Ukrainian economy: not only bad, but also a little good

The Institute for Economic Research and Policy Consulting monitored the state of the Ukrainian economy in November. There is nothing much to be happy about, but there are also positive trends.

In short, real Gross domestic product (GDP) growth slowed to 6.5% in October from 11.1% in September, but:

• Ukraine successfully broke the blockade of sea ports and was able to resume exports of not only grain, but also metallurgical products by sea, although the volumes are still small;
• Ukraine managed to prepare for the heating season – this is great;
• the strike of Polish carriers and their blocking of border crossings with Ukraine since November 6th has been preventing the export of Ukrainian goods – this is terrible;
• the trade deficit in goods and services reached a new historical high – for the nine months of 2023 it amounted to $28 billion, which is another historical high;
• the state budget for 2024 adopted by parliament provides for external financing of $41 billion, while $29 billion has not yet been guaranteed by international partners;
• in October, consumer inflation fell to 5.1%, and this happened for the first time since 2020, however, economic recovery, coupled with other factors, can accelerate price growth and, most likely, will accelerate;
• The National Bank of Ukraine (NBU) did not formally change interest rates on its operations, but equated the discount rate to the rate on overnight certificates of deposit. Therefore, the real rate is now not 25, but 16% per annum – this is a positive moment, of course, but not so much that business representatives will quickly go to banks to apply for loans for themselves;
• changes in the hryvnia exchange rate against the dollar have so far remained insignificant: the hryvnia has strengthened by 1.4% – and this happened at such a difficult time for the country.

Next are the details.

 

Economic growth or recession? It depends on what period you compare it with.

So, according to the Institute for Economic Research, the growth rate of real GDP slowed to 6.5% in October from 11.1% a year ago. The main reason is the decline in the contribution of such a sector of the country's economy as agriculture. At the same time, real GDP in October 2023 was 28% lower than in October 2021. So we still have a long way to go to reach pre-war indicators.

At the same time, the production of ores and non-mineral materials increased in October of this year. This contributed to an increase in real gross value added (GVA) in the mining industry, which the Institute for Economic Research estimates is 5% compared to last October. Production in the energy sector increased by 6.4% due to a lower comparative base last year, when the energy sector suffered from Russian shelling, as well as due to the completion of planned repairs at nuclear power plants and thermal power plants.

Real gross value added (GVA) of the transport industry decreased by 1.8% in October, which was a consequence of logistics problems. Ukraine successfully broke the blockade of sea ports and was able to resume exports of not only grain, but also metallurgy by sea, but so far in significantly smaller volumes than in October last year, when the grain corridor was fully operational. In addition, exports decreased, in particular by road transport across the western border. Now it is limited by the fact that Polish carriers have blocked border crossings.

Real gross value added (GVA) in trade, however, grew due to the resumption of imports and an increase in nominal consumer incomes amid falling inflation. An increase in demand for portable generators due to the expected Russian attacks on Ukrainian energy infrastructure played a certain role in this.

The Ministry for Development of Economy and Trade of Ukraine has revised the economic forecast for this and subsequent years as part of the budget process. Now the budget indicators are based on a forecast of real GDP growth of 5.0% in 2023 and 4.6% in 2024. At the same time, the forecast provides for a slower rate of inflation than previously assumed.

 

The electricity market is growing, but this is not making consumers any better

Ukraine has successfully started the heating season. However, some power units of thermal power plants and wind farms are shut down for emergency repairs due to Russian shelling. And there is not the slightest optimism in resolving these issues in the coming months.

The energy market regulator, the National Commission for State Regulation in the Sphere of Energy and Utilities, raised the issue the maximum prices for electricity. On average, the increase ranges from 4 to 23% depending on the time of day and will affect the cost of electricity for businesses. Thus, the maximum cost of electricity during the morning peak of consumption will increase in December from 5600 to 6900 UAH/MWh. The main goal of the changes, which the National Commission for State Regulation in the Sphere of Energy and Utilities declares, is to make the import of electricity in winter profitable in order to avoid a possible shortage. Let us recall that after the first increase in price limits in June of this year by 40–80%, the average price of electricity for businesses increased by 23%.

This is logical and expedient from the regulator’s point of view. On the other hand, such “changes” will become a tangible impetus for the promotion of inflation, which we could barely cope with this year.

 

Budget 2023

In October, state budget revenues amounted to UAH 139 billion, which is slightly less than in September of this year, when a grant from the United States of America was received in the equivalent of UAH 42 billion, which may be the last this year.

However, the situation with tax revenues has improved. The percentage of plan fulfillment greater than planned is small – 4.5% of the plan. In particular, value added tax (VAT) revenues from imports increased by 48%. However, taking into account inflation, they are still 17% lower than the October 2021 figure.

Gross VAT receipts on goods and services produced in Ukraine increased by 30.6%, but in real terms they are 13% lower than in October 2021.

Budget revenues from personal income tax in October were 2.5% less than the September figure. However, overall the situation on the labor market is improving. By comparison, revenue from this tax was 15.5% higher than in October 2022.

In October, the government was able to receive UAH 63.8 billion from the placement of government bonds, compared to UAH 36.9 billion a month earlier. A third of the funds came from foreign currency denominated securities.

In October, the next tranche of a preferential loan from the EU was also delivered. In total, since the beginning of this year, international partners have received $35 billion (in equivalent) to finance the budget, which is more than the 2022 figure. These funds are in fact the only source of financing budget expenditures not related to defense and security.

 

Budget 2024

In the 2024 budget, key indicators have not undergone fundamental changes compared to the current year. Revenues increased by UAH 22 billion, but external financing was reduced by the same amount. The state budget deficit is planned in the amount of UAH 1,571.5 billion, or 20.6% of GDP. It is also worth noting that expenditures on defense and security in the amount of UAH 1,693 billion will amount to 50.5% of total state budget expenditures.

For 2024, external grants and loans are planned in an amount equivalent to $41 billion. However, $29 billion is not yet guaranteed due to the domestic political situation in the United States of America and the whims of Orbán in the EU. So the risks of financing the budget next year remain high.

Some positive news: Ukraine and the International Monetary Fund (IMF) have reached an agreement at the expert level on a second revision of the program – this gives hope that there will be an external source of budget financing.

Limited budgetary space coupled with high risks forced the Cabinet of Ministers of Ukraine to significantly reduce capital expenditures, including restoration costs. The Fund for Elimination of the Consequences of Armed Aggression has practically no funding included in it for the next year: it will be provided from confiscated Russian assets, as well as from funding from the World Bank and the Institute for Economic Research.

It is clear that the Ukrainian economy is struggling to function normally. The pre-election disputes in the United States of America are an unexpected blow for us. The protest of Polish carriers on the border with Ukraine is again a blow for our country, and a well-planned one. Orbán’s dissatisfaction and complaints are also a blow (both to Ukraine and the EU). These are unexpected attacks from the allies. And this despite the fact that the assistance of our partners is vital for us in the context of large-scale Russian aggression. But we should not forget that even our best friends will put us and our interests at least in second place, and they will have their own problems in the first place. That's how life is.

Read this article in russian and Ukrainian.