Ukraine

Absence of gas deal limits growth this year, but exports set to drive pickup from 2014

The recession caused by industrial decline has continued into the first quarter of this year, and recovery will only begin when EU markets regain strength. As a result, we now anticipate GDP growth of just 1.1% this year (down from 2.4% in the previous edition), little changed from 2012. The large current account deficit and a need to roll over foreign debt will require new external loans and more FDI inflows. But in the absence of a gas deal with Russia (agreement proved elusive at talks in early March), a new IMF loan may require energy price rises that further delay the economic recovery.

The virtual elimination of inflation has avoided a further cost shock from currency depreciation. But delayed price rises (requiring subsidies that have widened the budget deficit to about 5% of GDP) have stored up pressures that will lift inflation to around 7% by the end of 2013.

Growth is forecast to pick up to around 4% in 2014-16 as EU markets recover. And the outturn could be better if improved dialogue allows an EU free trade deal to proceed or if Russia agrees to cut gas prices on terms that do not damage EU relations. But this is balanced by downside risks of currency depreciation and temporary capital controls if an IMF standby or alternative bilateral loans cannot be secured in time.

Government budget balance