IMF forecast: Damage to Ukrainian economy due to coronavirus pandemic

Author : Anna Peshkova

Source : 112 Ukraine

The economic development of the country or the health of the people? The authorities of countries around the world are faced with such a difficult choice, and some are trying to sit on two chairs. But, whatever the actions of countries to save their economies during the coronavirus would be, their well-being will inevitably decline. Analysts have to rush to rewrite their forecasts for 2020
20:47, 29 April 2020

Open source

After discussions with epidemiologists and infectious disease specialists, an updated forecast was published by the International Monetary Fund. According to it, the global economy will fall by 3% after last year's growth of 2.9%. This could be the worst fall since the Great Depression of the 1930s. The Ukrainian economy will fall by 7.7%.

What do such indicators mean, and how will countries of the world, according to the forecast of the fund, come out of the crisis?

How much will the Ukrainian economy lose

If GDP grows, the country produces more goods and services, that is, the country's total income increases and its own inhabitants become richer. A few months ago, the Ukrainian economy had every chance to set a five-year growth record. The government of Honcharuk, however, wanted a 40% increase in the country's GDP growth.

But the coronavirus destroyed all plans. The IMF suggests that our economy will show -7.7%. Thus, experts believe that the crisis will be more severe than in 2014. Then the economic decline amounted to only -6.6%.

At the same time, a much more optimistic forecast is laid down in the new budget of the country: -3.9%. And here the question immediately arises: while the guarantor has not signed the document, is it worth it to send it for revision?

The World Bank, however, cited approximately the same figure 5 days before the IMF publication, although their forecasts usually do not differ too much. Where is the truth?

Experts unanimously say that both institutions are overly optimistic. Banker Olexander Savchenko in a comment to shares a much more frightening assessment of the economic decline at 15%. Economic expert Oleg Pendzin calls the figure at 10%.

“These 7.7% are extremely optimistic. In my opinion, there will be about 10%. I don’t comment on the figures of Shmygal - this is ridiculous. Last year, the industry fell by 5.5%. Nobody even heard about coronavirus then. Agriculture grew by 0.8%. Retail trade and services showed growth, and this was largely due to remittances of our workers abroad. This year the industry will fall further: estimates are about -10%. Also this year we will face drought. The only economy driver remains retail trade, which share in these conditions will not rise ", explains Pendzin.

And an expert at the Growford Institute, financial analyst Oleksiy Kushch, recalls that the economy falls by 4% in just one month of quarantine. Plus, we will lose another 5% due to lower commodity markets. So those 7.7% that are called in the fund are, most likely, what we have already lost as of today. At about this point, our country will stop, unless a vaccine against coronavirus is suddenly invented. In fact, things can turn out to be much worse.

No less than the growth or decline of GDP, the inflation indicator is important, because both people and enterprises in the conditions of high and unpredictable inflation spend earned money as quickly as possible, invested them not in development, but in currency.

Related: IMF: Amendment of legislation on NABU may create problem in cooperation with Ukraine

Last year, inflation was 4.1%. This was the lowest figure in the past 6 years. And at the beginning of this year, the indicator stopped at 2.4%. As a result, according to the IMF, inflation will be 7.7%.

The most anticipated in the IMF forecast is the unemployment rate, since it affects the pockets of Ukrainians. For many countries, forecasts have not been formulated, but in Ukraine every tenth person will remain without work, the fund suggests. In 2021, unemployment should fall to 9.3%.

For comparison, in Germany the estimated unemployment rate is almost 4%, in Russia - almost 5%. Lower than in Ukraine indicators are predicted in the Czech Republic and Poland. So, if the experts are right, it is quite possible to increase the outflow of our people to these countries. Higher unemployment will be in Italy, Portugal, Turkey and Spain (in the latter it will reach 20.8%).

However, there are also big doubts about this forecast, since as of today, the unemployment rate is 13.7-15.4%, according to the Ukrainian Chamber of Commerce and Industry. And this is only a “white” wage fund, and there is no talk of unofficially employed people.

Apparently, the IMF does not take into account the fact that in our country the authorities are extremely ineffective in combating unemployment. Prime Minister Shmygal, for example, promises to create 500 000 new jobs, but experts say that this is a fantasy.

Oleksiy Kushch explains this forecast by the fact that the fund sees from the current situation in the country and does not look at the possibility of additional problems, that is, the snowball that is usually encountered in crises in the Ukrainian economy. In addition, there are too many unknowns: duration, depth of crisis. Even those countries that are gradually quarantining can return tough restrictions. Any forecast at this stage is very conditional, and most likely, it was reduced back in March. As for the World Bank forecast, experts suggest that it will be updated and correlated with the IMF forecast.
"This forecast assumes an assessment of the current situation with extrapolation of factors that simulate the situation today. Risks to be activated in the summer or fall may not play a role after some time. It’s like the joke about dinosaurs: they are either alive or not, that’s 50% to 50%,”says the analyst.

As for the dollar rate, the fund will have to provide a separate forecast. But the analytics, presented by the fund itself, should push panic moods and, accordingly, the devaluation of the hryvnia.

What will happen to other countries

The world has long been on the verge of an economic crisis, and the coronavirus has accelerated the recession. According to the IMF forecast, the global economy this year will drop by 3%. Bloomberg has roughly the same rating. But UN experts are more optimistic - they speak of a fall of only 1%.

Although the fund’s forecasts for Ukraine cannot be called accurate, they are indicators in terms of comparison for other countries. Brazil has a projected GDP growth of 5.3%. Russia has 5.5%. The IMF predicts a 5.9% fall in the United States of America, although many experts give more pessimistic forecasts.

Canada, Britain, Mexico, according to the fund, will have worse indicators. Among the leaders of the fall are Germany (7%), France (7.2%). Only then comes Ukraine with an indicator of 7.7%. Paradoxically, Latvia is ahead of it with a decline of 8.6%. And, of course, the country's leaders are the foci of coronavirus in Europe: Spain with an 8% drop and Italy with 9.1%. Interestingly, Italy is ahead of Greece with -10%.

Experts believe this ratio is quite reasonable. Those countries that live on tourism and the restaurant business will suffer the most. A lot of money will be lost on canceling the screening of films.

The most significant drop in the economy should show Venezuela (-15%). It seems that the coronavirus will affect the country positively: according to the IMF forecast, the country will face a 15% decline after 35%. Economists have different views on this. Perhaps the reason is that the country has been falling for too long. This crisis is an opportunity to beg for help. Someone sees the reason that the United States is buying Venezuelan oil, while someone even suggests the possibility of a mistake.

If everything is clear with the leaders of the economic depression, then why is the fall in Ukraine more significant than in a number of neighbors?

Our country has a simplified economy profile. This is a weak land of raw materials, and the last 10 years, the complexity of the Ukrainian economy is only declining. Ukraine does not have a capacious market: there is only a focus on abroad, not without benefits for the oligarchs. We do not produce the final product that citizens use. But on world markets, imports are falling in the era of crisis, and Ukraine feels this.

By comparison, situation in China and India will not be so sad. These countries, according to the IMF forecast, will continue to grow by 1-1.5%.

“The trends of this crisis will differ from the crisis of 2009. Then, endogenous models worked well, that is, economies with a high market share, with a developed services sector that is easy to stimulate through government injections and which does not depend on the external environment. Those same countries, which worked for export, fell. This year we are seeing a two-factor fall model. There is a fall in the financial markets and a pandemic that hit the insurance domestic segment of the economy. Therefore, now countries that have balance of the internal market and external exports, like China and India will win", says Kusch.

Savchenko, however, is not so optimistic about China. He believes that the country's economy will actually fall by 0–2%. In addition, he emphasizes that the country is still losing money: China's growth was previously 6.5%.

How will we get out of the crisis

Although the IMF has revised its forecast for GDP for the worse, it is still extremely optimistic about the economic recovery. The fund believes: if in 2008 the crisis arose due to the collapse of financial companies and sharp shocks in the financial market. Now the administrative stoppage of production has become the reason. Therefore, supposedly, the recovery will be quick. Countries will try to actively build up their own economic processes.

Poland is predicted to exit the recession at the beginning of next year, Great Britain - in the middle, Germany - already in the third quarter of this year. Latvia after a fall of 8% predicts GDP growth of 8.3% - the largest among the Baltic countries. IMF predicts growth of 3.5% in 2021 in Ukraine. This can be compared with increase after the 2014 crisis.

Most likely, in practice, everything will not be so rosy. The rebound in the global economy in 2021 will be weaker. In a number of countries, including Ukraine and Russia, everything may turn out to be worse. There are too few incentives for economic growth.

Related: In 2020, Ukraine expects to receive two tranches from IMF, - Minister of Finances

If the Americans are going to pour 2 trillion dollars into the economy, the Germans - up to a trillion, then Ukraine allocated only 2.2 billion euros to fight against coronavirus. You need to understand that this money is not a direct help to business. So, Ukraine, most likely, will come out of the crisis much later.

Savchenko believes that next year we will only go to 0%, which is already quite good after a fall of 15%. Since we have an inert economy, in 2022 growth can be 1-2%.

The IMF expects that Bangladesh, Brunei, Vietnam, Egypt, India, Laos, Nepal, Niger, Rwanda, Senegal, Tajikistan, Tanzania, Togo, Turkmenistan, Uganda, Uzbekistan, the Philippines, the Central African Republic, Eritrea, Ethiopia, and South Sudan will grow.

"In Africa, no one will pay attention to the pandemic - panic is 99% artificial. Countries will continue the primitive export of coffee, bananas," says Savchenko.

But the list of countries with planned GDP growth is suspiciously largely overlapping with the list of countries to which the IMF will write off debts. This is, for example, Guinea, Madagascar, Malawi, Mali, Mozambique, Nepal, Niger, Rwanda. In total, the debt burden will be eased for 25 countries due to the trust fund. But the most important thing is that there is no Ukraine among them. Why did this happen?

Selective Fund Support

"The IMF is a politician. Their activity is accompanied by the conclusion of memoranduns that are political in nature. Therefore, I have always said that both the IMF and the World Bank are not just financial, but financial and political organizations. The IMF has announced a list of countries that will receive financial support such as Afghanistan, Angola. Ukraine has not been included in this list, that is, we can still squeeze something out of us, "says Oleg Pendzin.

The economist is sure: if the fund wrote that our economy would fall by 15%, it would be difficult to justify why the country was not included in the list of those the fund forgives loans to. Therefore, it is important to say that everything will be bad in 2020, but then it will become good, and Ukraine will be able to pay off its debts.

And financial analyst Alexei Kushch believes that the negotiator specifically has a serious impact.

“If the Minister of Finance of Afghanistan arrives in a jacket made of hard cloth, the IMF looks at him and realizes that this is a poor country, despite the predicted economic growth. When Ukrainian politicians arrive in Brioni, have accounts in world banks, 200-300 million euro mansions, the heads of representatives are very likely to think: sell 20% of your assets and save the economy. This is a key reason why we are not given money in this format. The IMF does have programs for poor countries, but for those like Ukraine, there are rational relations", the expert explains.

Related: Zelensky instructs Saakashvili to negotiate with IMF

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