Possible default, inflation, and food prices: what’s in store for our wallets in the near future?
3 July 2024 20:11
ЕКСКЛЮЗИВ
A month before the default, a financial crisis is looming in Ukraine, and Ukrainians should prepare for a rise in food prices – these are the messages being spread by Western and Ukrainian media in recent days. “Kommersant Ukrainsky looked into what Ukrainians should really be preparing for in the next few months and what threats exist for the national economy.
The day before, Ukraine’s Finance Minister Sergiy Marchenko stated that the war is causing great damage to Ukraine’s economy. The country’s GDP is a quarter lower than before Putin’s invasion, the central bank is running out of foreign exchange reserves, and Russia’s recent attacks on critical infrastructure have worsened growth forecasts.
At the same time, The Economist cites the belated decision of the US to provide a $60bn financial aid package to Ukraine, the cash crisis and the end of the moratorium on payments to private foreign bondholders on 1 August.
“Ukraine has one month to avoid default. The IMF wants Marchenko to negotiate debt relief, but now the deal looks unlikely. If Ukraine defaults, it could undermine investor confidence in Western commitments. In the long run, this could spell disaster for the country’s recovery.” – The Economist
Is it not so scary to be in default?
The topic of the Ukrainian economy defaulting repeatedly surfaced even in pre-war times. In particular, a well-known businessman, Ihor Kolomoisky, considered such a scenario to be almost a panacea for all Ukraine’s ills. In the face of Russian aggression, Ukraine’s external debt obligations have increased many times over compared to the period before 2014.
“Ukraine needs to demand debt cancellation and instalment plans, because we have a classic force majeure,” Taras Zagorodnyi, managing partner of the National Anti-Crisis Group, explains to [Kommersant]. And defaulting during the war, he says, is not unusual at all.
“It’s not so scary that Ukraine is at war and, for example, defaults. We now spend a third of our budget on debt repayment. This is absolute nonsense in times of war,” Taras Zagorodniy
Suspension of debt payments or at least restructuring is something the Ministry of Finance and the NBU should be working on, Zahorodniy says. After all, the country cannot pay and fight at the same time. All resources should be directed to defence.
Ukraine is among the three debtors of the International Monetary Fund.
- Argentina – debt of $32 billion (5.3% of the country’s GDP)
- Egypt – debt of USD 11 billion (3.1% of the country’s GDP)
- Ukraine – debt of USD 9 billion (4.7% of the country’s GDP)
Other major debtors include Pakistan, Ecuador, Colombia, Angola and Kenya.
Despite the fact that Ukraine’s public debt to credit institutions and other countries has already reached a record level, the IMF estimates that by the end of this year it will reach the lion’s share of the country’s total GDP – 94%. This is stated in the Financial Monitor report. Although this forecast is significantly more positive than the previous release of IMF analysts, in October 2023, they predicted even 98.6% for 2024.
How the difficult economic situation will affect every Ukrainian
By the end of 2024, the inflation rate in Ukraine will reach 8.2%, according to the NBU. This is less than experts predicted at the beginning of the year. Back then, the estimated inflation rate was 8.6%. So, there is a chance that the actual rate will be even lower. Economist Oleg Pendzin explains for Kommersant Ukrainsky that if we separate core inflation from general inflation, which includes government price regulation, there will be no sudden rise in food prices.
“The situation is very simple. Summer is a period of deflation. We have a whole list of products that are formally cheaper than a year ago. Eggs are minus 35%. Oil – minus 15%. Sugar – minus 10%. Flour – minus 3%. But there are products that are more expensive. Meat – plus 7%. Milk – plus 5% per year. Bread – 1% per year. That is, the food basket itself has grown by less than 1% over the year,” Oleh Pendzin
“Yes, the rise in electricity and water prices will add to our inflation. However, despite the fact that the National Bank expects inflation to rise, from 5 to 8% in 2024, the situation is predictable. There will be no surprises for the population.
In 2025, we need to prepare for a worse situation – economist
The situation will be worse in 2025 – inflation is projected at 10%. And prices are only one side of the problem. Much depends on the income of Ukrainians, says Oleg Pendzin. For example, if inflation has risen by 10% and your social standards have not changed, you will live 10% worse. The economist adds that this year the income situation is more or less normal. The minimum wage has been doubled, the subsistence level and social benefits have been indexed, but 2025 is in doubt.
“Against the backdrop of 3.3% inflation, our real incomes have grown. But when we look at 2025, when inflation is forecast at 10% and real incomes have not grown, the situation will be worse,” Oleg Pendzin said
As a reminder, according to the budget declaration for 2025-2027, the government has no plans to raise the minimum wage and subsistence minimum, which are the basis for social benefits. The document states that the projected amounts of the subsistence minimum and the level of ensuring the subsistence minimum for 2025-2027 are set at the level of 2024. The minimum wage will be UAH 8,000.
Author – Anastasia Fedor
