UPDATE 2- Ukrainian economy will contract sharply in 2022 due to war, says IMF report

(Adds a comment from the head of the IMF mission for Ukraine, more details)

By Andrea Shalal, Natalia Zinets and David Lawder

WASHINGTON, March 14 (Reuters) – Ukraine’s economy is expected to contract 10% in 2022 following the Russian invasion, but the outlook could deteriorate sharply if the conflict lasts longer, the International Monetary Fund said in a statement. a report released Monday. .

The report, prepared ahead of the IMF’s approval of $1.4 billion in emergency financing, says Ukraine’s economic output could shrink by 25% to 35%, based on actual data of the wartime gross domestic product of Iraq, Lebanon and other countries at war.

Ukraine had an external financing gap of $4.8 billion, IMF staff said in their March 7 report, but its financing needs were expected to increase and require significant additional concessional financing due to the war. .

The IMF is working on setting up a trust fund instrument through which bilateral donors can channel resources to Ukraine, an official with the global lender said.

The $1.4 billion emergency financing already approved is the maximum Ukraine can borrow under current IMF rules, but the loan has a “catalytic” effect in encouraging other donors, the official said. responsible.

Ivanna Vladkova Hollar, IMF mission chief for Ukraine, said the Ukrainian authorities were making “a remarkable effort” to keep the country’s economy and financial system in the face of war.

“Make salary and pension payments, replenish ATMs, open bank branches … continue to make payments on foreign debt obligations, so that after the war they can resume normal operations with their creditors and the markets. It’s really actually a remarkable, remarkable effort,” she said.

The report predicted a deterioration in Ukraine’s growth outlook of at least 13.5 percentage points from a pre-war baseline, with output down 10% in 2022, assuming an early resolution. war and substantial donor support.

That compares to a 6.6% decline in production in 2014, the year Russia annexed Ukraine’s Crimea region, and just under 10% in 2015.

IMF staff said there was enormous uncertainty about the outlook, given the intensity of the conflict, and warned that the growing loss of physical capital stock and huge refugee flows could lead to “a contraction much more pronounced”, a collapse in trade flows and lower taxes. income.

DEBT GROWTH

The war – the biggest in Europe since World War II – has triggered a massive humanitarian and economic shock, according to the IMF report, citing rapidly increasing loss of life and major damage to infrastructure across the country. Russia describes its invasion as a “special military operation”.

He said the Ukrainian authorities had continued to service their external debt and the country’s payment system remained operational, with open and mostly liquid banks.

He said authorities had implemented appropriate emergency measures to stabilize markets and the economy, but downside risks were “excessively high” and the country faced large fiscal financing gaps. and exterior.

The country’s public debt is expected to reach 60% of GDP in 2022 from around 50% in 2021, according to the report.

Vladyslav Rashkovan, Alternate Executive Director for Ukraine at the IMF, told the IMF Board that the Ukrainian authorities broadly agreed with IMF staff’s assessment of the economic situation and stressed the need to increased financial support.

He said the liquidity buffers adopted after the Russian invasion were sufficient to fund spending and pay off debts, with most Ukrainian businesses still paying taxes and some even paying in advance to support the budget.

In his statement, Rashkovan said Ukraine had spent the equivalent of $1.4 billion on servicing and repaying its public debt in foreign currency since the start of the war. (Reporting by Andrea Shalal and David Lawder in Washington and Natalia Zinets in Lviv; Editing by Paul SImao)

Christi C. Elwood