The Ukrainian economy: The way forward after a year of political turbulence

On May 28, 2019, the Ukrainian Think Tanks Liaison Office in Brussels together with the Centre for Economic Strategy and Bruegel co-organised a conference “The Ukrainian economy: the way forward after a year of political turbulence”. The discussion aimed to reflect on the state and the main challenges of the Ukrainian economy in the coming years, as well as the necessary steps the new government needs to take to meet these challenges.

Olena Carbou, Executive Director of the Ukrainian Think Tanks Liaison Office in Brussels, moderated the discussion and started with a presentation of a general picture. 2019 is especially important year both for Ukraine and the EU. In terms of Ukraine’s economic growth, it was predicted to slow down a bit from 3.5% GDP growth in 2018 to 2.7% in 2019. 2019 is a year of political turbulence because of presidential elections (which already took place), upcoming early parliamentary elections (the legal basis of which is still in question), and 2020 local elections. Also, Ukraine is facing significant public debt repayment and continuation of cooperation with the IMF is important. The EU in its turn is also in a period of changes, following the recent elections to the EP.

Hlib Vyshlinsky, Executive Director of the Centre for Economic Strategy, presented a SWOT analysis for the Ukrainian economy in 2019-20. He highlighted that a small budget deficit and sizable leftovers of 3.2 billion USD in the budget as the strengths. However, he stressed on the much longer list of weaknesses and threats, such as shrinking labour force, public sector external debt repayment of 20Billions USD in 2019-21, political unpredictability and further decline of Ukraine as a key gas transit country. Mr Vyshlinsky underlined macroeconomic stability as one of the key tasks for the new government. Maintaining central bank independence and prudent fiscal policy are central to achieving this task, just as important is maintaining and building trust with creditors. The possibility of a default would be a disastrous blow, for the ordinary Ukrainians, as their real income would decrease, while Hryvna depreciates.

“It will be a long-term blow to the reputation of Ukraine, in the eyes of our European and transatlantic partners”.

Elena Flores, Director, International Economic and financial relations, Global Governance DG ECFIN, started her speech by introducing what has been achieved in reforms in Ukraine and mentioned that the glass is not empty, as lots of things have been done. She mentioned the fact that inflation has decreased substantially in Ukraine and outlined that series of reforms required by Association Agreement and in particular, by DCFTA have been done. Also, Ms Flores touched upon the topic of support of the EU towards Ukraine. Beyond the policy dialogue and technical assistance, there is also big financial support through different instruments. Namely, macro-financial assistance, grant assistance and investment protection. She called Ukrainian authorities to prioritize and select the areas, which are critical for reforming in order to achieve economic growth and stability. As for the main challenges in economy of Ukraine, Ms FLores named debt repayment and stated that

“If macroeconomic stability goes wrong – everything will go wrong”.

Marek Dabrowski, Bruegel Non-Resident scholar, agreed with other panellists on the challenges in the macroeconomic sphere that pose a threat to the economic stability of Ukraine. Highlighting the fact, that most of the debt is in foreign currency, he stressed that Ukraine needs to go to the markets and borrow money in order to repay the old debts. It will only be possible if the IMF and the EU remain the landers of last resort. Therefore, the current government must maintain its cooperation with these institutions and any collapse in this cooperation will lead to a severe economic crisis.

“Ukraine must keep cleaning up the problems in the banking sector, which remains very fragile. A lot has been invested, but more is needed in order to avoid the banking crisis”.

Ivan Miklos, Chairman of the Strategic Advisory Group for Supporting Ukrainian Reforms (SAGSUR) stated that not only in Ukraine, reforms face more political than technical challenges. He focused on answering the question “why there hasn’t been done more in terms of reforms”? There are two kinds of arguments why: objective and subjective. From the objective point of view, the expectations were too high in regards to what was necessary to do. Subjectively, there was a lack of will to do what was required. As a result, there are narratives both outside and inside Ukraine, that little has been achieved. At the same time, he acknowledged that the real changes have finally started, which he explained with the appearance of new, young members of the Ukrainian parliament.

“The keystones for successful reforms are leadership, ownership and communication. Unfortunately, in Ukraine, these three elements were at insufficient level to achieve better results”.