Ukraine: IMF deals draws near amid rising risks of recession
After months of foot-dragging, on 30–31 March the government successfully fast-tracked both the banking law and the land reform through Parliament. The legislation is a prerequisite sought by the IMF for a new three-year lending deal. Although initially planned at USD 5.5 billion, the Fund agreed on 26 March to increase the size of the lending program up to USD 10.0 billion as the country’s economy is set to be hit hard by the fallout from the Covid-19 pandemic. As such, the IMF deal is indispensable in order to finance the widening fiscal deficit and to support foreign exchange reserves before hefty debt repayments this year.
The fast-spreading Covid-19 pandemic heightened the urgency for Kyiv to pass the new legislation. On the one hand, the restrictions taken by the government to curtail the spread of the virus are taking a toll on demand, while dislocated supply chains hamper the already-weak industrial sector. On top of that, the impeding health crisis spells severe trouble for the government’s fragile fiscal stance. So far, policymakers announced a USD 7.1 billion stabilization fund to minimize the economic effects of the virus by supporting pensioners and the unemployed, while also delivering tax breaks for companies. As it stands, official projections see the economy contracting this year and, in turn, the fiscal deficit is seen jumping to 7.0% of GDP, up from a previous estimate of 2.1% of GDP.
Regarding the economic prospects for Ukraine’s economy, analysts at JPMorgan noted:
“We now think that economic growth will take a sizable hit this year and expect GDP to contract by about 2.6% compared to growth of 3.2% in 2019; risks are that the contraction will be more severe and more extended – we currently have only two negative quarters, 1Q and 2Q. The contraction should be followed by a strong recovery in 2021, currently penciled at above 5%. Following on the view of the global J.P. Morgan team, we expect a big drop in 1H20, mostly 2Q and then a strong rebound during 2H20. The 2Q20 drop will likely be large – i.e. 30% or so saar – because Ukraine is facing a large external shock and stoppages in domestic production/ consumption.”