Navigating Stormy Economic: Ukraine, grappling with the aftermath of the 2022 Russian invasion, is facing intricate economic challenges that extend into the foreseeable future. Although the economy is on track to achieve a growth rate of around 5% this year, the outlook for 2024 raises considerable uncertainties.
The impending $43 billion budget deficit for the upcoming year relies significantly on foreign financial aid, including a substantial amount from the European Union and the United States. However, these aid packages, essential for Ukraine’s financial stability, have encountered obstacles, with delays in the U.S. Congress and opposition from Hungary.
Since the invasion, Kyiv has directed all its revenue toward defense and military efforts, with foreign aid covering various expenditures, from pensions to social payments. While Ukraine could face a shortfall of several billion dollars in its financing needs for 2024, a shortfall of $10 billion or more could pose significant challenges to macroeconomic stability and its International Monetary Fund (IMF) program.
The IMF, which recently approved a new $900 million tranche, requires robust financing assurances for the next 12 months. A substantial decline in external financing could potentially jeopardize Ukraine’s IMF program.
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To mitigate potential budgetary shortfalls, Ukraine might be compelled to explore options such as tax hikes, a move that could prove counterproductive for the economy, or resort to printing money, a measure that carries its own set of risks. While Central Bank Governor Andriy Pyshnyi has emphasized that printing money would be an extreme measure not currently in the plan for this year, the economic landscape remains complex.
Moreover, Ukraine faces the challenge of restructuring approximately $20 billion in international debt next year, following a two-year payment freeze agreed upon by sovereign bondholders in August 2022. Finance Minister Serhiy Marchenko remains optimistic about securing foreign financing in full for 2024, but he acknowledges the potential need for adaptation if the war prolongs.
Despite signs of modest economic recovery this year, Ukraine’s commodity-driven economy is still smaller than it was before the war. Risks and constraints persist, with millions of Ukrainians remaining abroad as refugees, creating a shortage of workers, particularly for highly skilled positions. The economy is also impacted by Russian attempts to blockade the Black Sea, though a Ukrainian shipping route established in defiance of Moscow has provided some relief to commodities exports.
Furthermore, uncertainties related to the direction of the war persist, and logistics for exports remain disrupted. The National Institute of Agrarian Economics reported a 7% year-on-year drop in agrarian product exports in November due to transport and logistics problems, contributing to higher imported food costs. Food, constituting 60% of Ukraine’s exports, plays a pivotal role in the economic dynamics.
While the economy is expected to grow around 5% this year, forecasts suggest a slight easing to 5.0% in 2024, according to the Kyiv-based ICU investment house, with inflation likely to pick up. Dragon Capital expects GDP growth of approximately 4% in 2024 after a 5.2% expansion this year. Ukraine’s trade deficit, reaching a record-high $22.3 billion in the first 10 months of 2023, underscores the challenges posed by surging imports and weak exports.
Finance Minister Serhiy Marchenko has emphasized the importance of securing foreign financing in full for 2024, and while the economy has demonstrated resilience, potential challenges lie ahead. The deficit, before foreign aid and loans, is expected to exceed 10% of GDP until at least 2027, falling below 5% only beyond 2030, according to ICU.
espite concerns about waning Western financial support, Ukraine is likely to remain dependent on foreign financing, emphasizing the need for strategic economic planning and resilience amid evolving geopolitical and economic landscapes.
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