The performance of the Ukrainian economy continues to significantly exceed expectations thanks to uninterrupted inflows of international financial assistance and growth may exceed 5% this year, according to the economic forecast of the Investment Capital Ukraine financial group released on July 25.
On the demand side, GDP growth is supported by household consumption. A gradual increase in real household incomes, coupled with a significant rise in the share of income spent on current consumption, make household spending a powerful driver of economic recovery.
Inflation is decelerating rapidly and will decline to 10.5-11.5% by the end of the year due to a combination of favorable factors. It will continue to remain in the range of 10-13% through 2024.
The good prospects for further easing of inflationary risks leave the National Bank of Ukraine (NBU) no choice but to start easing monetary policy as early as July, analysts believe. ICU expects the key policy rate to be cut to 20% by the end of the year.
A huge foreign trade deficit will remain a key economic risk in the next few years, but international loans and grants should be sufficient to offset this deficit. International assistance has also boosted the NBU’s reserves to their highest historical level, and they will continue to grow in the second half of 2023 and in 2024.
The ICU notes that the regulator is becoming increasingly inclined to introduce some flexibility in exchange rates to allow market forces to help reduce external imbalances.
“We believe the NBU will be prepared to move away from the fixed-exchange-rate regime only in late 1Q24, and the official exchange rate will remain unchanged at UAH36.6/US$ till the end of 2023,” the forecast says.
The report notes that the implementation of the state budget is generally on track, and external loans and grants remain the only source of financing the fiscal deficit.
The ratio of public debt to GDP will approach 90% by the end of the year. However, the benign debt repayment schedule means that the high level of debt will not put significant pressure on the liquidity of public finances in the next few years.