Ukraine’s economy has passed its nadir, but it is bouncing of and extremely low base indeed. The fourth quarter growth in 2016 was a robust 4.6%, following a 15.5% collapse a year earlier. But as the first quarter got underway the base effect was already wearing off and growth looked like it was going to be on order of 2.2% for the first quarter of this year.
And the outlook for the rest of the year deteriorated after the government decide to enforce an economic blockage of the occupied Donbas region, which accounts for about a quarter of the country’s GDP. The National Bank of Ukraine (NBU) downgraded its forecast for economic growth this year from 2.8% to 1.9% and some commentators say there is a chance of growth being even less.
The bottom line is that while the economy has started to recover it is getting up from being flat on its back. On the macroeconomic front the news is improving. The hard currency reserves are stable at about $15.5bn, which is equivalent of 3.6 months of import cover – enough to ensure the stability of the national currency. Inflation is still high at 12.6% in January, but is down from catastrophic levels in 2015 and the NBU is aiming for 12% this year.
The government finances are also looking more healthy with tax collection up 90% in January and 30% in February as the wheels of commerce start to turn again. That will keep the federal budget deficit manageable this year and inside the IMF’s demand fro 3% of GDP.
Politics remains a mixed bag. The new the National Anti-Corruption Bureau of Ukraine (NABU) netted its first big fish: Roman Nasirov, the head of the government’s financial services and close ally of President Petro Poroshenko, was indicted on corruption charges by the independent agency. But he has posted $3.5mn and it looks unlikely that he will actually be charged. The highly regarded NBU governor Valeriya Gontareva has announced that she will quit, complaining that she is not getting any support from the president’s office, according to bne IntelliNews sources. One of the last liberals left in office Gontareva departure is a disappointment and Poroshenko will chose her replacement.
In general the population are becoming increasingly frustrated with the slow pace of reforms and the obvious corruption in the government, which is very reluctant to act. To rub salt into the wounds the government also watered down its e-declaration law that forces officials to reveal their wealth and Poroshenko forced through a repressive law that puts restrictions on NGOs in what appears to be a bill designed to mute civil society’s criticism of the government and largely resembles a law passed by Russia that came in for widespread criticism.
The IMF is also being very tough on Ukraine. It cancelled a board meeting where it was due to release the next $1bn tranche from its $17.5bn programme in March to assess the impact of the Donbas embargo. Ukraine has not had a payment from the IMF since last year and even then it only got $1bn vs the $6.5bn it received the year before.
Despite all these problems some foreign investment is coming to Ukraine to take advantage of its low wages and proximity to the rest of Europe. Listen to our podcast with Daniel Bilak, the director of UkraineInvest, the national promotion agency, on what is being done to encourage investment.
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