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Ukraine economy to contract more than 35% this year as war continues, IIF says

Ukraine’s economy is expected to shrink by more than 35 per cent this year because of Russia’s military offensive, with its fiscal gap expected to reach between $3 billion and $10bn a month, the Institute of International Finance said.

As a result of the dip in economic activity, war-related tax cuts and additional expenditure for the military campaign, government revenue will fall by nearly 50 per cent, the IFF said.

The international community’s commitments of $6bn so far will “certainly fall short”, it said.

“The economic impact of the war will be dramatic, even though the magnitude is set to remain unclear for some time,” said Elina Ribakova, the IIF’s deputy chief economist, and Benjamin Hilgenstock, an IIF economist, who jointly wrote the report.

This week, the World Bank projected that Ukraine’s economy would shrink an estimated 45 per cent this year because of the conflict.

The magnitude of the contraction will depend on the duration and intensity of the war, the lender said.

Ukraine’s Ministry of Finance expects the economy to contract by as much as 40 per cent this year.

The repercussions of the conflict are also being felt globally, especially in the food sector, because Ukraine is one of the main exporters of important staple food including barley, maize, vegetable oils and wheat.

Authorities have restricted exports of critical items such as barley, beef, buckwheat, rye, salt and sugar, while many other products now require licensing.
The heads of the World Bank, the International Monetary Fund, the UN World Food Programme and the World Trade Organisation called for urgent action on the food security challenge on Wednesday.

“The threat is highest for the poorest countries with a large share of consumption from food imports, but vulnerability is increasing rapidly in middle-income countries, which host the majority of the world’s poor,” they said.

For each one percentage point increase in food prices, 10 million people are thrown into extreme poverty worldwide, the World Bank estimates.

The UN chief also called for immediate action on Wednesday, saying the world is on the “brink of a perfect storm”. “We are now facing a perfect storm that threatens to devastate the economies of developing countries,” said UN secretary general António Guterres in a note by United Nations Conference on Trade and Development (Unctad).

“Two of the world’s breadbaskets, Russia and Ukraine provide around 30 per cent of the wheat and barley we consume,” Unctad said.

The IIF also said that the Ukraine war was exacerbating the global food security crisis.

“With world food prices at multi-decade highs, we worry about global food security,” the report said.

“The war poses an immediate risk to the 2022 harvest as the country could miss the sowing season, which should already have started.

“The Ukraine crisis’s geopolitical ripple effects also weigh on Russian exports, and we expect the situation to be most challenging for countries in Mena [Middle East and North Africa] and Sub-Saharan Africa.”

Ukraine’s exports in March fell by 50 per cent monthly to $2.7bn and imports by 70 per cent monthly to $1.8bn, according to Ministry of Economy figures.

The key near-term challenge before Ukraine is budget financing, the IIF said.

Reserves of the National Bank of Ukraine (NBU) have remained “stable” since late February but exports will be subdued for a considerable amount of time, it said.

Most of the Ukrainian ports remain closed and the country’s rail and road infrastructure is being used for other emergency purposes.

“Authorities currently estimate a monthly financing gap of at least $3bn, with the higher end of the range of possible outcomes at $10bn,” the report said.

“The key driver is lower revenues … and a number of war-related measures. Even under the most optimistic assumption of a $3bn financing gap per month, currently committed external funding would only last until the end of April.

“We are worried about a growing external financing gap.”

The World Bank is preparing a $1.5bn support package for Ukraine to ensure the continuation of essential government services in the country, it said on Tuesday.

Through the International Finance Corporation, the lender is also providing immediate working capital for companies providing supplies to Ukraine.

Financial account outflows from Ukraine also “accelerated sharply in February to $1.9bn partly due to refugees’ withdrawals abroad”, the IIF report said.

“Since then, the NBU has introduced restrictions but they may not be sufficient.”

More than 4.5 million people have fled Ukraine and more than seven million are displaced internally, UN figures show.

“The world is shaken by compounding crises,” the joint statement from the World Bank, IMF, WFP and the WTO said.

“The fallout of the war in Ukraine is adding to the ongoing Covid-19 pandemic that now enters its third year, while climate change and increased fragility and conflict pose persistent harm to people around the globe.”

The agencies urged the international community to “urgently” support vulnerable countries through co-ordinated action ranging from provision of emergency food supplies, financial support, increased agricultural production and open trade.

“We urge all countries to keep trade open and avoid restrictive measures such as export bans on food or fertiliser that further exacerbate the suffering of the most vulnerable people,” the agencies said.
Source: National News

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