More than 20% of the population of Ukraine has been below the poverty line as a result of the war.
Russia’s imperialist and aggressive war against Ukraine caused numerous human casualties and mass emigration of the population, the destruction of production facilities and business assets, and damage to physical and social infrastructure. The estimates of real GDP losses this year range from 31.5 to 40%. In terms of macroeconomics, the fall in GDP is associated with a reduction in domestic demand, a decrease in physical capital and labor force, a breakdown of internal economic ties, and adisruption of foreign trade logistics.
In 2023, less intense hostilities partial restoration of infrastructure and adaptation to the conditions of martial law are likely to be factors in the gradual recovery of economic activity. Real GDP growth rates may range from 1 to 4.5%.
As a result of the war, more than 20% of the population of Ukraine has been below the poverty line. The unemployment rate is now 24.5% of the working population, and next year it may drop to 20-21%. Real wages, according to the IMF forecast, will decrease by 27% in 2022, and by 2.5% in 2023. High unemployment and fall in real incomes have a negative impact on the level of consumer demand and slow down the economic recovery.
The inflation rate accelerated from 10% in 2021 to 30% in 2022. The main drivers of the inflationary surge were domestic supply constraints due to hostilities, the disruption of raw material/energy supply chains and the shift to more expensive substitutes, the exchange rate devaluation and increase in the cost of imported goods, price shocks of the world market for food and energy products. Most forecasts say that the inflationary wave will subside in 2023, although inflation rates will remain high of about 22%.
In 2022, the export of goods and services declined by 40%, which worsened Ukraine’s balance of payments. However, international grants, remittances from migrants and a freeze on debt servicecontributed to the stabilization of the current account. On the other hand, the outflow of foreign capital from the beginning of hostilities determined the negative financial account balance. According to the results of 2022, the total balance of payments is likely to be negative and reach USD 5 billion.
Gross international reserves at the end of 2022 will amount to USD 25-26 billion and will be at an acceptable level. Next year the reserves may drop by several billion dollars, but this drop will not be critical for external stability. In 2023, international aid to support the budget in the amount of USD 37-39 billion will promote the stabilization of the foreign exchange market. Therefore sharp jumps in the hryvnia exchange rate are not expected next year.
Large-scale destruction and decline in economic activity objectively affected budget revenues. Consolidated budget revenues without international grants in 2022 decreased by more than 20%. Andreal expenditures on defense increased almost six times, and on public order and security – twice. In general, the expenditures in real terms for the year rose by almost a third. As a result of divergent trends in revenues and expenditures, the budget deficit has become colossal – 20.5% of GDP,according to the IMF.
However, in 2023, it will probably fall to 9-10% of GDP. The Government is going to abandon monetary financing of the deficit in 2023 and cover it exclusively through external borrowing and commercial borrowing on the domestic market.
To support business during the war, the Government lowered tax rates, allowed tax deferrals and transition to a preferential system with payment of 2% sales tax, eased administrative requirements. In 2023, the growing needs for budget funds to reconstruct, to overcome the consequences of aggression and to finance social support programs (military officers, their families, displaced persons, people with disabilities) will prompt the Government to give up tax breaks. In particular, it is envisaged to cancel the moratorium on conducting tax audits, restore the pre-war regime for those paying the 2% tax and prevent the abuse by big businesses using a simplified taxation system.
Tetiana Bogdan, Scientific Director of the Growford Institute