The IMF updated the negative scenario for Ukraine in the event of an intense war
The International Monetary Fund (IMF) improved Ukraine’s GDP forecast for 2024, but worsened it for the following year.
This is reported by Interfax-Ukraine.
Economic decline
In the previous scenario, the IMF estimated a possible decline in the economy in 2024 at 4%, but assumed an end to the decline and zero growth in 2025. Now the IMF believes that under a negative scenario next year, Ukraine’s economy will shrink by another 1%. The shortage of energy resources will lead to a decrease in production in Ukraine in 2025, which will cause a decrease in GDP by 1%.
The IMF raised its estimate of the deficit of GDP from 7.9% to 8.6% this year and from 1.4% to 1.7% next year, while in the baseline scenario these indicators are projected at 5.8% of GDP and 6.9% GDP respectively. As for inflation, its forecast remains: 10% in 2024 and 8.5% next year. In the basic forecast, 8% and 7%, respectively.
Imbalances in the foreign exchange market will surface again and will last longer due to the deterioration of export indicators, the IMF notes. This will lead to a higher devaluation of the hryvnia before it approaches the basic trend.
Risks due to prolonged war
The IMF report noted that short-term external financing risks have eased after the United States approved a budget and military aid package.
However, the duration and intensity of the war represent the greatest risk. War may require additional costs for conducting operations, in particular through planned mobilization. A longer and more intense war, in the absence of additional external support, could cause a reduction in government aid or the accumulation of debt for expenditures, which would lead to a deterioration of the IMF’s forecast.
Given the severity of the upheavals, the Ukrainian authorities may have to take additional non-traditional measures. For example, it could be an additional personal income tax or an additional tax on luxury goods or excise duties, as well as the mobilization of domestic bond financing on an even larger scale.
Administrative measures may be applied to banks regarding the possession of Bonds of domestic government loans in a stipulated amount or a minimum period. Secondary purchases of government bonds by the NBU can also support the primary market, according to the IMF. You can consider instruments such as inflation- or exchange-rate-linked bonds.
