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Economic Summary for Ukraine

  • Year 2012: Economic Summary for Ukraine "Football and recession"

    05.08.2013
    Free

    Executive summary

    In the first half of 2012 Ukraine’s economy was supported by government spending and tax preferences related to the Euro-2012 football championship. However, benefits from Euro-2012 were limited to improved infrastructure and modest improvement in Ukraine’s visibility on international arena. In the second half of the year the stimulus was withdrawn and external demand slipped leading to recession. Ukraine did not achieve significant progress in domestic reforms and had limited success in external integration projects. Political instability remained one of the major risks for future development of Ukraine.

    Politics. In 2012 Ukraine did not achieve progress at many external initiatives. Signing of Association agreement with the EU was put on hold, while negotiations with IMF failed. Russia also refused to make any concessions on imported gas price without Ukrainian commitment to deep economic integration. Parliamentary elections were recognized as step backward in Ukrainian commitment to democratic principles and led to increased political instability.

    Real Sector. Real GDP grew by 0.2% in 2012 as strong domestic demand offset negative contribution of net exports and falling inventories. External demand weakened significantly leading to fall in real exports at 7.7%. Real gross fixed capital accumulation increased by 0.9%. Investments did not fall due to purchases of machine and equipment primarily attributed to the preparation for the EURO-2012.

    Agriculture. In 2012, agricultural output declined by 4.5% due to lower crop production but share of agricultural exports in total merchandise exports reached 26%. Higher agricultural exports may be attributed to decline in exports restrictions and high stocks.

    Energy policy. Ukraine continued efforts to decrease an energy dependency on Russia including reverse gas supplies from Europe, preparations for building LNG terminal. Ukraine also increased investment in renewables.

    Infrastructure. In 2012 Ukraine completed investments in infrastructure related to the Euro-2012 including renovation of airports, introduction of high-speed train links, repaired and widened roads. However in the second half of 2012 investment reduced significantly.

    Balance of Payments. The consolidated balance of payment was in deficit at USD 4.2 bn (2.4% of GDP). Increase in trade deficit resulted in widening of current account deficit to 8.4% of GDP.

    Income: Continued increase in minimum wages and public sector spending on wages, pensions and social assistance resulted in increase in real disposable income by 9.7%. Real income from social assistance payments and pensions grew by 13.6% due to lower than expected inflation and populist social policies.

    Fiscal policy. Government introduced a number of tax breaks for several ‘priority’ industries, while lower EPT rates went into effect. At the same time, the Government significantly increased social spending and continued to spend on Euro-2012. As a result, the Government faced significant gap between actual revenues and planned expenditures and was able to execute central fiscal expenditures at only 92.6% of plan.

    Monetary policy. Average consumer inflation decelerated sharply to 0.6% as food prices fell and non-food inflation slowed significantly. The monetary policy was very tight in the second half of 2013 as the NBU attempted to control pressure on the currency exchange market.

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