Slow recovery

In 2021, the economic recovery was supported by a surge in household consumption and investments. However, a large part of the growth was thanks to a favorable base effect, and the pre-pandemic level was not reached. Moreover, Ukraine benefited from a substantial price rise for its major export products, including cereals and iron. Higher volumes of exports, thanks to solid harvests, should still contribute to the first months of 2022. Household consumption (74% of GDP) will remain a growth driver, with inflation slowing down because of higher base effects and the price stabilization of the highest inflationary components. Rising food and energy prices accelerated inflation to 11% in September 2021, triggering several interest rate hikes from the National Bank of Ukraine (reaching 8.5% as of November 2021).

The COVID-19 pandemic still poses a risk to the recovery process. The number of cases and hospitalizations increased amid the slow vaccination process in the autumn of 2021. Indeed, Ukraine has among the lowest vaccination rates in Europe, with only 17.2% of the population fully vaccinated at the end of October 2021 and a high vaccine hesitancy. At the same time, companies are aware that it could limit the recovery process. According to the survey published in September 2021 by the American Chamber of Commerce and Citi Ukraine, 61% of surveyed companies indicated the possibility of a new lockdown as their biggest concern. On the other hand, 93% of surveyed companies advocated that eradicating corruption and implementing fundamental judicial reforms are crucial steps the government should take to improve the business climate and attract foreign investment. Indeed, the inefficient process of implementing reforms affects the investment climate in the country, impacting the economy as a consequence.

Improving public finances under IMF supervision

Expatriates’ remittances (10% of GDP, mainly from Poland, Hungary, and the Czech Rep.) remain necessary, not only as a support for household consumption but also as a contribution to external accounts. Indeed, the current account balance turned exceptionally positive (3.4%) in 2020 thanks, in particular, to the resilient inflow of remittances, while it would have fallen beyond -6% without such a contribution.

The budget deficit has been narrowing since the pandemic year 2020 caused it to expand and should gradually return to the pre-pandemic level, but probably only after 2022. Ukraine’s access to external financing remains important for public finances, especially short-term budget needs, including external debt repayments. Ukraine is due to receive USD 2.7 billion (10% of foreign currency reserves) as part of a Special Drawing Rights (SDR) allocation by the International Monetary Fund (IMF). The first tranche (USD 1.9 billion) was received in August 2021. In October 2021, it was announced that Ukraine would receive a USD 700 million disbursement and secure an extension to its USD 5 billion loan program through to June 2022. Previously, loan disbursals stalled over concerns about reforms and the central bank’s independence. Cooperation with the IMF is crucial for Ukraine’s financial stability, especially considering the country’s high external financing needs. Indeed, the external debt constitutes 54% of total State debt, primarily denominated in USD.

The government focused on anti-corruption reform

In 2019, Volodymyr Zelenskiy, an actor and TV producer, won the presidential election with over 73% of the vote after entering politics four months earlier. A few months later, his Servant of the People Party obtained the absolute majority (251 seats out of 450) in the legislative elections. However, Servant of the People has seen its support collapse in the last two years. The latest polls show a drop in support, from the 43% of votes it obtained at the time of the election to 14% in October 2021. The next presidential and parliamentary elections are scheduled for 2024.

The government intends to demonstrate progress in rebuilding anti-corruption infrastructure to improve the investment climate and secure IMF financing. In its 2020 Corruption Perception Index, Transparency International ranked Ukraine 117 out of 180 countries globally, giving it 33 out of a maximum of 100 points, where zero indicates that “corruption effectively replaces the government." In October 2021, the parliament passed a new law strengthening the independence of the National Anti-Corruption Bureau of Ukraine.

Relations between Russia and Ukraine remain tough. In November 2021, reports and satellite imagery of Russian troops’ movements toward the border caused renewed concerns about Russia’s intentions following a similar build-up of troops in April. Moreover, if Nord Steam 2 starts operating, Ukraine could lose most of its gas transit revenues from Russia.