Covid-19 leads to sharp contraction of Ukraine’s economy
The Covid-19 pandemic has taken a firm grip on the world economy. Ukraine will unfortunately not escape this global trend. A scenario-based analysis by the German Economic Team shows both the direct shocks and the total economic effect of the Covid-19 pandemic on Ukraine. Direct shocks include the temporary closure of domestic sectors, shocks to goods and services exports of Ukraine and a drop of remittances income.
Why an IMF programme is urgently needed
In December 2019, Ukraine reached a staff level agreement with the IMF on a 3-year extended fund facility (EFF). The agreement was supposed to unlock a USD 5.5 bn programme, conditioned on the fulfilment of a set of prior actions. Notwithstanding last year’s rather favourable macroeconomic dynamics, the IMF programme was considered as an important tool for anchoring structural reforms and facilitating further support by the EU and the World Bank.
Ukraine’s foreign trade in 2019
Ukraine’s foreign trade continued to grow in 2019, exports and imports of goods expanded both by 6%. The trade deficit amounted to USD 11 bn. This corresponds to 7.1% of GDP, which is lower than in the previous year. Economic growth and hryvnia appreciation were the main reasons for this reduction.
Ukraine’s economy in good shape
Ukraine emerges from 2019 in a stable economic shape. GDP growth was at 3.5%, driven by strong domestic demand, despite two elections being held in 2019. Due to strong inflow of foreign capital to the domestic bond market, the Hryvnia appreciated by 16% against the US dollar. Inflation was at 4.1% and thus for the first time within the National Bank’s target range, allowing a gradual reduction of the policy rate. Both the current account and budget deficits are under control at ca. 3% and 2% of GDP, respectively.
The new Russia-Ukraine gas agreements
Gas negotiations between Russia and Ukraine were ultimately successful: a package of agreements has been reached which allow Russian gas to be transported through Ukraine for five years at a roughly 50% level compared to average volumes of the past five years. Enabling factors included the successful unbundling process of Naftogaz in a race against time, Ukraine’s focus on achieving short-term gains, Russia’s willingness to bend to the Stockholm arbitration awards payment. With sanctions from the United States on Nord Stream 2, Russia was plunged into uncertainty over the opening of this alternative route and compelled to secure a longer and larger deal with Ukraine than it initially considered. Next issues to watch for are two remaining legal disputes, Gazprom’s possible direct gas supplies to Ukraine, and the fate of the Yamal-Europe transit pipeline.
Labour migration from Ukraine: A mixed blessing
Significant changes in patterns of labour migration from Ukraine have occurred since 2014. There has been a direction change of migrant streams from East to West and an overall increase of labour migration. The total number of labour migrants from Ukraine in the beginning of 2017 was at least 2 million. Out of these, at least 500,000 were in Poland and a further increase of this migrant stock by 200,000 migrants per year in 2017 and 2018 appears credible. Remittances of labour migrants amounted to ca. USD 11 bn in 2018, around 8% of GDP.
The new government plan: It’s not the destination, it’s the journey
Ukraine’s new government has recently unveiled its 5-year Action Programme, which sets its priorities in the economic and social sphere. While some targets like obtaining USD 50 bn of FDI inflows or reaching a foreign credit of “A-“ look (over-)ambitious, other targets like the reduction of the public debt to GDP or the diversification of borrowing into local currency look quite realistic. It is also very positive that budget planning is done with a conservative approach. Regardless of the ultimate achievement of all indicators, the focus should be on the implementation of key reforms underlying this programme.
New trade barriers in the steel market: Limited impact on Ukraine
Following the introduction of an additional 25% customs duty on selected steel imports by the USA in 2018, the EU and other markets responded by imposing their own safeguard measures. Especially the measures of the USA and EU matter for Ukraine: While the EU is Ukraine’s primary destination market for steel products with a share of 38% of steel exports, the USA are the third most important market, with a share of 8%. Steel remains a key export good of Ukraine, accounting for 23% of total goods exports in 2018.
Banking sector recovery continues, but risks remain
Banks operating in Ukraine have considerably improved their performance during the last few years. While the sector as a whole recorded a record loss of UAH 160.5 bn in 2016 (after the nationalisation of PrivatBank, the biggest bank in the country), the corresponding figure for the first eight months in 2019 is a profit of UAH 44 bn, also in part due to a turn-around in PrivatBank.
Modern Monetary Theory: Background and implications for emerging markets
Modern Monetary Theory (MMT) is an increasingly debated economic concept. While mainly brought into the current public discussion by politicians in the US, the concept does have some hetherodox theoretical foundations, which date back to the beginning of the 20th century.
The theory claims that budget deficits can be financed by the central bank creating thereby fiscal space, whereby the monetisation of debt is not an issue of concern, as long it does not lead to high inflation. In the current discussion, the proponents foresee the potential for a massive increase in public investments (be it for a “New Green Deal” or a “Job Guarantee Programme”), essentially without creating any harm, as inflation and interest rates are considered to be at very low levels for a very long time in developed markets.
Reforming the law “On Prices” in Ukraine: Analysis and recommendations
Price controls describe all regulations directly regulating the price setting by the suppliers of goods and services on markets. They usually take the form of either direct setting of prices (or maximum/minimum thresholds) by government or of limits on the profitability margin or cost markups of goods. They form a part of a wider toolkit for governments to affect market outcomes, including competition policy, producer or product standards, direct market interventions by the state, taxes, subsidies and social transfers.
Central Bank Digital Currencies: A Survey of the Key Issues
Central bank digital currency (CBDC) is currently a hot topic, discussed in a significant number of central banks as well as in academic circles. As can be expected, there is no clear-cut definition of CBDC. Rather, there are different variants of CBDC being in discussion with mainly one feature in common: It is digital money issued by the central bank. For the purpose of this paper, we focus on CBDC on an account basis that is available for the general public. Thus, in this paper, CBDC is synonym for digital money deposited at the central bank, with every adult being entitled to hold such an account, without any limit to swap deposits against CBDC.