11:38 07.10.2020

World Bank predicts Ukraine's GDP fall by 5.5% in 2020 with 1.5% growth in 2021

3 min read
World Bank predicts Ukraine's GDP fall by 5.5% in 2020 with 1.5% growth in 2021

Ukraine has entered the crisis in better macroeconomic condition than in previous crises due to prudent macroeconomic management over the past several years, and activity in Ukraine, the largest economy in the subregion, is projected to shrink in 2020, by 5.5%, the World Bank has said.

"Going forward, growth is expected to remain modest at 1.5% in 2021, rising to about 3.7% by 2023," the World Bank said in the Europe and Central Asia Economic Update "COVID-19 and Human Capital."

Compared to the June update, the forecast for the decline in Ukraine's GDP was worsened by 2 percentage points, for 2021 – by 1.5 percentage points.

"The outlook depends on the duration of the health crisis and reforms to address bottlenecks to investment and safeguard macroeconomic sustainability," the bank said.

The World Bank said that according to the negative scenario, Ukraine's GDP growth next year may be even lower – only 1%.

The World Bank's analysts said that the government's initiative to increase minimum wages by 37 percent in 2021, if adopted, could push the fiscal deficit to over 6% of GDP and increase total financing needs to over 13% of GDP in 2021.

Financing risks will remain high in the medium term, thus containing current expenditure pressures is needed to keep the fiscal deficit at more sustainable level, and also to anchor inflation expectations. Net foreign direct investment (FDI) inflow this year is expected at the level of 2019 – 2.1% of GDP, and next year the figure could grow to 2.5% of GDP.

Reviving investment depends on progress with reforms that address: structural weaknesses in the financial sector (including limited progress in resolving non-performing loans); market distortions from the lack of an agricultural land market, an anticompetitive environment, and large numbers of SOEs, and macroeconomic vulnerabilities, the World Bank said.

"Continued adherence to anticorruption reforms and prudent macroeconomic policies is necessary to anchor investor confidence," the World Bank said.

According to the forecast, the World Bank expects inflation in Ukraine at 4.8% at the end of this year and 5% in 2021. The analysts also predict a current account surplus in 2020 at 1.5% of GDP, next year – a deficit of 1.9% of GDP, and the level of public debt this year will grow to 62% of GDP versus 50.4% of GDP in 2019 with a further decline to 58.9% of GDP in 2021.

The Ukrainian government predicts a 4.8% decline in the economy this year and a 4.6% growth next year.

The National Bank of Ukraine had expected a 6% decline this year, but it admits some improvement in its forecast to 5%. According to the central bank, next year the country's GDP could grow by 4%.

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