2022, a downward revision of ten percentage points compared to the European Bank for Reconstruction and Development’s projections released last 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.
With the 3.4% GDP growth recorded in 2021 currently being no more than a distant memory, the war is putting Ukraine’s economy under heavyest stress, due to the devastation of infrastructure and production capacities, flee of population, closing of companies, stop of agricultural production, heavy public spend on war and other factors.
Despite all these circumstances GDP growth in Ukraine is forecast by the EBRD (European Bank for reconstruction and Development) to bounce back to 25% next year.
The forecast 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, EBRD’s report underscores.
The EBRD has already committed an initial €2 billion resilience package to help citizens, companies and countries affected by the war in Ukraine.
About 50% businesses closed and jobs lost
It is estimated that between 30 and 50% of businesses have stopped their operations completely, causing about half of all employees to lose their jobs and income.
Approximately 10% of the pre-war population has fled Ukraine and an additional 15% are displaced within the country. All this is severely weakening companies’ finances, thus exposing the banking sector to a drastic deterioration of asset quality.
Inflation at 13.7% in March and perhaps on the rise
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% year-on-year in March 2022, and it is likely that inflationary pressures will persist throughout the year.
Fiscal gap at $5Bn by war spending
Plummeting tax revenues, combined with government spending way above the budget, have opened a fiscal gap of at least $5Bn a month.
The fiscal gap is accompanied by a substantial external gap as well, so 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, says EBRD report.
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.
War in Ukraine puts at risk food security globally
Ukraine is a significant food exporter, accounting for almost 10% of global wheat exports, as well as 14% of corn and 37% 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% of the country’s corn production and 20% 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%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.
Long term logistical risks
Significant damage to seaports and transport infrastructure, as well as limitations on ships operating in the Black Sea add, and not only to the food insecurity thread, longer-term logistical risks.