NBU names main risks for Ukrainian economy: details
31 October 2024 16:24
In the near future, the Ukrainian economy may face higher taxes, high inflation, and the negative effects of migration. Such a forecast was made by NBU Governor Andriy Pyshnyi on October 31 during a press briefing on monetary policy decisions, "Komersant Ukrainian" reports.
He said that the National Bank of Ukraine (NBU) had decided to keep the discount rate at 13% to maintain control over inflation.
“In recent months, inflation has been growing faster than expected, reaching 8.6% year-on-year in September. This acceleration of inflation is explained by the rise in food prices due to poor harvests and higher production costs,” Pyshnyi explained.
There is also pressure on prices due to increased production costs and the weakening of the hryvnia. Inflation is expected to reach 9.7% by the end of 2024, but will begin to slow down in the spring of 2025.
At the same time, Ukraine’s economy continues to grow, but is limited by the impact of the war, attacks on energy infrastructure, and a shortage of labor. Real GDP grew in the second and third quarters of 2024, allowing the NBU to raise its real GDP growth forecast to 4%.
How the war with Russia will affect the domestic economy in the future
The NBU says that the key risk to inflationary dynamics and economic development remains a full-fledged war. Continued hostilities could lead to a further decline in economic potential due to the loss of people, territory, and production. The speed of economic recovery will depend on the nature and duration of the war. One of the consequences of Russian aggression could be additional budgetary needs to maintain defense capabilities and possible tax increases, which could increase price pressure.
Other risks include damage to infrastructure, which would limit economic activity and affect prices, increased negative migration trends, and labor shortages. In addition, geopolitical tensions are likely to increase as a result of the war in the Middle East, electoral cycles, and Russia’s attempts to form a coalition against the democratic world.
Therefore, the National Bank of Ukraine (NBU) has decided to keep the key policy rate at 13% in order to maintain the stability of the foreign exchange market, bring inflation to the target and control inflation expectations. Due to the volatility of inflation and pro-inflationary risks, the NBU decides to be cautious in its interest rate policy and take measures to stabilize the foreign exchange market.
What positive developments has the NBU noted in the Ukrainian economy?
According to Andriy Pyshnyi, the government and the NBU will receive significant external support, which will enable them to finance expenditures, cover the budget deficit and maintain the stability of the foreign exchange market. In October, the IMF disbursed USD 1.1 billion to Ukraine, and more than USD 15 billion is expected to be disbursed by the end of the year. Thanks to this external assistance and domestic market funds, the government and the NBU will be able to cover the budget deficit without issuing new debt.
The NBU also expects international reserves to increase to USD 43.6 billion by the end of 2024 and to USD 41 billion by the end of 2025. International support for Ukraine will continue, with total international financing expected to reach USD 41.5 billion in 2024 and USD 38.4 billion in 2025.
The NBU’s favorable monetary policy, improved energy sector, and higher harvests are expected to contribute to a slowdown in inflation in the future. The NBU expects inflation to decline to 6.9% by the end of 2025 and reach the 5% target in 2026. All these measures and support will help to maintain the stability of Ukraine’s economy and manage inflation expectations.
