Diving into the labyrinth of war

Ukraine suffered huge losses during the first months of the full-scale Russian invasion. The economy has clearly survived, but it is expected to face many headwinds in the years to come. The loss of physical assets and human capital against a backdrop of tense security situation implies that the recovery of real GDP will be marginal.

Inflation, as expected, accelerated, but it did not get out of control. It is generally expected to start slowing down in early 2023.

The external imbalances are enormous, as Ukraine has lost a significant part of its export capacity and capital flight continues in considerable volumes. The one-time depreciation of the hryvnia in July had a rapid positive impact on the foreign exchange market, but further rounds of depreciation may be needed until the end of 2023 to further reduce excess demand for foreign currency.

The Ukrainian economy will remain heavily dependent on international financial assistance in the years to come. Grants and foreign loans will be essential to fill the budget deficit and replenish the reserves of the NBU. External financing will reach nearly US$30 billion for 2022, but aid inflows are expected to decline next year. According to our estimates, the economy will need at least $20 billion in 2023 to continue to function relatively well. A significant portion of this amount will likely come from the IMF. We assume that there will be no major changes in the war situation until the end of 2023.

RESEARCH TEAM: Vitaliy Vavryshchuk.

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