Ukraine’s economy will shrink by more than 35% this year as war continues, says IIF

Ukraine’s economy is expected to shrink by more than 35% this year due to the Russian military offensive, with its budget deficit expected to reach between $3 billion and $10 billion a month, the Institute of International Finance mentioned.

Due to lower economic activity, war-related tax cuts and additional spending on the military campaign, government revenues will fall by nearly 50%, the IIF said.

The international community’s commitments of $6 billion to date “will certainly be insufficient”, he said.

“The economic impact of the war will be dramatic, although the magnitude is expected to remain uncertain for some time,” said IIR Deputy Chief Economist Elina Ribakova and IIR Economist Benjamin Hilgenstock, who co-authored the report.

This week, the World Bank predicted that Ukraine’s economy will shrink by around 45% this year due to the conflict.

The extent of the contraction will depend on the length and intensity of the war, the lender said.

Ukraine’s finance ministry expects the economy to shrink by up to 40% this year.

The repercussions of the conflict are also being felt globally, particularly in the food sector, as Ukraine is a leading exporter of important staple foods, including barley, corn, vegetable oils and wheat.

Authorities have restricted exports of essential items such as barley, beef, buckwheat, rye, salt and sugar, while many other products now require a license.

Leaders of the World Bank, International Monetary Fund, United Nations World Food Program and World Trade Organization on Wednesday called for urgent action on the food security challenge.

“The threat is greatest for the poorest countries where much of their consumption comes from food imports, but vulnerability is increasing rapidly in middle-income countries, which are home to the majority of the world’s poor,” they said. declared.

For every percentage point increase in food prices, 10 million people are pushed into extreme poverty around the world, the World Bank estimates.

The UN chief also called for immediate action on Wednesday, saying the world was on “the edge of a perfect storm”. “We are now facing a perfect storm that threatens to devastate the economies of developing countries,” UN Secretary-General António Guterres said in a note from the United Nations Conference on Trade and Development ( UNCTAD).

“Two of the world’s breadbaskets, Russia and Ukraine, supply around 30% of the wheat and barley we consume,” UNCTAD said.

The IIR also said the war in Ukraine is exacerbating the global food security crisis.

“With world food prices at record levels for several decades, we are concerned about global food security,” the report said.

“The war poses an immediate risk to the 2022 harvest as the country could miss the planting season, which should have already started.

“The geopolitical ripple effects of the Ukrainian crisis are also weighing on Russian exports, and we expect the situation to be more difficult for countries in the Mena region. [Middle East and North Africa] and sub-Saharan Africa.

Ukraine’s exports in March fell 50% per month to $2.7 billion and imports fell 70% per month to $1.8 billion, according to Economy Ministry figures.

The main short-term challenge for Ukraine is financing the budget, the IIR said.

Reserves at the National Bank of Ukraine (NBU) have remained “stable” since late February, but exports will be subdued for a considerable time, he said.

Most Ukrainian ports remain closed and the country’s rail and road infrastructure is used for other emergency purposes.

“Authorities currently estimate a monthly funding gap of at least $3 billion, with the upper end of the range of possible outcomes at $10 billion,” the report said.

“The main driver is declining revenues…and a number of war-related measures. Even under the most optimistic assumption of a $3 billion per month funding gap, the external funding currently committed would not last only until the end of April.

“We are concerned about a growing external funding gap.”

The World Bank is preparing a $1.5 billion support package for Ukraine to ensure the maintenance of essential government services in the country, it announced on Tuesday.

Through the International Finance Corporation, the lender also provides immediate working capital to companies providing supplies to Ukraine.

Outflows from Ukraine’s financial account “also accelerated sharply in February to $1.9 billion, partly driven by refugee withdrawals abroad,” according to the IIF report.

“Since then, the NBU has introduced restrictions but they may not be enough.”

More than 4.5 million people have fled Ukraine and more than seven million are internally displaced, according to UN figures.

Destroyed vehicles and a building in Yahidne, Ukraine.  PA

“The world is rocked by worsening crises,” said the joint statement from the World Bank, IMF, WFP and WTO.

“The fallout from the war in Ukraine adds to the current Covid-19 pandemic now entering its third year, while climate change and increased fragility and conflict cause lingering harm to people around the world. entire.”

The agencies urged the international community to “urgently” support vulnerable countries with coordinated action ranging from emergency food supplies, financial support, increased agricultural production and open trade.

“We urge all countries to keep trade open and avoid restrictive measures such as food or fertilizer export bans that further exacerbate the suffering of the most vulnerable people,” the agencies said.

Updated: April 14, 2022, 1:36 p.m.

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Christi C. Elwood