14:32 22.10.2020

NBU keeps forecast for Ukraine's GDP fall in 2020 by 6%, improves growth expectations in 2021 to 4.2%

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NBU keeps forecast for Ukraine's GDP fall in 2020 by 6%, improves growth expectations in 2021 to 4.2%

NBU keeps forecast for Ukraine's GDP fall in 2020 by 6%, improves growth expectations in 2021 to 4.2%

KYIV. Oct 22 (Interfax-Ukraine) – The National Bank of Ukraine (NBU) has said that the GDP forecast for 2020 has remained unchanged at 6% and the expectations regarding its growth next year were improved from 4% (in July forecast) to 4.2%, the NBU said on its website on Thursday.

"The GDP forecast for 2020 has remained unchanged. The main reason behind the year-end economic contraction lies in difficulties faced by businesses in Q2, when the strictest quarantine restrictions were in place. At the same time, business activity picked up markedly as the restrictions were eased," the central bank said.

The NBU said that a recovery in consumer and investment demand in H2 will offset the lower crop harvest and smaller fiscal impulse.

According to the central bank's forecasts, despite the fact that the regulator improved the forecast for GDP growth for 2021 to 4.2%, it simultaneously worsened expectations for the growth of the indicator in 2022 by 4% (in the July forecast) to 3.8%.

"Private consumption will remain the main economic growth driver, boosting GDP growth to 4% in 2021–2022. Fiscal stimuli, the loose monetary policy, and a rebound in external demand will support economic growth," the NBU said.

The central bank said that this scenario is possible if the quarantine restrictions are not tightened in Ukraine and across the globe.

After the economy returns to steady growth, it will need less fiscal stimuli from the state. This will help gradually reduce the state budget deficit to around 3% of GDP in 2022.

According to the central bank, going forward, the public and publicly guaranteed debt, which grew to 63% of GDP this year, will decline by 2–3 pp a year. The decline will be underpinned by economic growth, prudent fiscal policy, and moderate exchange rate volatility.

According to the report, the primary assumption of the NBU Board is that Ukraine will continue to cooperate with the International Monetary Fund (IMF). Another important precondition is receiving financing from international partners, which in turn depends on IMF financing.

"Ukraine needs this support to revive its economy as quickly as possible," the regulator said.

In contrast, any significant delays in, or suspension of, Ukraineэs performance of its commitments to the IMF could not only slow economic recovery, but also markedly worsen inflation and depreciation expectations.

"A constructive dialogue with international partners is the key to maintaining macrofinancial stability. Cooperation with the IMF will enable Ukraine to continue to meet its external obligations and to increase international reserves to $29-30 billion in the years to come," the NBU said.

According to the report, as before, a longer-lasting coronavirus pandemic, the further spread of the disease and stricter quarantine measures remain the key risks to macrofinancial stability.

The regulator said other risks also remain significant. They include the negative impact of certain court rulings on macrofinancial stability, an escalation of the military conflict in eastern Ukraine or on the country's borders and the higher volatility of global food prices, driven by global climate change and the risk of stronger protectionist measures.

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