Ukraine’s gross domestic product growth of 3 percent might be good for a country at war, but the economy is still falling further behind most of the rest of Europe, where growth is up to 5 percent a year, Gosta Ljungman, the head of the International Monetary Fund representative office in Ukraine, said on Nov. 13.
“Ukraine is growing at a slower pace and needs to have higher growth just to catch up to where it was in 2013,” Ljungman said at a press conference at state information and news agency UkrInform, where he was presenting the latest update of the IMF’s European Regional Economic Outlook.
The IMF sees three main tools to increase Ukraine’s economic growth, Ljungman said. These are decreasing nominal interest rates, improving legal protections of property rights, and fighting corruption.
Cutting corruption could boost Ukraine’s growth by up to 2 percent, Ljungman said.
“If Ukraine brought down corruption to the average European level, then the current growth of 3 percent would be 5 percent,” he said.
Ukraine also has to boost domestic investment to grow the economy, Ljungman added: Domestic investment is currently at a very low level of 17-18 percent of GDP, while in other countries in the region it is 23-25 percent of GDP.
As for foreign investment, Ljungman sees the agricultural sector as one of the biggest potential attractors of capital – if certain reforms are carried out.
Ukraine could see significant economic gains and a big increase in investment if it can create a functioning land market, Ljungman said. However, this is currently impossible due to the moratorium on land sales, which has been in place in Ukraine since 2002.
“In order to unlock such potential, big reforms need to be done,” he said.
Financial risks
Meanwhile, debt-laden Ukraine faces risks if there is a financial downturn, Ljungman said.
Ukraine’s debt increased from 2014 to 2016 because of large budget deficits, the cleansing of its banking sector of bad banks, and huge falls in the value of the national currency, the hryvnia. The debt level in Ukraine, however, has fallen from 80 percent at the end of 2016 to 72 percent now, due to the country following a prudent fiscal policy, said Ljungman.
“(The debt) is still high, but it’s moving in the right direction,” he said.
However, FDI remains at a historically low level – around 2 percent of GDP, or some $2 billion.
“We see money flowing into Ukraine, but half of it is just portfolio investments to take advantage of the country’s high-interest rates,” said Ljungman.
On the other hand, the IMF has a hopeful prognosis for inflation in Ukraine, which should fall from the current 11 percent to around 6 percent by the end of 2019, he said.
