Last year, Ukraine saw a notable rise in its real GDP, reaching 5,7%. However, forecasts for 2024 project a growth rate of 3,6%, as outlined in the National Bank’s January Inflation Report. The report thoroughly examines Ukraine’s economic progress over the past year and sets expectations for the years 2024 to 2026.
This year, economic expansion is expected to slow compared to the previous year, primarily due to anticipated decreases in crop yields and heightened pressure on the labour market. Notably, this pressure stems from the increase in the minimum wage and the subsistence minimum, effective January 1, 2024.
Over the next two years, the country’s GDP is projected to increase to 5,8% and 4,5%, respectively. The National Bank is hopeful for an upturn in both consumer and investment sentiments among Ukrainians and businesses alike. Additionally, they anticipate an improvement in employment rates and a rise in household incomes, both in nominal and real terms. It’s worth noting, however, that these figures represent only the baseline scenario of the macroeconomic forecast based on data available as of January 2024. Moreover, while commenting on the report, the National Bank underscores that the baseline scenario envisages a noticeable decrease in security risks from 2025 onward, complete unlocking of ports, and a gradual return of refugees to Ukraine.
Throughout 2024, consumer price growth is expected to reach 8,6%. However, by 2025, it will decrease to 5,8%, and by 2026, it will be 5%. Last year, inflation indicators were at a record low of 5%. This was facilitated by high yields, a decrease in the cost of energy resources worldwide, and a prohibition on raising tariffs for certain utilities for Ukrainians.
To ensure moderate inflation rates, the monetary policy of the National Bank will focus on exchange rate stability. According to its report, one of the key tasks for 2024 is to protect the attractiveness of hryvnia instruments aimed at preserving Ukrainians’ savings from inflationary depreciation. This includes deposits and domestic government bonds (OVDP).
Meanwhile, the National Bank has opted to keep the benchmark interest rate steady at 15%. The benchmark interest rate reflects the cost of money within the country, influencing lending terms. Lower rates generally result in reduced interest rates on loans. June 2020 saw the lowest benchmark interest rate in the history of independent Ukraine, at 6%. However, its impact on consumer lending growth was minimal during that period.
In its Inflation Report, the National Bank emphasised the crucial role of international financial support for Ukraine. Such support serves as a vital source of funding for the budget deficit and contributes to overall capital inflows in the country. This year, Ukraine plans to receive $37 billion from donors. In the first quarter, it expects to receive around $8 billion, $13 billion in the second quarter, slightly less than $10 billion in the third quarter, and approximately $7 billion in the fourth quarter. These funds will allow Ukraine to increase its foreign reserves to $40.4 billion by the end of 2024, almost equal to the volume of gold and currency reserves at the end of last year. By the way, these are the largest gold and currency reserves Ukraine has had during its independence. The reason? The war. Donor funds from Western partners cover about half of Ukraine’s budget expenditures.
However, the Bank foresees a gradual decrease in the amount of international financing. Next year, financial assistance is expected to be $25.1 billion, and in 2026, $12.6 billion. Nevertheless, Ukraine aims to gradually regain its ability to independently finance the state budget, as stated by the NBU.
The prospect of further European integration holds promise for the Ukrainian economy, potentially stimulating foreign trade and attracting investments. In light of these prospects, the NBU has outlined two development scenarios for Ukraine in its Inflation Report: moderate and favourable. The primary difference lies in the extent of reforms and the pace of Eurointegration. Under the moderate scenario, the country’s economy could grow by 4% over the course of a decade, while under the favourable scenario, growth could reach 7%. “In recent months, Western partners have ramped up discussions regarding the transfer of frozen Russian assets to Ukraine. These recoveries are expected to enhance key macroeconomic indicators notably,” concluded Ukraine’s National Bank.
