IMF expects Ukraine's GDP to stabilize next year if war doesn’t drag on

“Flash estimates suggest GDP growth declined by 37.2 percent y/y in 2022Q2, following a 15.1 percent y/y fall in 2022Q1,” reads the IMF’s report on Ukraine.

As active combat has shifted to the Eastern and Southern regions, activity in noncombat zones has started to stabilize, notably in Kyiv region, which accounted for a third of pre-war GDP. Nevertheless, private consumption and investment remain weak due to the erosion of purchasing power.

“GDP is now expected to contract by about 35 percent for the year (the same forecast as in the April 2022 WEO),” reads the report.

It is noted that the war is lasting longer than expected, but on the other hand, the recovery of economic activity is seen in Ukraine.

At the same time, persisting war-related supply disruptions as well as pressure from high global energy prices and hryvnia devaluation pushed headline inflation to 23.8 percent y/y in August 2022. Headline inflation is projected to reach 30 percent by the end of 2022.

The analysts note that pressure on the hryvnia and FX reserves rose but has eased somewhat since the devaluation of the exchange rate peg and disbursement of sizable external inflows.

“The war led to imbalances in the FX market, with constraints on FX supply due mainly to logistical challenges to exports, and increased FX demand, due to continuing import needs, outflows from migrants, and depreciation expectations. This put pressure on the hryvnia, with the cash rate (on the shadow foreign exchange market) deviating from the official pegged rate by around 25 percent by end-June. At the same time, the NBU had to intervene in the FX market in increasing amounts, with monthly sales reaching US$4 billion by June,” the IMF says.

Gross international reserves amounted to US$24.3 billion as of September 23, as compared to US$30.9 billion at end-2021, supported by large external financing disbursements.

The IMF projected the baseline scenario for the current and future years provided that the hostilities decline and external financing will continue to flow to Ukraine, including throughout 2024.

In particular, it is expected that Ukraine’s GDP will resume positive growth in 2023 and reach 3.5% (compared to the expected -35% this year). The public debt will rise to 87.8% of GDP this year and it is expected to gradually decrease to 87.5% in 2023. Gross financing needs in 2022 will be 29.7% and are expected to drop to 21.5% in 2023.

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