NOTE: Our Spring 2020 Regional Economic Update was published on 8 April 2020, and includes analysis of the economic impact of COVID-19 (Coronavirus) on countries in the region.
Learn more about how the World Bank Group is coordinating with partners to accelerate the international response and support countries to manage the global COVID-19 pandemic.
Recent Economic Developments
Economic growth was solid at 3.2 percent in 2019, led by a good agricultural harvest and sectors dependent on domestic consumption. Household consumption grew by 11.9 percent in 2019, supported by sizable remittance inflows and a resumption of consumer lending, while domestic trade and agriculture grew by 3.4 and 1.3 percent, respectively. However, manufacturing and investment growth remained weak. Manufacturing contracted by 0.3 percent in the first three quarters of 2019 (compared to 0.6 percent growth in 2018), while fixed investment growth slowed to 12.8 percent (compared to 14.3 percent in 2018). The economy lost momentum in the fourth quarter of the year, with estimated growth of 1.5 percent year-on-year (y-o-y), and the decline in steel prices contributed to a 5.1 percent (y-o-y) contraction in industrial production. Fixed investment, at 18 percent of GDP, has been too low for sustained economic growth. Fiscal restraint helped contain the fiscal deficit at 2.1 percent of GDP in 2019 (the fourth year in a row). This, together with currency appreciation, helped lower public debt to 50 percent of GDP in 2019 from 81 percent in 2018.
Prudent macroeconomic management helped reduce inflation and interest rates in 2019. Inflation eased to 4.1 percent at end-2019 and 2.4 percent in February 2020. In turn, the National Bank of Ukraine was able to reduce its key rate by 800 basis points to 10 percent between September 2018 and March 2020, with forward guidance on further reductions in the remaining months of the year. Real wages increased in 2019 by 10 percent. The unemployment rate decreased to 8.6 percent in the first three quarters of 2019 from 9.1 percent a year ago. As a result, moderate poverty (the World Bank’s national methodology for Ukraine) declined from a peak of 26.9 percent during the crisis of 2015 to 19.9 percent in 2018 and an estimated 17.8 percent in 2019 but remained above the pre-crisis level of 14.1 percent in 2013.
The COVID-19 crisis is expected to impact economic activity in Ukraine through several channels in 2020. First, disposable income and consumption will suffer from the sudden necessary restrictions, including the closure of restaurants, cafes, and shopping/entertainment centers and the halt to air, rail, and bus passenger transport. Second, lower remittances due to weaker economic activity in Poland and other European Union countries will also adversely affect household consumption. Third, lower commodity prices will have a negative effect on Ukraine’s exports. The overall impact on economic activity in 2020 will depend on the duration of the public health crisis, as a more protracted crisis would lead to second-order effects through more widespread layoffs, business closures, and weaker liquidity and asset quality in banks.
A key factor will be the economy’s ability to rebound once the pandemic subsides. This will require swift progress on key pending reforms as well as prudent macroeconomic policy to address critical investment bottlenecks and provide an important signal of the new Government’s reform orientation. Under a scenario in which the crisis is contained by the second half of the year and key reforms move forward, the economy is projected to contract by 3.5 percent in 2020. Prudent macroeconomic policy will need to be an important pillar of the policy response and will require that spending be prioritized within the limited fiscal space. However, the fiscal space for a major stimulus is constrained by sizable debt repayments of about 6 percent of GDP per year due in 2020–22. Revenues are expected to decline significantly, which means that the authorities will need to prioritize spending to create space for critical health and social assistance needs and identify additional financing. The fiscal deficit is projected to be 5 percent of GDP in 2020, but a prolonged disruption in international capital markets would impact the country’s ability to meet financing needs. As exports, remittances, and capital inflows decline, safeguarding external sustainability will require a flexible exchange rate and external adjustment.