Poroshenko and Groysman want to boost Ukraine's GDP per capita

Author : Yuriy Hryhorenko

Source : 112 Ukraine

Ukrainian top officials talk about plans to achieve 5-7% GDP growth. Poroshenko promised to do everything possible, and PM Groysman associates such growth with the development of digital technologies
14:49, 24 April 2018

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Obviously, the officials became more optimistic after improving estimates of GDP growth in 2017. State Statistics Service has revised the indicator of GDP growth in the IV quarter upward - from 1.8% to 2.2%, resulting in an annual increase of 2.5%. In turn, the National Bank (NBU) estimated the growth of real GDP in 2017 at 2.1%, although in early July 2017 it worsened its forecast from 1.9% to 1.6%. That is, there is an obvious improvement in the development of the economy in the IV quarter. The Ukrainian authorities use every chance for optimism to show at least a minimal advantage in the Ukrainian “sea of the misfortunes.” It should be noted that according to official estimates, 1% of GDP was "lost" as a result of the blockade of trade with Donbas.

Current forecasts of GDP growth in the current year and subsequent periods are quite optimistic, and they are close to the lower limit of expectations of the president and the prime minister. According to the forecasts of the NBU, in 2018 economic growth will accelerate to 3.4%, and in 2019-2020, it will slow down to 2.9%. According to the World Bank, Ukraine's GDP will grow by 3.5% in 2018 and by 4% in the next two years. The Cabinet expects GDP growth at 3% in 2018, 3.6% in 2019, and 4% in 2020. According to the NBU, Ukraine's real GDP in the 1st quarter of 2018 grew by 2.3%.

Related: S&P improves forecast of Ukraine's GDP growth rate in 2018

Experts note that it is quite possible to achieve the stated rates of development. "If we analyze GDP growth for the entire period of Ukraine's independence, it becomes clear that the 5-6% index is absolutely real. After the 2008-2009 crisis, when GDP fell by 14.8%, in 2010 and 2011 we observed growth in 4.2 and 5.2% respectively. In comparison, after the crisis of 2014-2015, when GDP fell by 6%, and then by another 10%, Ukraine managed to reach only 2.3-2.5% in 2016-2017. Now, like 9 years ago, we are also recovering from the crisis, so economic growth may well reach 5-6%," Igor Kozhevin, the chief financial officer of First Ukrainian International Bank (FUIB).

For the last 20 years, China's economy has been growing at no less than 6% of GDP per year. Even the 2008 crisis did not greatly affect the GDP growth rate, which decreased from 14.2% to 9.7%. Ethiopia, Vietnam, India, Malaysia, Bangladesh, Cambodia, Laos, Senegal and several other countries in Asia and Africa added more than 5% to their economies in 2017.

In turn, the GDP of the Eurozone in 2017 increased (according to preliminary data) by 2.5%, and the growth rate was the highest since 2007. While the growth of the world economy last year, according to the IMF, was 3.7%.

Related: IMF saves forecast of Ukraine's GDP growth at rate of 3.2 percent

Concerning the rate on the digital economy, the prospects for this direction are great, but in Ukraine its development is slow. Digital measures are not a strong enough argument for the whole economy. The introduction of 3G and 4G improves the conditions for the operation of a number of businesses (e-commerce, Internet services of things, cloud technologies, fintech and agrotech, telemedicine, streaming music and video services, online broadcasts, online games and mobile advertising), but these are point improvement. Electronic document management alone can only save paper, and the introduction of electronic services has little impact on the frequency of contacts between the average Ukrainian and the official and the level of corruption, while open registries comprehensively improve the level of information in business and minimize the number of cases of forgery of documents. But this is not enough to form the prerequisites of 5-7% of GDP growth.

Of course, without sufficient grounds for that, the Ukrainian economy cannot grow significantly. The most important factors affecting the change in the parameters of the economy are changes in net exports (imports), consumer spending, and gross accumulation. According to the National Bank of Ukraine, the main factor of economic growth in 2017 was domestic demand.

Despite the fact that 5-6% growth is something usual for our economy (especially with a low base of comparison), its development is uncertain. This is due to doubts about the dynamics of revenues from the export of goods and services, as well as a sufficient level of investment. 

Related: World Bank confirms Ukraine’s GDP growth forecast at 3.5% for 2018

According to Kozhevin, in order to achieve GDP growth of 5-6% or more, either external factors should be positively influenced in the form of higher prices for agricultural products and metals, or the arrival of foreign investment through improving the investment climate.

The most realistic option for accelerating economic growth may be the arrival of a large volume of foreign investment in the Ukrainian economy. If we manage to carry out real reforms, primarily anti-corruption and judicial, and pass laws on the protection of investments and creditor rights, this will allow external investors to begin to actively consider long-term investments in Ukraine. Such experience of the arrival of investments in 2006-2008 confirms that the Ukrainian economy will be subject to a significant effect even from relatively small investments. If large companies choose Ukraine to locate production facilities, this can significantly improve the economy and development of small and medium-sized companies in Ukraine.

Related: What better says about Ukraine's economy: dollar rate or inflation?

The Cabinet associates the probability of significant economic growth with deregulation, in particular, with joining the TOP-50 rating of Doing Business in 2018. However, according to the results of rating in 2017, Ukraine took 76th place.

At the same time, it is necessary to take into account the high vulnerability of the Ukrainian economy from external factors, as well as potential additional payments in favor of creditors, which the country undertakes to carry out with a certain economic growth (terms of the restructuring of Eurobonds from 2015).

Related: Ukraine to increase pre-war level of GDP until 2021

For his part, Olexander Okhrimenko, the president of the Ukrainian Analytical Center, connects economic growth with the opening of the land market. "If you start the land reform and allow large TNCs to buy up land, then the GDP growth will reach 5-6% per year. Without the land reform, there will not be growth. The economy needs drivers, and the allegedly anti-corruption or pseudo-reforms do not work," the expert assures.

The comparatively small size of our economy is a simplifying moment for achieving high rates of economic growth. In order to substantially increase the economy, we do not need any "miracles", but we need to pass the path chosen by the countries of Eastern Europe.

Related: Termination of economic cooperation with Russia makes Ukraine stronger, - Groysman

"As the economy of Ukraine is small, external factors are necessary to achieve rapid economic growth: for example, if conditions for the growth of prices for products exported by Ukraine (agricultural products and metals) are formed on world markets, this will lead to temporary economic growth. Only if prices for oil and gas are preserved, which make up the bulk of imports for energy supply, in this case, the situation depends on geopolitical changes and depends little on Ukraine,"  emphasizes Kozhevin.

Quite a fantastic option, which, however, is not meaningless is a revision of the methodology for calculating indicators. It should be noted that the latest example of the revision of the methodology showed a significant "potential". Thus, the National Bank revised the methodology for estimating the volume of remittances of labor migrants to the country in terms of proceeds through informal channels. As a result, this indicator in 2017 increased from 7.3 billion dollars to 9.3 billion dollars, and in 2016 - from 5.4 billion dollars to 7.5 billion dollars.

This column does not necessarily reflect the opinion of the editorial board or 112.International and its owners.

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