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Ukraine's economy is crumbling: How to stop it?

Author : Kateryna Odarchenko

Source : 112 Ukraine

Economic crisis, caused by the coronavirus pandemic, has become the largest economic disaster since the Great Depression of 1929-1930s
17:48, 6 May 2020

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The economic crisis, caused by the coronavirus pandemic, has become the largest economic disaster since the Great Depression of 1929-1930s. According to the head of the International Monetary Fund, Kristalina Georgieva, the IMF predicts a drop in per capita GDP for 170 countries. Analysts and investors from all over the world are trying to at least roughly predict the main macroeconomic indicators in the near future and help market participants in making decisions. The Covid-19 outbreak created three macroeconomic impulses: a global strike on demand, a global strike on supply, and the oil war, which drove market prices to many-month lows. These events will entail a massive depreciation of capital and subsequently structural unemployment. Bank of America analysts expect a drop in global GDP by 2.7%. Previously, they predicted global economic growth of 0.3%. They note that a decline in global GDP of almost 3% is significantly worse than the 2008-2009 recession. Analysts believe that the main reason for the worsening outlook is the lack of effective policy measures to combat coronavirus in developed markets and in some developing countries.

Related: U.S. budget deficit could increase to $3.7 trillion due to coronavirus crisis

Most of all, the new crisis hit developing countries. Ukraine, unfortunately, is included in the list of these countries. According to IMF estimates, about $ 100 billion of foreign investments were withdrawn from these countries - this is three times more than during the same period during the economic crisis of 2008-2009. There is considerable uncertainty regarding the depth and duration of the crisis. Much depends on the epidemiology and effectiveness of containment measures, and also on the development of vaccines, the rate of which is difficult to predict. In the baseline scenario, the IMF stipulates that not only all measures taken to contain coronavirus taken by states will be successful, but, including efforts to prevent large-scale bankruptcy of companies, there will be no loss of jobs and large-scale problems of the financial sector, including a large number of bad loans. A less optimistic scenario - if the pandemic cannot be restrained in the second half of 2020 - the global economy might decline by 6%. And in the event of a shock transition from a pandemic to 2021, the economic decline in 2021 could amount to 8%. Dragon Capital's updated basic forecast for 2020 provides for a 4% drop in Ukraine’s GDP and hryvnia devaluation to UAH 30 per dollar at the end of the year, provided that quarantine measures last until May (the average rate is expected to be at UAH 29 per dollar, then there is a devaluation of about 11% to last year's rate). According to a less optimistic forecast, if quarantine is extended for a longer period, GDP may fall by 9%, and the hryvnia will fall in price to 35 UAH per dollar. However, Dragon Capital's forecast is more like someone’s fantasy than real data.

Related: Ukraine’s economy to reduce by 5% due to pandemic, global crisis

Almost 156,000 Ukrainians received an unemployed status. The number of official unemployed is approaching 500,000. As of May, the number of registered unemployed in Ukraine increased by 48%, the press service of the State Employment Center reports. According to estimates of the Ukrainian Chamber of Commerce and Industry, the unemployment rate today is 13.7-15.4%. This is the highest rate in the last 15 years. In total, about four million people are employed in the “stopped” industries. Also, in most cases, the job was lost by those employees who were unable to regularly get to work due to the stop of passenger traffic. The leaders in unemployment among the regions are Dnipropetrovsk, Kharkiv, and Lviv regions.

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Prime Minister Denys Shmygal, in turn, said that the Cabinet of Ministers would soon introduce a phased business support plan. He noted that first of all, help is needed for micro and small businesses, which they will help in the first place. According to him, both at the government level and at the president’s daily meetings, work is continuing on an action plan for all sectors of the economy, including for the development of the industry. He emphasized that a program for refinancing loans for businesses at 0% with a deferred repayment of the loan body is already in place, work is underway to introduce the New Money program for small and medium-sized businesses.

If the crisis lasts only one quarter and we can return back to normal, then this short-term period will be financed by the governments of the countries by increasing the debt, which is scheduled for many years.

In many ways, governments and central banks will take on the role of saviors, while the other part will be taken over by international financial organizations. Many world central banks work like that, representing the liquidity of the banking system, and the banking system, in turn, helps people. The state partially guarantees these loans. So, on the one hand, if a certain number of people do not repay loans, the state will have to cover, but it will not be 100%. As a result, the possibility of using the banking system to overcome the crisis will increase the ability of the state.

Related: How to prevent the food crisis in Ukraine during epidemic

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