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The first quarter of 2021 has come to an end. It is time to sum up the interim results and think about the prospects for economic development in the near future.

Official statistics on GDP growth for the first quarter will not appear until mid-May, which makes us use monthly data on changes in key economic indicators.

Following the results of January-February 2021, industrial production decreased by 4.2% compared to the corresponding period of the previous year (in particular in the processing industry – by 6.5%), and agriculture – by 6.1%. Construction volumes dropped by 12.9% in January to January this year.

Only retail trade shows a positive trend: in January-February, compared to the corresponding period of the current year, turnover went up by 4.6%, while wholesale sales fell by 0.8%.

The Ministry of Economy estimated the fall in GDP in January 2021 (until January 2020) at 2.6-2.8%. At the beginning of the year, the Ministry of Economy forecast that a drop in GDP in the first quarter could be 3%, while in January the NBU expected a decline in GDP by only 0.1%.

Although the Ministry of Economy softened its rhetoric in its further communications, it is highly likely that the actual results of the first quarter will be much closer to its assessment than to the NBU forecast.

Even these facts are enough to call into question real GDP growth forecasts for 2021 as a whole: the official Government projection, which is the basis of the calculations of budget, is 4.6%, and the NBU forecast is 4.2%.

However, in the middle of March, the Minister of Economy announced that the Ministry maintained the forecast of GDP growth in 2021 at 4.6%. The office of the President of Ukraine expects even growth of 5.1%. The World Bank has recently improved its forecast from 3% to 3.8%.

Unfortunately, there is every reason to disagree with such optimistic view of the future.

In the fourth quarter of 2020 (compared to the corresponding period of the current year), the decline in capital investment reached 42.9%, including in industry – 52.6%. In general, in 2020 the volume of investments in the economy decreased by 38.2% (in industry – by 43.6%), which is even worse than in 2014. These indicators suggest that intensive economic growth (due to endogenous factors) should not be expected in 2021.

The external conditions, which have significantly mitigated the effects of the crisis on the Ukrainian economy in 2020, will not always remain favorable. Energy prices have already risen significantly, and the potential for expanding demand for Ukrainian exports may soon be exhausted. Therefore, the prospects for economic growth due to external factors are also very uncertain.

The Ministry of Economy gives quite optimistic forecasts for agriculture in 2021: the harvest of cereals and legumes is expected to increase compared to 2020 by 14.7% to 75.1 million tons, i.e. it is expected to return to the record level of 2019. However, we are all aware that the probability of forecasts in agriculture is a priori very doubtful.

It would not be very reasonable to expect that the entire economy will be “pulled out” by retail trade. The increase in consumption during the crisis is an anomalous phenomenon, which can last only until the previously formed savings of the population are exhausted. In addition, the second quarantine since the beginning of the year, which is currently ongoing, may not be the last, which will have a corresponding effect on trade conditions.

All the above circumstances should motivate the authorities to seek incentives and compensators for the economy. However, the possibilities of the state budget are objectively limited, despite the persistence of a significant planned deficit (about 5.5% of GDP).

Even the payment of UAH 8,000 to sole proprietors, which was recently supported by the Verkhovna Rada, is an additional UAH 4 billion nationwide, which is twice the budget expenditures on the Affordable Loans 5-7-9% and Affordable Mortgages at 7% combined.

At the same time, there is a state administration body that has a much wider room for maneuver, i.e. its ability to respond to the crisis is not so limited. We are talking about the National Bank of Ukraine and its monetary policy.

What does the NBU do in this difficult situation? On March 4, the National Bank raises the key policy rate from 6% to 6.5% and suggests the possibility of its further growth. This means that it is no longer worth expecting a significant reduction in interest rates on bank loans to business and government issued bonds yields.

The reason for tightening the NBU’s interest rate policy was “a significant increase in fundamental inflationary pressures in recent months.”

Annual inflation did accelerate to 6.1% in January and 7.5% in February (the last figure was published on March 9). However, this was mainly due to the influence of factors independent of monetary policy: insufficient harvest in 2020, rising world prices for food and energy.

The NBU does not consider this feature of inflationary processes, as well as to the above-mentioned decline in investment, reduction of industry production, construction, agriculture (livestock) and so on.

Mentioning that “increased quarantine restrictions remain a key risk to macro-financial stability”, the NBU completely ignored the Prime Minister’s statement about the start of the third wave of the epidemic and the prospect of a severe quarantine an hour before promulgation by the National Bank of a decision on the key policy rate.

As we can see, the Prime Minister was right and the epidemic situation has significantly worsened. Medicine is working at its limit, the number of fatalities is breaking sad records every day and on March 30 it was 407 people (32,825 people during the entire period of pandemic). The vaccination program failed: as of that date, 1 dose of the vaccine was given to 231,564 people, 2 doses – only to 2 people!

From April 5, Kyiv will significantly tighten quarantine restrictions.

We will find out whether the National Bank noticed all this on April 15, when the next decision on the key policy rate will be announced.

The NBU Council, for its part, could temporarily postpone consideration of the issue of global climate change and warn the NBU Board against realizing its intentions to “increase the key policy rate more decisively.”

It is also worth to recall the IMF’s advice given in the January Global Financial Stability Report: until vaccines become widely available, accommodative monetary policies should be remained to maintain household and business liquidity while controlling financial risks. Insufficient support, according to the IMF, could threaten economic recovery.

Returning to the prospects of economic growth in the current year, it is necessary to make reservations. Stubbornly fighting inflation (the causes of which are beyond the influence of monetary policy), the NBU can deal even more damage to the economy, plunging it into the trap of stagflation, when rising prices occur against the background of falling production.

The NBU’s extremely tight monetary policy has already caused irreparable damage to the economy in 2018-2019 (when at the peak of its rise real GDP grew at a rate of only 3.4-3.2%), and during the unprecedented crisis of 2020, support for the economy by the NBU was symbolic. Unfortunately, the NBU does not make conclusions from its past mistakes and continues to destroy Ukraine’s economy.

Founder and Chairman of the Board of the Growford Institute Vitalii Lomakovych for LB.UA.