This is the other front of the war in Ukraine. Two years after the start of the Russian invasion, the Ukrainian government is trying to keep afloat an economy severely hit by the incessant fighting in its territory.
The challenge is immense. In 2022, the country saw its GDP fall by almost 30%. Its workforce has declined significantly as hundreds of thousands of Ukrainians have been sent to the front and millions more have fled abroad. To the east, Ukraine has lost a significant part of its industry based on the part of the territory now occupied by Russian forces.
In the agricultural sector, Ukraine’s grain production fell by 29% for the 2022-2023 campaign. And if the agreement signed in mid-2022 with Russia initially allowed Kiev to continue delivering grain to disadvantaged countries through the Black Sea, the suspension of this agreement by Moscow last year caused its exports to be halved to end of 2023.
Better than expected economic results
However, the Ukrainian economy is not collapsed. After the shock suffered in the months following the outbreak of the conflict, the country’s activity stabilized before recovering slightly. “The economic shock of 2022 was predictable, but what is notable is that the economy has not collapsed. The banking system works, the currency is maintained, stores are supplied, companies are resisting…”, indicates Sylvain Bersinger, chief economist of Asterès.
In late 2023, Kiev announced that it had been able to export seven million tons of raw materials since the opening of a Black Sea grain corridor in August, despite threats from Moscow against ships sailing to and from ports. Ukrainians.
With the help of the government, companies based in Ukraine have adapted, sometimes moving their factories to the center and west of the country, areas far from the front lines. According to a report from the Kiev University of Economics published by Les Échos, almost 28% of companies that have moved their production centers have already returned to the pre-war level of activity, and 43% should achieve it next anus.
Some multinationals have even invested in Ukraine despite the conflict. This is the case of Bayer, which promised 60 million euros for its corn seed production plant in Pochuiky, or Nestlé, which announced 40.5 million euros to build a new factory in Smolyhiv.
This resilience allowed the Ukrainian economy to grow by 4.5% in 2023, according to the IMF.
Although they are still far from returning to the pre-war level, macroeconomic indicators “have been better than expected, which has contributed to an upward revision of growth prospects,” further stressed the IMF, which has a increase in Ukrainian GDP of between 3 and 3 percent. 4% this year. As for inflation, it has slowed significantly thanks to the reorganization of the economy, going from 26.6% on average in 2022 to around 10% currently.
Significant financing needs
Of course, forecasts for the trajectory of the Ukrainian economy in the coming months and years “remain subject to significant risks related to the exceptionally high uncertainty arising from the war,” the IMF continues. Its resilience will also depend on foreign financing. Because if kyiv still manages to maintain its administration and its companies, it is in part thanks to the billions of dollars of aid provided by Western countries, mainly the United States.
The American Parliament is currently discussing a new allocation of 60 billion dollars for Ukraine, while the European Union agreed in early February on additional financial aid of 50 billion euros until 2027. Among the measures to support its economy, Kiev It also obtained from the EU a suspension of customs duties on its exports in order to stimulate its foreign trade. This support is essential for Ukraine.
Financial aid, in particular, allows the government to continue keeping the country running, paying state bills, civil servants and even retirement pensions. Especially since Ukraine, which intends to spend half of its budget on defense in 2024, presents a worrying deficit.
According to Kiev-based investment firm ICU, Ukraine’s deficit (before foreign aid and loans) “will exceed 10% of GDP at least until 2027, and will fall below 5% only after 2030.” . The Government, for its part, estimates that its financing needs from allies and international organizations such as the IMF will be 41 billion euros in 2024. According to initial projections, its allies should cover them with 30 billion euros.
In the long term, it will add to the cost of rebuilding the country. In April 2023, the World Bank had already estimated it at $411 billion, twice the size of the pre-war Ukrainian economy.
Source: BFM TV
