Cabinet drafts 2021 GDP growth forecast of 4.6%

Ukraine’s Cabinet of Ministers preliminary approved on
July 29 its forecast for macroeconomic and social development for 2021-2023,
with projected GDP growth of 4.6% yoy and inflation of 7.3% YTD in 2021. The
respective draft document is to be finalized within three days.

GDP growth will slow to 4.3% yoy growth in 2022,
before accelerating to 4.7% yoy in 2023, according to the forecast. Consumer
inflation will slow to 6.2% YTD in 2022 and 5.3% YTD in 2023.

The government expects import growth to outpace rising
exports. In particular, imports of goods and services will increase 10.6% yoy
in 2021, 10.0% yoy in 2022 and 11.1% in 2023. Meanwhile, exports are expected
to advance 2.9% yoy in 2021, 6.4% yoy in 2022 and 8.2% yoy in 2023.

With this trend, the trade deficit will swell from USD
10.4 bln in 2021 to USD 13.6 bln in 2022 and USD 17.0 bln in 2023. The average
exchange rate in 2021 is expected at UAH 29.1/USD and UAH 28.8/USD at the year
end.

Real wages are projected to grow 12.1% yoy in 2021,
6.0% yoy in 2022 and 5.1% yoy in 2023.

Evgeniya Akhtyrko: The
forecast assumes quite a quick economic turnaround in 2021 and implies that all
the negatives related to the coronavirus pandemic are to be left behind in
2020. At the same time, the same growth rate in 2021-2023 shows that the
current government has no ambitions for an economic breakthrough, as had been
promised by President Zelensky at the beginning of his tenure.

In particular, the forecast assumes quite moderate
growth of exports, which doesn’t correspond to the recent efforts of the
Zelensky administration to improve the protection of domestic producers (particularly,
exporters). Moreover, the relatively high and stable growth rate of imports in
the forecast implies that these efforts to foster domestic producers will
hardly result in import substitution, even in the mid-term. As a result, the
trade deficit will set a new record in 2023, according to the forecast.

The projected accelerated inflation is another
point of concern, as the cabinet is expecting it will exceed the NBU’s mid-term
inflation target range of 4%-6%. This discrepancy deserves attention and we
don’t rule out that the NBU might be forced either to raise its target
inflation rate or to give up altogether its policy of inflation-targeting,
which was introduced in 2015. In either case, this will violate the NBU’s
status as an independent institution.