Quick economic recovery, but with some risks
After Ukraine’s economy declined by 4.0% in 2020 due to the pandemic, we expect a GDP recovery by 4.3% in 2021, mainly driven by domestic demand. The pre-crisis GDP level will already be reached within this year. However, once the rebound is over, Ukraine will be back on the path of moderate pre-crisis growth rates of around 3.5% if no essential structural reforms are conducted. Past reforms like the introduction of inflation targeting (IT) and the flexible exchange rate regime served Ukraine well, as they ensured a stable exchange rate as well as growing foreign reserves. Inflation is currently the main risk factor, after rising to 9.5% in May 2021, substantially above the target range (4% to 6%). While the National Bank of Ukraine (NBU) raised the key policy rate, further hikes to bring inflation under control may be necessary. In this regard, an independent NBU is essential.
A renewed reform drive would open the door for a further tranche under the current IMF programme, which has not seen any disbursements for the last 12 months. It would ensure both deficit financing and debt repayments as well as unlock further disbursements by the EU and the World Bank.