What will happen to Ukraine’s economy: three findings from an expert survey
What will happen to inflation, will the dollar be above 40 and what determines economic growth in times of war.
GDP growth will be faster, the hryvnia will be stronger, and inflation will be less rapid – experts from non-governmental organisations and private companies surveyed by the Centre for Economic Strategy have optimistically updated their forecasts.
The average forecast for GDP growth in August is 4.7%, although it was close to zero in March. Experts expect the consumer price index to be much lower: 10-11.5% of GDP instead of 14.5-18.5% of GDP in March.
Analysts are also optimistic about exchange rate forecasts: no expert expects the exchange rate to exceed UAH 40 per dollar by the end of 2023, while in March, five out of seven respondents mentioned figures above this mark.
However, the forecasts also contain other non-obvious trends that provide insight into the state and prospects of the economy. In short, Ukraine and its donors deserve high marks for keeping the economy going during the war, but it is too early to relax.
1. Risk resilience
Experts made even worse assumptions about risks in their August assessments than in March.Firstly, all experts assume that the war will last at least until the end of 2023, while in March, half of them expected active hostilities to end in the summer.
Secondly, while in March everyone assumed the uninterrupted operation of the grain corridor, now the forecasts are based on the current state of affairs: interruptions in the initiative or its likely termination.
The fact that growth forecasts have increased despite this demonstrates the resilience of the Ukrainian economy, the importance of donor assistance and successful risk management
2. The unpredictable year of 2024
One of the distinctive features of the August forecast is a slight divergence in the most pessimistic and optimistic estimates of macroeconomic indicators for 2023. In the March forecasts, the differences were dramatic: for example, assumptions about GDP growth in 2023 ranged from almost -5% to +5%.
There is now a relative consensus for 2023, but forecasts for 2024 still vary considerably. Both economic growth and price levels depend on a number of factors that are difficult to predict. Starting from external ones, such as the situation at the frontline, the consequences of shelling of port and energy infrastructure, and ending with internal ones, such as the government’s decisions to raise utility tariffs.
Amid high uncertainty, expert expectations for GDP growth ranged from 2.8% to 8%. Inflation could either decline to 9.5% or accelerate to 14.5%. The exchange rate may cross the 40 UAH/USD mark if the NBU changes its fixed hryvnia policy in favor of managed float or moves its exchange rate.
3. This is no time to relax
There are a number of expected factors that do not play in favor of economic growth.
First, for at least two years after de-occupation, one should not expect a rapid economic recovery in those regions, especially in agriculture. This is due to the long process of land demining.
Secondly, rapid economic growth requires financial incentives. To a large extent, we are talking about international donor funds. It is likely that their flow may decrease. This is especially true of grants. The absence of an effective Marshall Plan and reparations from russia after the victory is a risk for the economic situation.
Thirdly, experts expect that the National Bank will allow the hryvnia to devalue in 2024. Although the NBU does not announce specific figures and deadlines, it confirms the experts’ guesses and intentions to move away from a fixed exchange rate over time as part of its policy of easing administrative currency restrictions.
Maintaining economic and financial stability in such an environment will be important. Thus, achieving economic growth is an ambitious and difficult challenge.
We would like to thank the representatives of Concorde Capital, Dragon Capital, Oxford Economics, Sence Bank, ICU, Institute for Economic Research and Policy Consulting, and German Economic Team for their participation in the event and the survey.
The material was prepared within the framework of the project “Economic Hub: Effective Public Finance Management Policy and Growth Vision”, which is being implemented with the support of the UK Government (UK Aid). The project is implemented by Abt Britain and the Centre for Economic Strategy.
The op-ed was published on European Pravda