EBRD forecasts Ukraine’s economy to grow at 3 per cent in 2024

Ukraine’s economy is expected to grow by 3.0 per cent in 2024, according to a report by the European Bank for Reconstruction and Development (EBRD) published today. The figure is down on the 5.3 per cent seen in 2023, which halted a sharp earlier fall in growth in 2022 following Russia’s invasion.

In its flagship Regional Economic Prospects (REP) report, the EBRD said that, while 2023 growth in Ukraine – an agriculture superpower – had been supported by a record harvest, recent war damage to the country’s electricity infrastructure was among factors seen likely to constrain further growth in 2024.

The Ukraine forecast is in line with the EBRD’s overall 2024 projections of 3.0 per cent output growth across the regions where it works (central and eastern Europe, Central Asia and the southern and eastern Mediterranean, or SEMED). The overall figure is up from 2.5 per cent in 2023, despite challenges stemming from global geopolitical tensions, including increasing limitations on trade. Growth in the Bank’s regions is projected to pick up further in 2025, to 3.6 per cent.

In Ukraine in 2023, the economy was boosted not only by bumper crops but also increased defence spending, which supported domestic demand while net exports continued to decline. Other supportive factors included the Ukrainian authorities’ success in restoring electrical supply after the previous winter’s Russian attacks on civilian infrastructure, and the resilience and adaptability of Ukrainian business.

Timely external financing in 2023 was a further stabilising factor, helping to reduce inflation to target levels of around 5 per cent. This included a 48-month extended arrangement under the Extended Fund Facility (EFF) for US$ 15.6 billion, whose third review was approved by the IMF Board in March 2024, as well as US$ 42.5 billion from donors and international organisations, including US$ 12 billion in grants. This lifted official foreign reserves to record levels as public debt surged to close to 90 per cent of GDP.

However, in 2024, the prospect of a prolonged war of attrition and renewed doubts about external financing for this year, which persisted for several months before being resolved, have raised new challenges. Limited domestic demand, labour shortages and insufficient investments are also among factors that will likely constrain growth prospects.

On the positive side, a new Ukrainian Black Sea export corridor along the coastline has been opened, removing some of the wartime uncertainty about the safety of using the Black Sea to export Ukraine’s vast offerings of agricultural produce and other bulk good such as metals and ores.

After a slow start, this corridor’s usage has been picking up, boosting not only agriculture but also the metal industry and mining, which have been among the hardest hit industries over the last two years. A recovery in exports and higher domestic military production will likely generate economic growth of 3 per cent in 2024, accelerating to 6 per cent in 2025. However, risks remain high, in particular related to the destruction of port and electricity infrastructure.

A region-wide forecast

The EBRD report, entitled “Taming inflation”, showcases an easing of inflationary pressures across EBRD regions relative to last year, which was marked by economic slowdown due to high energy prices resulting from the war on Ukraine and post-Covid recovery.

The report describes how geopolitical tensions are impacting the economies where the Bank operates, leading to a rapid fragmentation in trade and increased defence spending, while eroding the peace dividend – the economic benefit resulting from a reduction in defence expenditure and a subsequent reinvestment of funds in the civilian economy.

While growth across the Bank’s regions is expected to accelerate, the forecast is slightly below last September’s projections, with a downward revision of 0.2 percentage points.

As energy and food prices have moderated since 2022, inflation in the EBRD regions fell to an average of 6.3 per cent in March 2024 from a peak of 17.5 per cent in October 2022. While this drop was quicker than expected a year ago, inflation remains two percentage points above pre-pandemic levels. This pattern mirrors trends in advanced economies, where inflation has declined but remains above central banks’ targets. The forecast notes slower disinflation in EBRD countries with larger budget deficits and weaker macroeconomic frameworks.

“While disinflation has been faster than expected, inflation in some of our countries remains high,” said Beata Javorcik, the EBRD’s Chief Economist. “The outlook is subject to significant risks, particularly from the escalation of geopolitical tensions and their unwanted economic effects. While the current shifts in trade and investment relationships may benefit some individual economies, let’s not forget that globally, geopolitical fragmentation leads to inefficiencies and higher volatility.”
Source: European Bank for Reconstruction and Development (EBRD)