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What Impedes Ukraine’s Economic Revival?

Friday, 15 July 2016, 14:17

The Ukrainian Government has a positive frame of mind for the first time in recent years. At least you can say this looking at the economic forecast for 2017 published by the Ministry of Finance in late June.

In 2017, Ukraine’s GDP may grow 3%, while inflation is estimated at 8%. At the same time, the Ministry has a backup plan – GDP grows 1.5%, inflation is around 10%.

In any way, the Government hints that the Ukrainian economy is recovering from crisis. At least, they want to believe it.


Green shoots?

However, a sober estimate of the Ukrainian economy proves that it’s too early to say the recession is over.

In the first quarter of 2016, GDP showed modest 0.1% growth. Nonetheless, considering the baseline – GDP decline by 10% and 43% inflation in 2015 – the results of January-March are far from satisfactory.

The slender hopes for quick recovery are confirmed by conservative expert predictions. In particular, the International Monetary Fund decreased its forecast on Ukraine’s 2016 GDP growth from 2% to 1.5%. This vision is shared by the World Bank experts, who estimate GDP will increase 1% or less.

The Ukrainian authorities, known for their over expectations, are also conservative about GDP growth in 2016. Both the Ministry of Economy and the National Bank forecast a less than 1% increase. According to the Cabinet of Ministers, if GDP doesn’t drop in the first half of 2016, it would be considered a positive achievement.

International ambitions

Nonetheless, Prime Minister Groysman and his team are optimistic about trend reversal. They consider foreign investment and increased foreign demand to become the drivers for Ukraine’s economic growth in 2017.

All fine and dandy, but such speculations look odd in the situation of dropping foreign trade and near-zero investment.

For instance, Ukraine had a $1.7 billion negative trade balance in 2015. In January-May 2016, this trend continues, with the negative balance amounting to $1.3 billion.

It is noteworthy that both the exports and imports decline. While the former can be explained by the dire business environment, the latter runs against the Government’s commitment to overcome the crisis by increased domestic demand.

When it comes to foreign investment, the picture is even bleaker.

In 2015, the negative foreign investment balance numbered $818 million. In January-May 2016, it rose to $1.84 billion, making things even worse.

These figures explicitly don’t comply with the pattern drawn by the Government. Moreover, officials seem not to realize the very evident idea that investors are never motivated to risk expropriation of their money in a country with no adequate tax, judicial and financial systems.

The national debt of Ukraine beat the limit for 2016 – as of 1 May, it was as high as ₴1.7 trillion ($68 billion) which is $8 billion more than approved in the state budget. The average interest on sovereign Eurobonds exceeds 8%.

More than words

Despite these headwinds, the expectations of the Ministry of Economy for 2017 are feasible. All in all, 1.5-3% GDP growth is not an impossible mission even now.

However, the positive scenario is only possible if the Government does a ‘correction of errors.’

The tasks of the Government are well-known. They were discussed multiple times and clearly articulated in the governmental agenda approved in May.

First of all, these are privatization, ambitious tax reform, providing solutions to energy and housing problems, improving social standards, wiping off the state debt, and business deregulation.

In short, the Government should focus on lowering dependence on foreign finance and incentivizing business activities and domestic demand.

Moreover, production is reviving – the industrial production index is growing over the past four months – in February, it increased 7.6% year-to-year, in March – 4.8%, 3.5% in April and 0.2% in May.

To support this pace, however, fine words of the Government are not enough. Tangible reforms are necessary, as advised by the International Monetary Fund.

According to the IMF, Ukraine should work hard to reform its public administration and combat corruption in order to revitalize cooperation with the IMF and regain economic growth.

Sure, such claims of the Fund can be considered as a threat or even blackmail.

However, unless efficient drivers of economic growth are provided, the rosy forecasts will die on the vine. Otherwise, the Government will have to scale back its ambition and try to explain another underwhelming year by Russia’s activities or poor international market conditions.

Translated by Mykhailo Koriukalov

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