28.Sep .2022 14:15

EBRD Expects Ukraine’s Economy To Contract By Nearly A Third In 2022

EBRD Expects Ukraine’s Economy To Contract By Nearly A Third In 2022
views 476

Russia’s war on Ukraine will cause the latter’s economy to shrink by nearly a third in 2022, according to the latest forecast by the European Bank for Reconstruction and Development (EBRD).

The Bank’s forecast that Ukraine’s gross domestic product (GDP) will contract by 30 per cent this year, issued today in the EBRD’s Regional Economic Prospects report, is unchanged from its previous forecast in May.

For 2023, the EBRD has lowered its forecast of an economic rebound to eight per cent from the more robust 25 per cent foreseen in May, when the expectation was that substantial recovery work would already be underway.

The reduced forecast is a sign of how heavily uncertainty over the shape of the future is weighing on Ukraine’s economic prospects.

Ukraine’s economy, which had grown by 3.4 per cent in the wake of the Covid-19 pandemic in 2021, has been functioning under war conditions since the Russian invasion on 24 February 2022.

Though combat operations in more recent months have become more concentrated, covering territory that generates only around 20 per cent of GDP, the devastation of human capital, infrastructure and production capacity has been enormous.

Approximately 15 per cent of the pre-war population had left the country as of mid-August, while a further 15 per cent had been displaced internally.

Economic activity has been severely disrupted, even in regions without combat activity, due to supply bottlenecks, logistical challenges, financial difficulties and a lack of adequate labour.

Russia’s blockade of ports, hampering agricultural exports, and the devastation of many steel-producing facilities in the east of the country have decimated the country’s two main exports, which generated almost half of all pre-war export revenues.

GDP plunged by 15.1 per cent year on year in the first quarter of 2022 and by 37.2 per cent in the second quarter, when the most severe and widespread fighting took place.

Inflation picked up to 23.8 per cent in August 2022 due to supply disruptions and a soaring iscal deficit.

The country’s initial high reliance on monetary financing of the fiscal deficit amid a significant external financing gap had depleted foreign reserves by 20 per cent as of July 2022, despite capital controls being in place.

That prompted the central bank to increase the policy rate from 10 per cent to 25 per cent in June and to undertake a one-off 20 per cent devaluation of the currency in July.

The situation has since started to improve, in part because of higher inflows of external financing in August and September. As a result, foreign reserves had recouped half of their losses by the end of August.

The recent resumption of grain exports from some ports and the expectation of sufficient external financing could be positive factors for economic activity over the rest of 2022.

However, the risks to forecasts are exceptionally high, depending on the duration and intensity of the war.