Economic Summary for Ukraine

  • Year 2014: Economic Summary for Ukraine "A year of crisis and new opportunities "


    Executive summary

    In 2014, Ukraine faced the toughest challenges in the XXI century including economic crisis, military conflict in the East, and annexation of Crimea by Russia. Drop in domestic demand and weak external demand resulted in contraction of real GDP by 6.8%. High economic and political uncertainty resulted in sharp increase in demand for foreign currency. This along with decline in exports lead to sharp hryvnia depreciation. Throughout the year the Government faced tough fiscal choices as more spending for defence and security was needed at time of restricted revenues, which required the Government to revise the Budget Law and taxation legislation. Despite IMF Program new Ukrainian authorities were slow in implementing reforms required to ensure economic growth in the medium term. Still, the Association Agreement with the EU was finally signed in 2014 and it defines reform commitments of Ukraine for the future.

    Politics. Mass civil unrest led to ouster of President Yanukovych and a geopolitical reorientation towards Europe. This triggered an abrupt reaction from Russia, which annexed Ukrainian peninsula of Crimea and stoked a ferocious war in Donbas, disrupting large part of Ukraine’s economy.

    Real Sector.Real GDP dropped by 6.8%. Real gross value added declined in all sectors, except for agriculture and nonmarket services, due to conflict in the Eastern Ukraine. High fiscal pressure, financial constraints and accelerated inflation led to contraction of domestic demand by 10.8%. Net real exports positively contributed to economic growth as real imports dropped more than real exports.

    Agriculture.Agricultural production increased by 2.8% due to good crop harvest and increase in livestock production. At the same time, food exports dropped by 11.5% as Russia imposed bans on a number of food products from Ukraine.

    Energy policy. Ukraine reduced sharply purchases of natural gas from Russia due to increased reverse gas supplies from Europe and contracted overall gas consumption. The Government also had to deal with massive energy deficit due to loss of coal production, limited gas supplies and electricity grid imbalances. The year was mostly marked by protracted conflict between the Naftogaz and Russian Gasprom.

    Infrastructure. The Government increased housing and utility tariffs as well as rail freight and passenger tariffs. Spending to maintain the infrastructure declined sharply. However, no substantial reforms in infrastructural sectors were delivered. 

    Balance of Payments. Balance of payments deficit surged to USD 13.3 bn or 10.1% of GDP due to negative financial account balance. As a result, NBU international reserves dropped to USD 7.5 bn by the end of 2014 as compared to USD 20.4 bn in the end of 2013. At the same time, hryvnia depreciation led current account deficit to shrink to USD 5.3 bn or 4.0% of GDP.

    Income:Real disposable income dropped by 8.4% due to high inflation, difficult financial situation of companies, and frozen social standards.

    Fiscal policy. Fiscal policy was a core priority of the IMF Program and government reform agenda. The Government increased taxes and tried to contain spending as revenues were restricted due to recession. Fiscal deficit, recapitalisation of state-owned banks and the Naftogaz as well as sharp hryvnia depreciation led to surge of state debt to 70.3% of GDP.

    Monetary policy and financial sector.Huge size of quasi-fiscal operations with government bonds, disruption of interbank credit market due to bank failures, limit on bank refinancing outside of rescue policy limited role of monetary policy. In December 2014, CPI surged by 24.9% yoy as hryvnia lost half its value vs. US dollar. Financial sector remained functioning but a lot of companies left the market.  

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