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Ukrainian Economy to Grow by about 4% Annually in 2021–2023, Inflation to Begin to Slow in Autumn of 2021 – Inflation Report

Ukrainian Economy to Grow by about 4% Annually in 2021–2023, Inflation to Begin to Slow in Autumn of 2021 – Inflation Report

In 2021, inflation will stand at 8%, but it will return to the 5% ± 1 pp target range in H1 2022. After slumping by 4% last year, Ukraine’s economy will grow by 3.8% this year. This is according to the NBU’s April 2021 Inflation Report.

Inflation will be above the NBU’s target range in 2021, but it will return to the 5% target in H1 2022

Rising global food and fuel prices and high consumer demand in Ukraine led to a rapid acceleration of inflation at the beginning of the year. Inflation will peak in Q3 2021, primarily due to last year’s low base of comparison, according to NBU projections. However, inflation will begin to decline in the autumn and will be 8% by the end of 2021. This will be facilitated by the new harvest’s arrival into the market, the depletion of the low comparison base effect for individual products, and the key policy rate hike by the NBU. Inflation will return to the 5% ± 1 pp target range in H1 2022, settling at about 5% in the years ahead.

In 2021–2023, the economy will grow at a steady pace of about 4%

In 2021, the economy will grow by 3.8%. Consumer demand will continue to be its main driver. The gradual revival in investment activity as the global economy recovers and the pandemic subsides will also contribute to economic growth. In 2022–2023, GDP growth will thus be close to 4%.

The current macroeconomic forecast is based on the assumption that lockdown restrictions in the “red zones” will be rolled back starting in May, and that the adaptive quarantine will continue throughout H1 2021. Under this scenario, the negative contribution of quarantine restrictions in H1 2021 to annual GDP will be 0.5–0.6 pp, according to the NBU.

Exports and imports of goods in 2021 will exceed their pre-crisis levels

In 2021, exports will be driven primarily by rising commodity prices. At the same time, export growth will stall in 2022–2023, despite an increase in physical volumes of supplies. Meanwhile, imports will grow during 2021–2023, in particular due to the rapid recovery in consumer and investment demand. Strong demand for pharmaceuticals and medical equipment amid further measures to combat the spread of COVID-19 will also drive imports higher.

In 2021, the current account will go back into small deficit (0.8% of GDP) as domestic demand continues to strengthen and international tourism picks up. In 2022‒2023, the current account deficit will widen significantly due to less favorable terms of trade for exporters of agricultural and metallurgical products, as well as the growth in consumer and investment imports in a full–fledged economic recovery.

Unemployment in 2021 will decline moderately and will fall to its natural levels in 2022

Unemployment will decline this year, averaging 9.1%, according to NBU projections. On the one hand, the resumption of economic activity will help this indicator go back to normal. On the other hand, this decrease will be hampered by a significant rise in labor costs. In 2022, however, unemployment is expected to fall to its natural level of 8.5%.

Further economic recovery and rising social standards will support higher incomes. Nominal wages in 2021 will increase by 17.8%, and by 9.7% the next year. Real wages will rise by 8.6% and 3.9%, respectively. 

In addition to updated macroeconomic forecasts, the April Inflation Report addressed a number of special topics, including:

  • Global inflation rattled by turbulence

In 2021, inflation in both developed economies and EMs will temporarily accelerate from 2020’s low levels as energy prices rise and supply factors in certain commodity markets (grain, oil) play out. However, the pandemic will have a longer-lasting effect on the labor market and consumer demand than previously expected. As a result, with temporary effects fading away, these factors will restrain the growth in inflation in the coming years.

Given the temporary nature of accelerating inflation, leading central banks will continue to be able to pursue loose monetary policies. At the same time, they will cut back on securities purchase programs in 2022 (the ECB, Bank of Japan) or stop buying them altogether (the Fed, Bank of England). In contrast, central banks of EM countries, including Ukraine, will find it harder to ignore the inflation spike in 2021, given their shorter track record of inflation targeting and more weakly anchored inflation expectations. As a result, monetary policy in EMs is expected to gradually normalize.

  • The Meeting of Inflation Targets by Other Central Banks

Currently, there are 41 inflation-targeting countries. These countries have on average been applying their inflation targeting (IT) regimes for 17 years. Ukraine is a young inflation targeter – the country adopted this regime in 2016. Despite great uncertainty resulting from the 2014 – 2015 crisis, the NBU was able to curb high and volatile inflation and stabilize it in the single-digit range. More specifically, since the introduction of inflation targeting in Ukraine, the standard deviation of inflation has almost halved – from 7.3 pp to 4.2 pp.

Over the last five years, inflation in Ukraine has often deviated from the target range set by the NBU. That said, such results are consistent with those of other central banks that have relatively recently switched to inflation targeting, have an inflation target close to that set by Ukraine, and have experienced disinflation. Evidence from countries that have pursued inflation targeting for a longer period shows that further implementation of a consistent IT policy can reduce the magnitude, frequency, and duration of inflation deviations from the target range.

  • Trade in Medical Goods in 2020

While having an adverse impact on the global trade in goods and services in 2020, the COVID-19 pandemic boosted the trade in medical goods. Last year, pharmaceuticals accounted for over a half of global trade in medical goods. The key players on the medical goods market were the United States, China and Germany.

Last year, Ukraine’s foreign trade turnover of medical goods increased by more than a quarter, fueled mainly by imports. The largest contribution to the growth in imports of medical goods was made by imports of medical equipment and pharmaceuticals. Meanwhile, exports were primarily driven by those of pharmaceuticals and reagents used in the production of coronavirus tests.

  • The 2019 Gas Transit Agreement – Amat Victoria Curam

In late 2019, Ukraine and Russia entered into a new gas transit agreement for 2020 – 2024. Despite the expected decline in transit revenues due to Russia’s active development of new transit routes, it guarantees gas transit through the Ukrainian gas transportation system (GTS), while also enshrining several favorable provisions for Ukraine. The key provision is ensuring minimum gas transit volumes on the “pump or pay” principle and no requirement that Ukraine buy Russian gas.

What is more, the spadework done before signing the agreement resolved some energy sector issues that had accumulated in previous years. These issues mainly concerned the liberalization of the Ukrainian gas market and the provision of new services by the Ukrainian gas transportation system. This, together with the implementation of certain contract provisions, provided Ukraine with direct benefits of about USD 500 million in 2020.

At the same time, future prospects for the Ukrainian gas transportation system will depend on whether or not the system is optimized in accordance with market requirements, additional sources of system utilization are found, and Ukraine’s gas production is increased.


  • The Money Supply: Does Size Matter?

The Ukrainian money supply expanded by almost one third in 2020 – the largest growth in the last 12 years. Despite the crisis, the bulk of the growth was generated by an increase in deposits, mainly demand deposits. The absence of deposit outflows was one of the features that distinguished the COVID-19 crisis from other crises. At the same time, cash also expanded significantly. Stronger demand for the most liquid assets, which is a typical response by households to growing uncertainty during crises, was apparent in most countries.

The increase in domestic credit seen in 2020 was mainly due to large hryvnia borrowing by the government to finance the widened deficit. Last year demonstrated that an increase in the money supply to GDP ratio is not always accompanied by a ramp-up in lending to the private sector, and can be caused by other factors. Under an inflation targeting regime it is not the quantity of money in the economy that is important, but its value.

  • Estimating the Accuracy of Macroeconomic Forecasts

The NBU continued the practice, launched in 2019, of annual assessment of its macroeconomic forecasts and compared them with consensus forecasts, surveys of financial analysts, and the forecasts of other leading institutions for the period from 2016 to 2020. Among them were: the Ministry of Economy, Alfa Bank Ukraine, ICU, Dragon Capital, Raiffeisen Bank Aval, J.P. Morgan, OTP Bank, Goldman Sachs, the IMF.

The accuracy of the NBU’s forecasts on inflation, GDP, current account balance and the key policy rate was at or above the average forecasts of market participants. Errors were largely due to external shocks.

Compared to other central banks in the region (Czech Republic, Poland, Serbia, Hungary, Romania), the precision of the NBU’s forecasts also continues to be close to average. In particular, the accuracy of inflation and current account forecasts is above average across all countries, while the accuracy of the GDP forecast is somewhat lower.

The annual evaluation of forecast performance allows the NBU to adjust its tools if systematic errors are revealed and understand to what extent market participants rely on the NBU’s forecasts. More accurate macroeconomic forecasts significantly increase the effectiveness of the inflation targeting regime, as the effect of monetary policy tools is lagged by 9–18 months.

  • Possible SDR allocation by the IMF and the outcome for Ukraine

In June 2021, the IMF Executive Board will discuss allocating the equivalent of USD 650 billion in SDRs.  The SDR allocation will boost liquidity in low-income countries and EMs and help fight the COVID-19 pandemic. Moreover, it will contribute to the build-up of additional reserve buffers and significantly reduce the risks of global stagnation.

If such a decision is approved by the IMF Executive Board, Ukraine will receive SDR 1.9 billion (USD 2.7 billion), according to NBU estimates. The SDR allocation will boost Ukraine’s international reserves. Whether the funds can be used for other purposes will be additionally discussed. The funds from the previous SDR allocation (2009) increased Ukraine’s international reserves and were used to finance the budget deficit.


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