Ukraine flag Ukraine: Economic and Political Overview

The economic context of Ukraine

Economic Indicators

On February 24th 2022, Russia initiated a military conflict on the Ukrainian territory, which profoundly upsets the current political context in both countries and will have substantial political and economic ramifications. For the ongoing updates on the developments of Russia-Ukraine conflict please consult the dedicated pages on BBC News.

For the latest updates on the key economic responses from governments to address the economic impact of the COVID-19 pandemic, please consult the IMF's policy tracking platform Policy Responses to COVID-19.

After years of political and economic tension, the Ukrainian economy had started to stabilise, but the outbreak of COVID-19 pushed it into recession in 2020 (-4%). According to the IMF, GDP growth rebounded to 3.5% in 2021, supported by the revival of external and domestic demand, as well as fiscal and monetary stimulus, and despite the new waves of Covid-19 infections. Economic growth was expected to accelerate marginally in 2022 (3.6%) before slowing down slightly in 2023 (3.4%) (IMF), but Russia’s invasion of Ukraine on February 24th 2022 darkened the outlook. The government called on Ukrainian citizens to resist but Russia’s determination suggests further escalation. Massive infrastructure destruction, disruption of agriculture, industry and trade, and large capital outflows will provoke a sharp contraction of economic growth in 2022 (The Economist Intelligence Unit).

Until February 2020, the Ukrainian economy was still in a robust macroeconomic state thanks to the successful implementation of a reform program, with declining public debt, falling inflation and positive growth forecasts, but the outbreak of the pandemic and the government reshuffle darkened the outlook (Euler Hermes). In June 2020, the IMF approved a USD 5 billion support package to help Ukraine to cope with COVID-19 pandemic challenges. Policies under the new arrangement focused on four priorities: mitigating the economic impact of the crisis; ensuring continued central bank independence and a flexible exchange rate; safeguarding financial stability while recovering the costs from bank resolutions; and moving forward with key governance and anti-corruption measures to preserve and deepen recent gains (IMF). The IMF approved an extension of the Stand-By Arrangement to end-June 2022. Following Russia’s attack, the IMF and the World Bank issued a join statement condemning the offensive and ensuring Ukraine for their support. The IMF responded to Ukraine’s request for emergency financing through a possible Rapid Financing Instrument; and the World Bank started to prepare a USD 3 billion package of support (including the mobilization of financing from several development partners) comprising fast-disbursing budget support operation and fast-disbursing support for health and education (IMF). Before the war, declining nominal GDP and Covid-19-related fiscal stimulus widened the fiscal deficit. After soaring to -5.2% GDP in 2020, public deficit decreased to -4% GDP in 2021 (IMF). It was expected to further decrease to -3.4% GDP in 2022 and -2.3% GDP in 2023 (IMF), but will deteriorate because of the conflict-related expenses and decreased revenues. Similarly, public debt, which reached 60.8% GDP in 2020, fell to 54.4% GDP in 2021 and was expected to continue decreasing to 51.7% GDP in 2022 and 48.9% GDP in 2023 (IMF). It is now forecast to widen. Inflation, which reached record lows in 2020 (2.7%), picked up again in 2021, reaching 9.5% (IMF). It was expected to decline gradually to 7.1% in 2022 and 5.8% in 2023 (IMF), thanks to better harvests, price corrections in global commodity markets, the hryvnia’s relative strength, the fading of low base effects, and the further impact of the NBU’s monetary policy tightening measures (National Bank of Ukraine). However, the war is causing food shortages and soaring inflation.
In addition to the continuation of the reform program agreed with the IMF, the priorities of the State Budget for 2022 remained unchanged: healthcare, education, security and defence, social sphere, infrastructure, business support and innovation (Ukraine Government Portal). Since Russia’s invasion, the government is focused on organising the resistance and gathering political and logistical support from the international community.
 
Ukraine's unemployment rate was falling until 2019, but due to the negative economic impact of the COVID-19 pandemic, it is estimated to have increased to 9.7% in 2021 and was forecast to stay high in 2022 (8.7%) and 2023 (8.2%) before the start of the war (IMF). The informal sector in Ukraine is estimated to account for a third of the country's GDP, and GDP per capita (at purchasing power parity) is only 20% of the EU average. The human cost of the war with Russia is still unknown but already, hundred of civilians have been killed, hundreds of thousands refugees have fled the country, and supply chains disruption have triggered food shortages.

 
Main Indicators 201920202021 (e)2022 (e)2023 (e)
GDP (billions USD) 154.00e155.30e181.04203.93222.82
GDP (Constant Prices, Annual % Change) 3.2e-4.03.53.63.4
GDP per Capita (USD) 3,6903,741e4,3844,9585,440
General Government Balance (in % of GDP) -1.8-5.2e-4.0-3.4-2.3
General Government Gross Debt (in % of GDP) 50.560.854.451.748.9
Inflation Rate (%) 7.92.79.40.00.0
Unemployment Rate (% of the Labour Force) 8.59.2e9.78.78.2
Current Account (billions USD) -4.216.23-1.24-4.97-7.27
Current Account (in % of GDP) -2.74.0-0.7-2.4-3.3

Source: IMF – World Economic Outlook Database, October 2021

Note: (e) Estimated Data

Main Sectors of Industry

The agricultural sector plays a major role in Ukrainian economy. In 2020, it contributed to 9.3% of the GDP and employed 14% of the working population (World Bank). The main crops are cereals, sugar, meat and milk. Ukraine is the world's fifth largest exporter of grain. The European Union has reduced its customs duties on the agricultural areas of Ukraine, which could be a boon for this sector. The country is rich in mineral resources, mainly iron and magnesium, as well as in energy resources (coal and gas).
 
The secondary sector employs a quarter of the active population and accounts for 20.8% of the GDP, a percentage which has declined considerably in recent years. The Ukrainian manufacturing sector is dominated by heavy industries such as iron (Ukraine is the world's seventh largest producer of iron) and steel. These two sectors alone account for around 30% of the industrial production. However, steel production is now below its pre-2008 level. Coal mining, chemicals, mechanical products (aircraft, turbines, locomotives and tractors) and shipbuilding are also important sectors.
 
The service sector employs 61% of the workforce and contributes to 55.7% of the GDP. Ukraine is a country of energy transit, historically transporting Russian and Caspian oil and gas to Western Europe and the Balkans, through its territory. However, in the context of tensions with Russia, Ukraine’s role as the main transit corridor has diminished, with Russia seeking alternative routes (to the south via Turkey and to the north via Germany). The transit contract between Gazprom and Naftogaz Ukrainy, which expired on December 31, 2019, has been extended for a period of five years.

Due to the COVID-19 pandemic, Ukrainian economic sectors have been hit hard in 2020, but a recovery occurred in 2021. Agriculture was among the least affected by quarantine restrictions, while service, trade and transport have been the most affected. Approximately 700,000 small businesses in the service sector have closed (UNIDO).

 
Breakdown of Economic Activity By Sector Agriculture Industry Services
Employment By Sector (in % of Total Employment) 13.8 25.0 61.2
Value Added (in % of GDP) 9.3 20.9 55.6
Value Added (Annual % Change) -11.5 -3.3 -2.4

Source: World Bank, Latest Available Data. Because of rounding, the sum of the percentages may be smaller/greater than 100%.

 

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Indicator of Economic Freedom

Definition:

The Economic freedom index measure ten components of economic freedom, grouped into four broad categories or pillars of economic freedom: Rule of Law (property rights, freedom from corruption); Limited Government (fiscal freedom, government spending); Regulatory Efficiency (business freedom, labour freedom, monetary freedom); and Open Markets (trade freedom, investment freedom, financial freedom). Each of the freedoms within these four broad categories is individually scored on a scale of 0 to 100. A country’s overall economic freedom score is a simple average of its scores on the 10 individual freedoms.}}

Score:
56,2/100
World Rank:
127
Regional Rank:
45

Economic freedom in the world (interactive map)
Source: Index of Economic Freedom, Heritage Foundation

 

Business environment ranking

Definition:

The business rankings model measures the quality or attractiveness of the business environment in the 82 countries covered by The Economist Intelligence Unit’s Country Forecast reports. It examines ten separate criteria or categories, covering the political environment, the macroeconomic environment, market opportunities, policy towards free enterprise and competition, policy towards foreign investment, foreign trade and exchange controls, taxes, financing, the labour market and infrastructure.

Score:
5.27
World Rank:
72/82

Source: The Economist - Business Environment Rankings 2014-2018

 

Country Risk

See the country risk analysis provided by Coface.
 

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Sources of General Economic Information

Ministries
Ministry of Culture
Ministry of Ecology and Natural Resources
Statistical Office
State Statistics Service of Ukraine
Central Bank
National Bank of Ukraine
Stock Exchange
PFTS Exchange
Ukrainian Exchange
Economic Portals
Korrespondent Review (website in Russian)
"MIG-news" agency
 

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Latest Update: June 2022