Ukraine’s Economy Could Shrink by Up to 35%

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The International Monetary Fund (IMF) expressed concern at the beginning of this month that Ukraine’s economic output could shrink by 35%. This is why the organization has moved ahead with the approval of a $1.4 billion fund (the maximum allowed under its rules) in emergency financing as a result of the current Russian invasion. 

In the past, specifically in 2014 and 2015, Ukraine also suffered an economic shock when production fell by 6.6% and 10%, respectively, following Russia’s annexation of Crimea. This IMF report on the shrinkage of Ukraine’s economy is also based on real wartime gross domestic product data from Iraq, Lebanon, Syria, and other countries at war. 

In the present day, the war has sparked a massive humanitarian and economic shock, with rapidly increasing loss of life and significant infrastructure damage across the country. Given the intensity of the conflict, the IMF considers that increasing losses of physical capital stock and massive refugee flows could result in significantly more pronounced output contraction, causing a collapse in trade flows and lower tax revenues.

Vladyslav Rashkovan, alternate executive director for Ukraine at the IMF, has confirmed that Ukrainian authorities are in broad agreement with the IMF staff’s assessment of the economic situation and have underscored the need for more financial support. 

According to the report, Ukraine has an external financing gap of $4.8 billion but its financing needs are expected to grow and it would require significant additional concessional financing as the country’s public debt is expected to spike by 60% of GDP in 2022. 

Since a month ago, the IMF has been in constant contact with its Ukrainian counterparts and has provided support to Ukraine through:

  1. Working with Ukraine on crisis management measures that the Central Bank and the financial authorities have swiftly introduced; and
  2. Coming up with a very swift response to the request for emergency financing by supplying $1.4 billion, which has now been disbursed in Ukraine’s SDR account. 

This comes on top of the $2.7 billion in SDR allocation issued to Ukraine that is so handy right now, and the $700 million that was disbursed in December under our, at that point, existing program. Resources that will be utilized to keep the country afloat. 

A deep recession and large reconstruction costs are to be expected, against the backdrop of this humanitarian crisis. Overall, with the war ongoing, the situation remains extremely fluid, and any forecast is, at this stage, subject to massive uncertainty.

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