It will be hard for Ukraine’s economy to sustain a long war – The Economist

Author

Valery Moiseev

The influential English economic magazine The Economist published an editorial in which it tried to assess the prospects for the Ukrainian economy during wartime.

Ukraine went into the war in good shape, with an economy growing, a population that had not been hit hard by covid-19, good prices for for export goods, a well-supervised banking industry and a government deficit of less than 3% of GDP.

What is happening now? Thanks to the digitised tax system revenues are still coming in smoothly from the parts of the economy that are still functioning, despite Russia’s invasion. Pensions and government salaries are all still being paid, even in areas that are now under Russian occupation. Ukraine’s internet and 3G mobile are, almost everywhere, unaffected. Most businesses are still paying their employees, even if they cannot operate as normal, or at all. Payroll taxes, says Finance Minister Serhiy Marchenko, are down by only 1%.

However, the World Bank has predicted that Ukraine’s GDP will shrink by 45% in 2022. ("Our estimate is 44%," Mr Marchenko grimaces in response to a question from The Economist correspondent). Both estimates are, of course, hugely uncertain, the magazine notes. The reasons for this are the following:

customs revenues, a significant part of the state budget revenues, have crashed to around a quarter of their pre-war level over the lower imports and the suspension of many duties;
military salaries are another big burden, even if weapons and ammunition are being provided free by Western partners;
small and medium-sized businesses are now paying tax on a voluntary basis, though Mr Marchenko says he is impressed at the patriotic way in which they are responding.

It all adds up to a financing gap of around $5bn every month.

Dynamics of Ukraine's GDP, % in annual terms

How to fill that? In part, Mr Marchenko says, by having the NBU print more money. In part, too, by issuing war bonds, on which the government currently is paying around 11% interest, which is less than the inflation rate.

But the main source will need to be foreign. That is why the Finance Minister spends most of his day lobbying foreign governments for help.

U.S. President Joe Biden recently said he was asking Congress to authorize a further $33bn for Ukraine (Congress might even up that number). It is expected that of that, $20bn will be spent supplying Ukraine and other frontline countries with more weapons. Only about $8.5bn is for economic assistance, with the balance for humanitarian aid. "It’s good news, but what will the American package look like, and when will it arrive? We don’t know," Marchenko says.

But the end result of all these appeals is that for the second quarter of this year, Ukraine has so far totted up grants totalling only about $4.5bn, against a fiscal shortfall of $15bn.

Но конечным результатом всех этих призывов является то, что во втором квартале этого года Украина получила грантов на общую сумму около 4,5 млрд долларов против дефицита бюджета в 15 млрд.

This is not sustainable, admits Mr Marchenko, who fears that if the war lasts more than another "three or four months", painful measures will be needed, involving huge tax rises and swingeing spending cuts. The real fear is that what has become in recent years a fairly market-driven, freewheeling economy might see a wave of nationalisations undoing years of hard-fought progress.