In December, Ukraine successfully completed the second review of the EFF program and received another tranche of $900 million.
This happened against the backdrop of rapid developments regarding the (non) approval of a $61 billion aid package for Ukraine in the US Congress and a summit of EU leaders, at which a historic decision was to be made on the start of negotiations on Ukraine’s accession to the EU and the provision of a four-year support package (Ukraine Facility) in the amount of 50 billion euros. Agree, the amounts are amazing, and you can’t get rid of the bitter aftertaste of these impressions.
Under such circumstances, our usual “progress in implementing reforms” is obviously not enough to achieve the economic breakthrough necessary for Ukraine. Which, in fact, is what the IMF is hinting at in its forecasts .
Upside scenario (optimistic/positive scenario)
The IMF program still provides for two scenarios for the development of events in the medium term: basic and negative. The key assumptions for both scenarios are the duration and intensity of hostilities. The base case scenario assumes that the intensity of hostilities will gradually decrease until the end of 2024 . Even the basic scenario is built taking into account the fact that the war (without increasing intensity) could last six months longer, and the negative scenario for the course of events provides not only for a longer period of war - over the next two years, but also an increase in its intensity. As a consequence, if the negative scenario is realized, the reduction in real GDP in 2024 can be expected at the level of 5% .
At the same time, IMF specialists have prepared an “illustrative” positive scenario for the course of events in the medium and long term, which, in particular, provides for higher investment (especially from the private sector), a more intensive return of forced migrants and increased productivity. As a result, the potential rate of real economic growth over a ten-year period may increase by 1.5 times, from approximately 4 to 6% . This is a significant breakthrough that should lead to an increase in the average level of well-being and an improvement in the quality of life in Ukraine. The main macroeconomic assumptions of all three scenarios are shown in the table.
Moreover, even such an optimistic course of events is not enough to catch up with the neighboring countries of Eastern Europe in terms of development. Let's look at this using the example of Poland. It is no secret that over the past 30 years, the economic gap between Ukraine and Poland has gradually increased. According to the IMF, at the end of 2020, GDP at purchasing power parity per person in Ukraine and Poland was $13.1 thousand and $34.1 thousand, respectively. And before the war, according to well-founded assumptions of potential GDP growth for Poland and Ukraine at 2.5 and 4% per year, respectively, with a constant population size, it would have taken Ukraine about 60 years to bridge such a gap. The growth rate of real GDP, which would allow Ukraine to overcome this gap in 20 years, even before the start of a full-scale invasion, was 7.5% per year. The persistence of the income gap compared to other countries in the region over the next ten years is also confirmed by the calculations of IMF specialists (see figure).
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This situation means that even short-term double-digit growth rates for several years (as envisaged in the optimistic scenario) after the end of the war do not provide the opportunity to achieve growth that will allow Ukraine to catch up with the average standard of living of our Western neighbors . This situation can be regarded as a dead end and doom to the status of the poorest country in Europe, or it can be considered a low start for rapid development. And this may indicate that Ukraine will do more and faster than can be expected from it. For example, one of the few developing countries that has managed to join the “club of developed economies” over the past 30 years is the Republic of Korea. At the same time, if in the mid-1950s someone in a war-torn, poor and agrarian country had voiced the assumption that in 40 years the IMF would consider it a developed economy, then he would have been called, to put it mildly, a man with a rich imagination .
Additional risks according to IMF estimates
The list of risks from IMF specialists that can most influence the course of the base scenario partially coincides with the risks indicated in the latest inflation report of the National Bank : longer duration/intensification of the war, reduction in volumes/partial loss of international (financial) assistance receipts, decrease transit opportunities (both due to damage to the port infrastructure and problems with Western neighbors).
At the same time, additional both external and internal risks are also highlighted, which are not paid enough attention or are not voiced at all in Ukraine.
External risks : rapid global slowdown/recession of the world economy and volatility in commodity prices. the risk of a global recession materializing is assessed as medium (10–30%), and its impact as significant. The materialization of this risk could lead to problems with external financing and will require fiscal consolidation and the search for new sources of financing (including monetary and on less favorable terms). The likelihood of exposure to commodity price volatility is assessed as high (30–50%), as is its potential impact. Rising energy prices will lead to additional pressure on the balance of payments and an increased need for external financing. A decrease in prices for agricultural products will cause an additional negative impact on an important sector of Ukrainian exports. To counter this risk, Ukraine, in particular, may have to limit access to energy resources for some categories of consumers and allocate additional resources to meet the needs of the poorest segments of the population.
Additional internal risks were identified as the growth of social tension in society and the loss of the necessary pace of reforms. The probability that both risks will materialize is assessed as medium (10–30%), but the strength of their expected impact on the base case scenario is assessed as high. According to IMF specialists, a decline in living standards and increased inequality may undermine national unity and lead to the adoption of populist decisions that will widen fiscal and external imbalances, and the loss of the necessary pace of reforms may lead to “fatigue” of international partners and a decrease in external financial support.
To counter both risks, Ukraine should maintain prudent monetary and fiscal policies, continue anti-corruption and judicial reforms, mobilize domestic sources of financing, and set spending priorities .
