Trillion for Defense and Everyday Difficulties: What Risks for Ukraine's Economy Will 2023 Bring

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Trillion for Defense and Everyday Difficulties: What Risks for Ukraine's Economy Will 2023 Bring

Photo: Associated Press

Russia's war against Ukraine has caused massive losses to the Ukrainian economy.

The economy of Ukraine suffers enormous losses caused by the Russian military aggression. Currently, it is difficult to estimate these losses, because the war continues. Read more about the forecasts by the NBU, the World Bank, and the IMF to find out how the country’s economy will survive the war.

Ministry of Finance: Partial Recovery Expected in 2023

The annual forecast of real GDP decline in 2022 could be 33-35%, with growth of 3.2% expected next year.

Ukraine's economic activity has been severely affected by the destruction of production capacities, damage to agricultural land, as well as a shrinking workforce: more than 14 million Ukrainians have been forced to leave their permanent place of residence.

"The work of business in Ukraine is absolutely unprecedented. Business has shown to be quite resilient to the shocks associated with the war. Companies pay taxes, which allows us to finance primarily our military expenditures and maintain the stability of the macro-financial situation", Minister of Finance of Ukraine Serhii Marchenko said.

Photo: Associated Press

IMF: Ukraine's Economy Expected to Stabilize in 2023

The IMF believes that Russian aggression against Ukraine is a "powerful destabilizer" of the economy. For Ukraine itself, the cost of the Russian invasion is enormous, but its consequences extend far beyond the country.

"In addition to the senseless destruction of lives and livelihoods, it (Russian aggression) has led to a severe energy crisis in Europe, which is driving up prices and slowing economic activity," the IMF report says.

It recalls that compared to 2021, gas prices in Europe have more than quadrupled, and Russian supplies are now less than 20% of what they were last year.

Colossal damage to infrastructure, and recently to energy infrastructure, negatively affects the economic situation. Therefore, the IMF forecasts a reduction in the real economy by one third in 2022. The next few months will be the most difficult, when the destruction of energy infrastructure will continue with the beginning of winter.

The missile attack on November 23rd caused shutdown of all power units at operating nuclear power plants in Ukraine, which resulted a huge shortage of electricity in the country.

Photo: ТСН.ua

The NBU Forecast: GDP to Decline by More than a Third

The baseline forecast of the NBU has certain "upside" risks, i.e. those risks, the realization of which will lead to a better development of macroeconomic indicators than the NBU expects. The NBU's October estimate of GDP decline in 2022 is about 32%. Growth in the coming years will be moderate - 4-5%.

"Significant losses of labor force and production capacities, high world energy prices and significant import needs at the stage of post-war recovery will slow down the economic recovery," the regulator said in its forecast.

The NBU's forecasts are based on the assumption that security risks in Ukraine will weaken significantly from mid-2023. According to the NBU survey, in September, "business continued to mitigate negative assessments of the prospects for its economic activity against the background of adaptation to military conditions and adaptation of the population." In other words, the population and business have adapted to the war and are somewhat more confident about the future.

Now the government has resumed the discussion about tax cuts - the President's Office and the Ministry of Economy are preparing a tax reform with the conditional name "10-10-10".

Photo: Associated Press

It providers the following tax reduction policy:

- up to 10% of value added tax (currently 20%)

- up to 10% of personal income tax (currently 18%)

- up to 10% corporate income tax (currently 18%)

Photo: Associated Press

What Spendings the Government Plans in 2023

According to government estimates, next year's state revenues will be almost twice less than expenditures. The shrinkage of the Ukrainian economy and inflation this year will be so significant that even a slight improvement will turn into an increase. Therefore, the budget for the next year envisages GDP growth of 4.6% in real terms and 37% in nominal terms.

At the same time, the average salary will be approximately 18.5 thousand hryvnias, inflation may reach 30%, the average annual dollar exchange rate will fluctuate around 42 hryvnia.

This year, the Ukrainian economy is expected to shrink by 30-40%, and inflation will exceed 33%. The huge budget deficit for next year is primarily due to huge expenditures on security and defense.

This item of expenditures was already among the top priorities last year, because according to the Budget Code, it should be at least 5% of the country's GDP. Russian aggression forced the Ukrainian government to significantly increase this figure.

Photo: Associated Press

Defense Expenses

In the draft budget for 2023, UAH 1.136 trillion or almost 50% of the budget is allocated for defence expenses (in the 2022 budget, it was planned to spend UAH 287 billion on security and defense)

According to Volodymyr Zelenskyy, in 2023 non-critical expenses should be reduced as much as possible. This applies to state-owned enterprises, the agencies and institutions that do not help the defense, economic development of Ukraine and social and cultural welfare of Ukrainians.

"Accordingly, the government must submit a program of spending cuts on state-owned enterprises, apparatus and institutions that do not meet the needs of this special time," the President noted.

According to Dragon Capital forecasts, which the company updated on November 22, Ukraine's GDP will decline by another 5% next year after a 32% collapse in 2022. Next year, GDP will decline by another 5%, according to the company.

At the same time, the investment company ICU maintained its forecast for GDP growth next year at 4%.

"Our forecast is based on the assumptions of a gradual decrease in the intensity of hostilities, improvement of the security situation and partial return of refugees. At the same time, we do not assume that Ukraine will receive reparations and foreign direct investment will resume," the ICU report dated November 25th reads.

Poverty and Everyday Difficulties

According to the World Bank’s report, the poverty in Ukraine will increase tenfold, and by the end of 2022, one in five Ukrainians is projected to live in poverty. The document adds that the main factors are the sharp rise in food prices, as well as the displacement of millions of people who have lost their homes.

Analysts emphasize that the poverty rate will increase even more than projected if governments and institutions around the world fail to provide Ukraine with sufficient funding to fill Ukraine's large and growing non-military budget deficit.

Reconstruction During War

The cost of rebuilding Ukraine and its economy has already reached about 349 billion US dollars. This is stated in the report prepared by the World Bank, the European Commission and the Ukrainian government. 

"The consequences of the invasion will be felt for generations, as families have been separated and displaced, human development has been disrupted, cultural heritage destroyed, and the positive trajectory of economic development and poverty has been reversed," the report reads.

The World Bank report emphasizes that despite the critical importance of a phased approach to reconstruction, Ukraine needs about $105 billion over several years in the short term to rebuild social infrastructure, including schools and hospitals, restore transport links, and prepare for possible energy shortages this winter.   

"It is critical that Ukraine continues to receive support from the international community to meet daily operating costs," the report says.

The Board of Executive Directors of the World Bank (WB) approved additional funding for Ukraine in the amount of $ 1.49 billion, the bank said in a statement on its website on Wednesday night, June 8. The funds will be provided under the project "Support to Public Expenditures for Sustainable Public Administration in Ukraine".

"The funds under this project will be used to pay salaries to civil servants and teachers," the release said.

The new funding is part of a more than $4 billion support package from the World Bank. About $2 billion has already been disbursed to Ukraine.

The analytical department of the British Economist estimated that the war in Ukraine has already led to a loss of $ 1 trillion in global GDP in 2022.

International Aid

The main "donors" of the Ukrainian budget include the EU, Canada, the IMF, Germany, the World Bank, the European Investment Bank, Japan and the UK.

The main donor, as in 2022, will be the United States, whose contribution to cover Ukraine's urgent budget expenditures should amount to $ 18 billion, and $ 6.5 billion for recovery.

The second largest donor should be the IMF, whose assistance is expected to amount to $15 billion. The EU will provide almost $5 billion to cover the budget deficit and more than $7 billion for recovery.

However, hoping for international support in such volumes, it is important to understand what is happening in the global economy and specifically in those countries from which Kyiv expects help.

Russian aggression against Ukraine affects the world through the destruction of supply chains, as well as higher prices for commodities - food and energy, which Russia has turned into weapons. And this is not just a familiar set of words. The figure in question is measured in hundreds of billions of dollars.

Impact of War on Other Countries

According to the report, the Russia's aggression against Ukraine has impacted many regions of the world. According to World Bank analysts, production in Europe and Central Asia will decline by 0.2% in 2022. If the war escalates, regional production could decline even further.

Due to geopolitical tensions, an energy crisis in Europe has become a significant concern. Countries with medium and high dependence on natural gas imports for heat production will suffer the worst punch.

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