Economy of Ukraine

Ukraine was plagued by high inflation since its independence in

1991. Initially caused by the price liberalization during the period of
widespread deficit of consumer goods, which was a common
experience of all post-Soviet and Eastern European economies, it
hasn’t declined in 2-3 years, like in Poland or Baltic states, but
continued to accelerate. The main reasons behind this growth were the
policy inconsistency and the attempt to keep high Soviet-style social
standards in the rapidly shrinking economy without a strong tax base,
which led to excessive money emission.
 In 1992, Ukrainian budget deficit
reached 12.2% of GDP, which, in the
absence of access to capital markets,
was financed predominantly by issuing
money, thus, inflation reached 2000%.
In 1993, the situation with the budget
deficit improved slightly, but the need to
always ‘surprise’ economy with ever
higher inflation to have an effect on the
real economy resulted in price growth of
over 10,000% that year.
 The consequences were severe: over 20% drop in GDP. It was
impossible to make any long-term decisions with such enormous price
growth, thus austerity measures were introduced, allowing to lower inflation
to double digits by 1995. In September 1996 the inflation lowered enough
to finally introduce the local currency – UAH or hryvnia instead of
‘transitional’ coupon-Karbovanets.
One of the reasons behind the inflation was high budget deficit. The
introduction of hryvnia and fixing exchange rate at roughly 1.8 UAH/USD
allowed for temporal reduction in inflation expectations, hence, the CPI
growth in 1997 lowered to single digits.
 The drop in inflation was caused
by notably cutting budget deficit in
1999-2000, renewal of economic
growth and stabilization of exchange
rate around UAH/USD 5.4 in the
early 2000. The main conclusion was
clear – inflation is the consequence
and not the reason of economic
problems, which in Ukraine chiefly
originated from soft monetary and
fiscal policies.
 The acceleration of the worldwide economic growth and consequent rise
of commodity prices (chiefly ferrous metals, which generated 30-35% of
Ukrainian total export revenues) allowed for inflow of hard currency in 2003-
2004. Positive current account balance coupled with fixed exchange rate led
to growing forex reserves and parallel growth of hryvnia in circulation.
Since 2005 the current account started to deteriorate but this was more
than compensated with inflows of capital, which started after the Orange
revolution. The NBU kept the exchange rate fixed, purchasing hard currency
without any significant sterilization of such interventions.
 Nominal incomes grew enormously (e.g. in 2005 they increased by 45%)
pushing prices upward. Additional boost came from explosion of lending to
households – private loans roughly doubled each year from 2005 to 2008.
Such outstanding increase in resources led to growth of private consumption.
In cases when domestic supply and imports weren’t enough, prices increased.
As long as the private consumption grew rapidly, averaging 10.8% per year in
real terms in 2002-2008, the population did not care much about the inflation,
which during this period stayed almost constantly over 10% in annual terms. In
May 2008, when the world optimism on commodity markets went into
overdrive, yearly inflation in Ukraine reached 30%.
 The world crisis of 2008-2009 hit Ukraine hard: GDP contracted by
14.8%, year average exchange rate changed from UAH/USD 5.27 in
2008 to 7.79 in 2009, exceeding for a short period UAH/USD 10 at the
peak of the crisis.
Nevertheless, inflation actually subsided slightly – from (year
average) 25.3% in 2008 to 16% in 2009 and 9.4% in 2010. The
situation seemed on the right track: economic growth resumed in
2010, exchange rate stabilized, inflation lowered to single digits.
 In addition, during the period 2014-2015, Ukraine faced acute
economic and security challenges. The conflict in eastern Ukraine and
falling commodity prices have combined to rock its economy, which
contracted by 6.8% and 9.8% during 2014 and 2015, respectively.
The situation eventually stabilized and its economy grew by 2.4% in
2016. In the post-conflict period from 2014 to 2019, the government
undertook significant fiscal consolidation, moved to a flexible
exchange rate, reformed energy tariffs, and worked to increase
transparency.
 The first half of 2020 was quite successful, as
the government signed a Stand-by Program with the
International Monetary Fund. As a result, Ukraine
received the first tranche of more than $ 2 billion.
The Ukrainian economy has proved more
resilient to the coronavirus crisis than experts
predicted in March 2020. For the first time, inflation
remained low. Transfers of Ukrainian workers from
abroad decreased by only 10%.
But still, after calculations, experts saw
disappointing figures: Ukraine's economy in 2020 fell
after four years of growth.
Ukraine's real gross domestic product (GDP) in
2020 decreased by 4% compared to 2019.
 According to the State Statistics Service, the economy of Ukraine for 9 months
of 2021 showed only 2.2% annual growth, which does not compensate for last
year's decline (-4%).
The regulatory capital of the banking system has increased by 17% since the
beginning of the year - up to 213 billion hryvnas, which is its historically highest
value.
The profit of the banking system for 11 months of 2021 amounted to almost 66
billion hryvnas, an increase of 1.5 times compared to the same period last year.
Much of this profit is received by state banks and later transformed into tax and
other revenues of the state budget.
 The war in Ukraine has been going on
for almost (2 months). Economic losses
will be the highest in the history of the
country's independence. The World Bank
predicted a drop in Ukraine's GDP to
45%. They also worsened the growth
forecast for the world economy - from
4.1% to 3.2% - due to Russia's invasion
of Ukraine.
The deterioration of the forecast of
the world economy to 3.6% was
announced by the IMF.
 The fall in Ukrainian production,
according to IMF forecasts, will be at least
10%. Again, with a quick end to hostilities
and significant donor support. Ukraine will be
able to recover from the 10% drop this year
no earlier than 2025.
Thus, the need for external financing,
according to the IMF, is about $ 4.8 billion,
and they will be covered by the Fund, the
World Bank, the European Union and other
donors.
Thank you for your attention