Page 5 - UKRRptAug22

1.0 Executive summary
Ukraine’s economy experienced a huge negative shock from the invasion. Because the economy has already contracted so much and the government has to cover enormous military spending, the fiscal deficit stands at approximately $5bn per month, which without external help Ukraine is not getting it cannot sustain.
According to the estimates of IER experts, real GDP dropped by about 46% y/y in March 2022, and over the next three months, the rate of GDP contraction stabilized at the level of 39-40% y/y.
In June, the contraction of real gross value added in the agricultural sector accelerated. This was primarily a result of the temporary occupation of the Kherson oblast and part of the Zaporizhia oblast, which substantially contributed to crop production (grain, vegetables, and fruits) in June 2021.
In the second half of the year, the IER forecasts a gradual improvement in the economic situation. As a result, real GDP is estimated to decline by about 30% y/y in 2022.
However, the GDP contraction may be much higher if inflation accelerates further, logistics do not improve, and hostilities intensify.
A financial crisis has also started. The central bank has hiked rates to 25% and intends to keep them there for two years. The National Bank of Ukraine (NBU) also devalued the current from high 20s to UAH36 to the dollar, a drop of 25%, to bring the official rate in line with the cash rate. But the currency immediately fell further to UAH41 and will continue to slide.
The government is running a deficit of around $5bn a month which is being financed almost entirely by the NBU’s printing presses. This is not sustainable. The western donors have sent a total of $12.3bn since the start of the war five months ago – about $2.75 per month – but this is insufficient to cover the funding gap. The EU and the US have promised another $16bn but the distribution of this money has been dogged by bureaucratic delays and in the meantime the economy is in a slow crash.
The shortfall is already impacting the NBU’s reserves which have fallen by about $5bn in the last two months, further undermining the value of the hryvnia. And the government has ordered all the state-owned companies to delay their debt payments to “preserve cash.” As a result Naftogaz defaulted on a $335mn bond, despite having the money to hand and management wanted to pay to preserve its credit history.
Grain exports resumed on August 1 which will bring some badly needed revenues, but as grain shipments are expected to earn some
5 UKRAINE Country Report XXXX 2018 www.intellinews.com