Ukraine's economy is adapting, but the real relief is still a long way off

The worst thing you can do right now is to relax. After all, in our country, inflation is decreasing, GDP is growing, tax revenues are at their peak, and reserves are at their maximum. But any economic forecast one way or another rests on security risks, and all the current gains together can be leveled already in the fall. So let's emphasize: the joy of existing improvements is the joy of a patient who went from the resuscitation department to the intensive care, not to the morgue.

However, everything is really better than it could be. Consumer inflation gradually slowed down from 26 to 12.8% last year, so the National Bank of Ukraine (NBU) improved its inflation expectations for the second half of the year from 14.8 to 10.6%. Thus, it is worth noting that consumer inflation has risen to a quite acceptable level, given the circumstances. The National Bank of Ukraine (NBU) expects inflation to be 8.5% next year, and up to 6% in 2025, i.e. already in the pre-war target range.

The economic growth of the warring country looks no less optimistic. Already this year, the National Bank of Ukraine (NBU) has improved its GDP growth forecast from 2 to almost 3%. Analysts from the investment market are even more optimistic and predict GDP growth in the range of 4.5–5%.

In addition, analysts supported the construction and declared the possibility of restoring housing and infrastructure, as well as the development of logistics hubs on the western border. In turn, the increase in the carrying capacity of the western border contributed to the improvement of the situation in metallurgy and ore mining, animal husbandry and the food industry. Restoration work in the energy sector supported the extractive industry and engineering, while demand for fertilizers supported the chemical industry.

Globally, we are helped by the following factors: an increase in domestic demand, a stable energy supply, and the traditional resilience and courage of Ukrainian entrepreneurs, who seem to be able to adapt to anything.

The total amount of revenues of the consolidated budget of Ukraine for January-June 2023 amounted to UAH 1.5 trillion, exceeding last year's figure by more than UAH 700 billion. However, only 49% of them are taxes, the rest are non-tax revenues (33.2%) and Western aid (17.8%).

In general, in July there was a record after a record: tax officials collected almost 52 billion UAH, customs officials – 38.5 billion. The Ministry of Finance of Ukraine also auctioned 40 billion UAH for the sale of domestic government bonds. So, in general, for the first time in a year, our income in July exceeded our expenses.

Currently, the situation on the foreign exchange market is quite calm, and the National Bank of Ukraine (NBU) continues to accumulate reserves, which are already at a historical maximum ($39 billion) and cover more than five months of future imports. Nevertheless, imbalances in foreign trade continue to scare.

The unemployment rate, no matter how conditional this indicator may be, was 21.4% in June, and already 16.6% in July. On the good side, since the beginning of the year, the demand for labor has continued to grow. On the bad side, new vacancies are dominated by working professions, teachers and doctors. The first left the country during previous waves of labor migration, the second and third were driven to Western Europe by a full-scale invasion. The labor market is unbalanced – employers' requests and employees' offers obviously do not match. At least the unemployment rate among internal migrants (which has been consistently higher than the overall rate) has finally begun to decline. The share of internally displaced persons (IDPs) who have a job has increased from 45% in February to 62% in June 2023, including those working in a new job, from 15% to 31%.

There are also hints that the incomes of Ukrainians are increasing. In particular, the indirect estimates of the National Bank of Ukraine (NBU) based on tax data, as well as on salaries offered in vacancies, indicate at least a further increase in nominal wages. In addition, according to data on salary payments to bank cards, real incomes of citizens also increased. Entrepreneurs also indicate that they plan to increase labor costs in the future. Even the conditional indicator of poverty, namely the percentage of people who save on food, decreased from 26.4% in June to 23% in July.

It seems that everything is not so bad, but you should not be too happy about this development of events and think that everything is great. There are so many risks ahead that the excessive optimism of the government, for which the expression "it will happen somehow" is the main strategy of work, should be quite stressful, forcing people to be attentive and stay ready for new challenges.

Despite all the July records, Ukraine's needs for additional financing of the state budget, after the March increase in expenditures, increased to 59.3 billion dollars. However, the volume of confirmed and received foreign financing for this year is only 42.1 billion dollars, of which we have already received 27 billion dollars. Also, the government has already issued domestic government bonds worth $9.1 billion, reducing the annual financial gap to $8.1 billion. However, these are still huge funds, which are unlikely to be attracted only by additional issues of domestic government bonds, even with growing demand from non-residents. At the same time, we remember that in the matter of Western support, it is not so much the amounts that are important as rhythmicity and predictability, which, in fact, make it possible to avoid the monetary financing and, therefore, to restrain inflation. Of course, the Ministry of Finance of Ukraine is convinced that the Western partners will not leave us without support, but at the moment we do not have any confirmation of this confidence. Well, we have to somehow find a way out of this situation.

The lack of people, without whom there is neither production nor demand, is no less a challenge. Let's not forget about the qualification discrepancy between the supply of the labor market and the demand from employers. However, the maximum we can see is that the officials in the Ministry for Development of Economy and Trade expect that next year about three million Ukrainians will return to Ukraine, that is, almost half of those who are currently abroad. Their optimism is based on public opinion polls, which show that security is the main factor that currently influences the decision to return or not to return to Ukraine. This probably explains why the current government does nothing at all to speed up the process of returning the country's fixed capital. After all, officials believe that this issue will be resolved by itself and does not require extra attention.

Inflationary risks are also more than real: tariffs will definitely increase, as was already the case with electricity. Yes, the officials in the National Bank of Ukraine (NBU) hope that the process will be phased and planned, but let's remember the state of electricity in our country. At the same time, the cost of fuel is already increasing due to the return of the pre-war VAT rate, and most goods will become more expensive along with fuel. This is all against the background of the ongoing logistical problems of exporters and the reduced or half of next year's harvest.

Moreover, it is clear that insufficient exports (which bring currency into the country) with huge volumes of imports (which take currency out of the country) is a problem that will remain with us for a long time. Substantial volumes of imports will remain, even if all the most optimistic forecasts about the desired victory come true, because imports will be needed for the post-war reconstruction of the country. Instead, a quick return to pre-war export volumes is unlikely. After all, even this issue will not be given enough attention and it should obviously be resolved by itself without the intervention of the authorities.

And most importantly, the basic scenario of the National Bank of Ukraine (NBU) is based on the assumption of a significant reduction in security risks from the second half of 2024 and, accordingly, the full unblocking of sea ports and the return of forced migrants to Ukraine, that is, the growth of both export potential and domestic production and consumption. Pardon the pun – very optimistic baseline scenario.

If the war continues, casualties and destruction will increase, including the energy infrastructure and the issue of economic activity, on the contrary, will become more serious and acute. In addition, people will continue to leave the country, export logistics will remain limited, so the economy is unlikely to grow, unlike government spending and dependence on international aid. Moreover, these are not prospects for the second half of next year, it could actually get worse in the fall if the enemy returns to energy terror. Of course, we will try to find a way out of this difficult situation in this case, but we would like to have more confidence that we will be able to record the level of improvement that we have now achieved. That is, if we do not even make our current shaky improvement even greater, then at least find the strength and opportunities to keep it at the same level where it has reached in various areas.

Read this article in Ukrainian and russian.