Economic Summary for Ukraine

  • Year 2013: Economic Summary for Ukraine "Recession, no reforms, no Association with the EU"


    Executive summary

    Real GDP in 2013 remained at the level of 2012 as positive contribution of domestic demand to economic growth was outweighed by negative contribution of net real exports. Decline in investments undermines economic growth in the future. During the year the Government did not approve reforms for fiscal consolidation and improvement of business climate and, as a result, failed to negotiate new IMF program. The Government faced huge liquidity gap in the end of the year, which resulted in delays in financing all expenditures including even wages and social payments. In the end of the year, Ukraine did not sign Association Agreement with the EU and negotiated for closer relations with Russia, which triggered political crisis in the country.

    Politics. In 2013, Ukraine tried to continue its long standing policy of balancing between the European Union and Russia. However, in the second half of the year tensions between Ukraine and Russia increased after Russia imposed informal trade barriers for Ukrainian goods and threatened to break off free trade and industrial cooperation. The EU refused to ease requirements for the Association Agreement. As a result, on November 28, Viktor Yanukovych refused to sign the AA at the EU’s Eastern Partnership Summit in Vilnius, which triggered the largest protests in Ukraine since the “Orange revolution” in 2004.

    Real Sector.Real GDP in 2013 remained at the level of 2012. On expenditure side, real private final consumption supported domestic demand, while real gross fixed capital accumulation declined. Negative contribution of net real exports to growth at 1.0 p.p. was explained by larger decline in real exports than in real imports. On production side, real gross value added grew rapidly. Industrial output declined due to lower external demand and sluggish consumer demand for domestically produced goods.

    Agriculture.In 2013, agricultural production increased by about 14% due to higher crop production. At the same time, agri-food exports declined by about 5% (to USD 17 bn) primarily due to drop in world prices for grains, oilseeds and their products in the second half of the year.

    Energy policy. Ukraine continued efforts to decrease energy dependency on Russia including reverse gas supplies from Europe and promotion of unconventional gas extraction.

    Infrastructure. The Government did not conduct any substantial reforms in infrastructural sectors. Lack of investments in infrastructure undermines economic development in the medium term.

    Balance of Payments. In 2013, the NBU international reserves dropped as balance of payments surplus of USD 2.0 bn was insufficient to cover repayment of debt to the IMF. Current and capital account deficit at USD 16.5 bn (9.0% of GDP) was lower than USD 18.8 bn (10.3% of GDP) financing raised through financial account.

    Income: Difficult financial situation of companies and high fiscal pressure resulted in the slowdown of disposable income growth, which grew by 5.0% in nominal terms and 5.3% in real terms.

    Fiscal policy. Expenditures and revenues were significantly under-executed in 2013 due to overoptimistic targets as well as economic slowdown. Lack of financing resulted in delays in payments of pensions and social assistance. Primary fiscal deficit resulted in increase in state debt to 41% of GDP.

    Monetary policy.In 2013 the NBU de facto focused on maintaining exchange rate stability and supporting fiscal policy. Monetary policy was secondary to interventions on foreign exchange market and quasi-fiscal operations with government bonds. In 2013, average CPI declined by 0.3%. 

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