Despite months of heavy Russian attacks on its energy facilities, Ukraine’s economy is expected to grow by 3.0 per cent in 2024 and 4.7 per cent in 2025, according to a report published today by the European Bank for Reconstruction and Development (EBRD).
The 2024 growth forecast is unchanged since the EBRD’s previous outlook in May and slightly above the Bank’s overall 2024 estimate of 2.8 per cent growth for the regions where it operates (central, eastern and southeastern Europe, the Caucasus and Türkiye, Central Asia and the southern and eastern Mediterranean, or SEMED).
However, the Bank’s flagship Regional Economic Prospects report says the destruction of electricity generation and transmission capacities is impacting Ukraine’s economy and has interrupted four quarters of solid gross domestic product (GDP) growth, leading it to revise down its forecast for the country’s GDP growth in 2025 to 4.7 per cent from the 6.0 per cent it forecast in May.
According to the report, the Ukrainian economy grew by an estimated 6.5 per cent year on year in the first quarter of 2024, after growing 5.3 per cent in 2023, marking a partial recovery from a sharp fall at the start of the war in 2022. However, growth has slowed since the first quarter of 2024 because of power shortages and the higher costs of imported electricity.
Although Ukraine has now secured sufficient external financing for the whole of 2024, delays in agreeing those funds in the early months of the year also created uncertainty, which negatively affected the exchange rate. The Ukrainian hyrvnia has lost around 10 per cent against the US dollar since it moved from a fixed exchange rate to a managed float at the beginning of October 2023.
Inflation, which had stabilised below the National Bank of Ukraine’s target level of around 5 per cent in the first half of the year, recently started to rise again, reaching 5.8 per cent in July 2024. This prompted the central bank to pause its relaxation of monetary policy after seven policy-rate cuts between July 2023 and June 2024, during which time the rate was reduced from 25 per cent to 13 per cent.
The country’s short-term growth prospects remain highly uncertain, the report adds.
The Regional Economic Prospects report notes that Ukraine’s export prospects have improved, boosted by a Black Sea export corridor along the coast that opened last year. This has removed 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. It added, however, that this improvement could be outweighed by electricity shortages.
In addition, although Ukraine’s international partners may have covered its external financing for this year, the picture for 2025 is less clear. What is more, labour shortages remain acute and the risk of additional destruction of infrastructure and productive capacity remains.
Across the EBRD regions, the Bank expects a 2024 growth rate of 2.8 per cent, revised down 0.2 percentage point from the previous forecast in May, and 2025 growth of 3.5 per cent, 0.1 percentage point below the previous projection.
The Regional Economic Prospects report, entitled “Along the adjustment path”, gives several reasons for these downward revisions. Economic activity has been slower than expected in Central Asia, where mining activities in Kazakhstan and Uzbekistan have stagnated. South-eastern European Union economies have been impacted by the spillover effects of a weaker outlook in advanced Europe, while those in the SEMED region are feeling the effects of the ongoing conflict in Gaza and severe droughts.
