Wave of Optimism Sweeps Through Ukrainian Economy

While international financial organizations have been warning about a global economic slowdown and revising growth forecasts downwards, Ukraine has been among the few economies for which forecasts were revised upward recently. The World Bank (WB) now expects that Ukraine will grow by 3.4 percent this year, which is more optimistic than the WB’s 2.7 percent growth forecast from June. The WB improved its forecasts also for 2020 (to 3.7 percent) and for 2021 (4.2 percent) (Worldbank.org, October 9). The International Monetary Fund (IMF) most recently predicted that the Ukrainian economy would grow by 3 percent this year—an upward revision from April, when the IMF predicted growth of 2.7 percent. For comparison, the IMF’s 2019 GDP growth forecasts for Ukraine’s former Soviet neighbors Russia and Belarus were revised downward, to 1.1 percent and 1.5 percent, respectively (Imf.org, October 24).

The government of young technocrats that came to power in Kyiv as a result of the presidential election last spring and the parliamentary election last summer is even more upbeat. The baseline growth scenario it recently approved is aligned with that of the World Bank, and the Ukrainian Ministry of Economic Development and Trade put forth an even more optimistic scenario, predicting growth acceleration from 4.8 percent next year to 6.5 percent in 2022 (Ukrinform.ua, October 23). That would be comparable to growth rates in China and to the speed of growth Ukraine itself demonstrated before the global economic crisis of the late 2000s. The new head of government, Prime Minister Oleksy Honcharuk, has been even more ambitious than his forecasters. He hopes that thanks to the swift structural reforms and anti-corruption measures planned, growth will accelerate to 5 percent next year and to an average 7 percent per annum thereafter, thus allowing GDP to soar by 40 percent over five years (UNIAN, October 4).

Ukraine’s economic ascent this and last year (3.3 percent growth in 2018) owes mainly to record crop harvests and double-digit wage growth. The latter was additionally stimulated by labor migration, which increased after 2017, when the European Union countries (except the United Kingdom and Ireland) granted visa-free travel to Ukrainian citizens, prompting Ukrainian employers to hike wages in order to slow labor outflow. Ukraine has also been showing steady progress in the WB’s Doing Business classification, moving steadily up to the 64th position among 190 world economies in the 2020 report, from 152nd place in 2012. Prompted by all that and also by optimism in the wake of this year’s change in government, business sentiment and especially consumer confidence figures finally climbed to pre-crisis levels this fall (Info-sapiens, Bank.gov.ua, October 16).

Still, Ukraine has a long way ahead to bridge the development gap with its western neighbors. Ukraine is still ranked among the poorest economies in Europe, along with Moldova. The relatively quick growth achieved this and last year and expected in the medium term are partly thanks to a low base of comparison. Ukraine has had to rise from lower levels than its neighbors in the former Soviet space after the economic crisis; and this was further exacerbated by the most intense phase of war with Russia (2014–2015), when Ukraine’s GDP plunged by a cumulative 16 percent, according to the WB. The country’s GDP has not yet reached pre-global-financial-crisis levels, while its western neighbors had long exceeded them.

Assistance from the EU, the United States and international financial organizations helped Ukraine emerge from the crisis. But despite growth, Ukraine still needs assistance to repay its public debt, which soared from 41 to 81 percent of GDP during 2013–2016 and still remains high, at around 60 percent. New borrowing to the tune of 8 percent of GDP will be required in the next couple of years in order to repay debt and finance the fiscal deficit, according to the WB (Worldbank.org, May 23). But Ukraine risks losing Western assistance now, as reform efforts were insufficient and corruption thrived under the previous president, Petro Poroshenko; his successor, Volodymyr Zelenskyy, has yet to prove his worth. The EU has been delaying 500 million euros ($555 million) in assistance to Ukraine since last spring, and the IMF has not lent anything since approving a $3.9 billion stand-by loan and issuing its first tranche in December 2018.

Prime Minister Honcharuk’s government began negotiating a new three-year assistance program with the IMF, but the organization’s delegation left Kyiv non-committal in September. The issue of PrivatBank, the country’s largest bank, which was nationalized and bailed out for some $5.5 billion in line with IMF requirements in 2016, has been the most difficult stumbling block in the loan talks (Epravda.com.ua, October 13). The bank’s former owners sued Ukraine, demanding compensation, while Honcharuk indicated, in an interview with the Financial Times, that some compromise could be reached with them (Financial Times, September 17). Moreover, local courts in several cases ruled in the previous stakeholders’ favor. The situation is complicated by the fact that one of PrivatBank’s former owners, oligarch Ihor Kolomoysky, backed Zelenskyy’s victorious presidential election campaign early this year, and several people linked to him hold top positions on Zelenskyy’s team (see EDM, April 23, June 19, October 9). The next IMF mission is expected in Kyiv in November, and Honcharuk insists that a new agreement will be reached this year (Zn.ua, October 21). But his government will have a hard time proving its independence from oligarchic influences.