Ukraine Politics


Ukraine: New government convenes amid worsening crisis

December 2, 2014

Ukraine’s new government convened for the first time on 27 November, renaming Arseniy Yatsenyuk from the People’s Front as Prime Minister. Ukraine’s parliament is now dominated by pro-European parties for the first time since the former-Soviet republic became independent in 1991. A coalition government has been formed among five parties, including the People’s Front and a political bloc that supports President Poroshenko, following the 26 October parliamentary snap elections. The new government is under pressure to resolve Ukraine’s wide-range of problems, including the military conflict in the east and the economy’s downward spiral. The government must also deliver on campaign promises to prepare the country for eventual EU membership and possible NATO admission.

Ukraine’s outlook has deteriorated rapidly in the past months. The military conflict between the government and pro-Russia separatist rebels has had a devastating impact on the country and a resolution is still far from clear. Despite the September ceasefire agreement, casualties have been increasing and negotiations have stalled. Further, the state of the economy has worsened rapidly and the country is nearing bankruptcy. The Central Bank’s reserves have dwindled to a nine-year low and the hyrvnia has plunged in value since the beginning of the year. Against this backdrop, the Ukrainian government began cutting off government services and funds to the separatist-held regions of the country, which has fueled tensions. The Central Bank ordered all banks to suspend services in the region and Poroshenko issued a presidential decree to withdraw all state services, including hospitals and schools, from the area.

Ukraine is in desperate need of the next tranche of funding from the IMF’s USD 17.1 bailout program. In order to receive the needed aid and to fulfill part of the country’s commitments to the Ukraine-European Union Association Agreement, the government will have to implement some tough economic reforms. Further, it is widely expected that Ukraine will need more financing on top of the existing program, especially if the conflict persists into next year.

The unrelenting downward economic spiral and the military conflict continue to weigh on Ukraine’s economic outlook. FocusEconomics panelists expect GDP to plummet 7.4% in 2014. For 2015, panelists expect the economy to contract 1.8%, which is down 0.8 percentage points from last month’s forecast.

Author: Angela Bouzanis, Senior Economist

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