Analysis: Ukraine economy heads for tough 2024 as Western aid concerns grow
19/12/2023 06:00
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Wartime economy relies on foreign financial aid
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Uncertainty swirling over U.S. assistance
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Ukraine has liquidity reserves for several months
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Kyiv's wartime economy faces more challenging 2024
By Olena Harmash and Tom Balmforth
KYIV/LONDON, Dec 19 (Reuters) - Ukraine's embattled
economy can weather the next few months until foreign aid
arrives, but 2024 is certain to be tougher than this year and
Kyiv will need to rely more heavily on its own resources.
Ukraine hopes to plug next year's $43 billion budget deficit
mostly with foreign financial aid including 18.5 billion euros
from the European Union and more than $8 billion from a U.S.
package that also contains vital military assistance.
Both packages have been blocked so far - by Republicans in
the U.S. Congress and by Hungary in the European Union - but
should eventually pass, though a question mark lingers over U.S.
financial aid, economists and foreign diplomats said.
Since Russia invaded in February 2022, Kyiv has ploughed all
of its revenue into defence and the military, while spending on
everything from pensions to social payments has been covered by
tens of billions of dollars of foreign aid.
Kyiv could fall several billion dollars short of its
financing needs in 2024 but a $10 billion shortfall would create
problems for macroeconomic stability and its International
Monetary Fund programme, said Olena Bilan, Dragon Capital's
chief economist.
The IMF - which approved a new $900 million tranche this
month - requires firm financing assurances for the next 12
months, so a substantial decline in external financing could
call its programme into question, she said.
"The government has a liquidity reserve for January and
February," said Yurii Haidai, senior economist at the Centre for
Economic Strategy, a think tank in Kyiv.
Filling a gaping hole in the budget could force Ukraine to
hike taxes, which would be counterproductive for the economy, or
even print money for the budget, which would also come with
risks, Dragon Capital's Bilan told Reuters.
Central Bank Governor Andriy Pyshnyi has made clear that
printing money would be an extreme measure and one they do not
plan to resort to this year.
Ukraine also needs to find a way to restructure about $20
billion in international debt next year after sovereign
bondholders agreed to a two-year payment freeze in August 2022.
Finance Minister Serhiy Marchenko said the government hoped
to secure foreign financing in full in 2024, but added that if
the war lasted longer, then "the scenario will include the need
to adapt to new conditions."
ECONOMY TO GROW BUT RISKS HIGH
The economy is on course to grow around 5% this year after
contracting by almost a third last year. Inflation has fallen to
single digits, foreign reserves are near historic highs and
foreign aid has arrived regularly this year.
Ukrainian businesses and foreign businesses have adapted to
new wartime realities with some even announcing new production
facilities in central and western regions, far from the fighting
in the more heavily industrial east and south.
Nestle invested 40 million Swiss francs (about $46 million)
in a new facility in western Volyn region while German
drugs-to-pesticides giant Bayer planned to invest 60 million
euros from 2023 onwards in corn seed production in central
Zhytomyr region.
But despite modest signs of recovery this year, the
commodity-driven economy is still smaller than it was before the
war, and risks and other constraints remain high.
Millions of Ukrainians remain abroad after fleeing the
invasion, prompting many businesses to complain about a shortage
of workers, especially for highly skilled positions.
The economy is also held back by Russian attempts to
blockade the Black Sea, although a Ukrainian shipping route set
up in defiance of Moscow this summer has helped commodities
exports and may visibly boost growth next year, economists say.
Uncertainty over the direction of the war persists, and
logistics for exports remain disrupted with refugees still
abroad. The National Institute of Agrarian Economics said
transport and logistics problems led to a 7% year-on-year drop
in agrarian product exports in November and pushed up imported
food costs. Food accounts for 60% of Ukraine's exports.
The Kyiv-based ICU investment house sees growth easing to
5.0% in 2024 after 5.8% this year, with inflation expected to
pick up next year. Dragon Capital expects GDP to grow by about
4% in 2024 after 5.2% this year.
Kyiv is also certain to remain dependent on foreign
financing despite concerns Western financial support might be
waning, economists said.
"We see the deficit (before foreign aid and loans) exceeding
10% of GDP at least until 2027, and going below 5% only beyond
2030," ICU said in a research note.
Ukraine's trade deficit ballooned to $22.3 billion in the
first 10 months of 2023, a record high that illustrated how
imports were surging while exports remained weak.
This month, Marchenko called on the public to cut
consumption of imported goods in comments published by Ukraine's
LB.UA outlet.
He said putting the economy on a war footing meant not only
building up the military industry but also the public's
understanding of the situation.
"This reality will need to be corrected if we want to go on
a military footing. It is a limit on public consumption," he
said.
"If we do not draw conclusions, the economy will draw them
on its own - as a rule, quite quickly and painfully."
(Reporting by Olena Harmash in Kyiv and Tom Balmforth in
London; Editing by Hugh Lawson)
((tom.balmforth@thomsonreuters.com
Olena.harmash@thomsonreuters.com))