Military conflict in Donetsk and Luhansk oblasts (Donbas) is assumed to continue at least until the end of 2016. As a result, economic activity in the region will be depressed over the two years, while infrastructure will be restored only partially in the end of 2016. Many companies will remain closed and supply links will remain disrupted limiting potential for recovery. Trade with Russia is expected to fall further. Very limited financing options contribute to lower investments in 2015 and allow for only small increase in 2016, when political and economic uncertainty will somewhat reduce.
The Government will continue reforms, which would secure continuation of international assistance/ However,economic effect will be felt only gradually with the most impact on medium-term growth after 2016.
Fiscal policy is expected to remain one of the biggest challenges in 2015 and 2016. Fiscal consolidation measures as well as unfavourable financial results of companies during period of two-digit inflation will result in decline of real private final consumption.
At the same time, sharp hryvnia depreciation and decline in domestic demand will result in decline in imports in 2015 and small recovery in 2016. Overall, real net exports will make positive contribution to real GDP growth in both years and current account balance will shift to small surplus.
As a result, real GDP is expected to decline by 4.1% in 2015 and increase by 1.6% in 2016.
However, risks of the forecast remain high. The main risk for the forecast is an escalation of military conflict, which would result in larger disruptions in production and infrastructure and deficits of critical goods.