IMF significantly improves its forecast for Ukraine's economic growth

Economic situation

According to the updated World Economic Outlook (WEO), the IMF has significantly improved its forecast for Ukraine's economic growth in 2023: from -3% (April 2023) to +2%. At the same time, the IMF's forecast remains conservative both compared to other IFIs (e.g., the World Bank's forecast of +3.5%) and to the forecasts of Ukrainian institutions (NBU +3%, Ministry of Economy +4%). For 2024, the IMF forecasts growth of 3.2%, which is highly likely to indicate that the end of the active phase of hostilities in 2024 is not a basic assumption of the forecast.

With the need for external financing remaining at over USD 40bn in 2014 and the country's debt service at over USD 1.5bn in 2015, the forecast is likely to be lower than the current level, and the rapid growth of public debt (the IMF forecasts that it may exceed 100% in 2025), discussions have intensified about the possibility of using frozen assets in favour of Ukraine. An attempt to quantify the potential for using the proceeds of frozen assets (assumption: investing USD 300 billion over 20 months at 3.5%) indicates that this instrument could be used to transfer USD 19 billion to Ukraine, which is about ¼ of the projected amount of funding from international partners in 2022-2023.

Public sector

During a regular auction for the placement of government securities held on 17.10.2023, the Ministry of Finance raised UAH 9.2 billion to finance the state budget for terms of 1 to 3 years at rates ranging from 17.40% to 19.19%. The largest amount of funds was borrowed under 1.5- and 3-year securities, the demand for which exceeded the limited supply from the Ministry of Finance. The weighted average yield on new hryvnia borrowings was 18.71%.

"According to the Ministry of Finance, in January-September 2023, the total cash expenditures of the general fund of the state budget amounted to UAH 2118.6 billion, with September expenditures amounting to UAH 230 billion. Given the martial law, state budget expenditures were mainly directed to social purposes and support for the defence forces, as well as to public debt service."

In particular, in the first 9 months of 2023, the following were the most important expenditures:

• UAH 80.5 billion (in September - UAH 111.5 billion) was spent on salaries and wages, or 41.6% of the total expenditures spent in January-September 2023. In particular, UAH 681.5 billion was allocated for the salaries of military personnel (UAH 87 billion in September).
• UAH 511.8 billion (UAH 47 billion in September) was allocated to pay for the use of goods and services, or 24.2% of total expenditures, including UAH 343.8 billion to support the Armed Forces of Ukraine.
• UAH 102.1 billion was transferred by the National Health Service of Ukraine to implement the programme of state guarantees for medical care;
• UAH 386.4 billion (in September - UAH 39.9 billion) - for social security (payment of pensions, allowances, scholarships) or 18.2% of the total expenditures, including UAH 203.9 billion transferred to the Pension Fund to ensure the financial support of pensions, allowances and pension increases; UAH 129.7 billion - to be paid by the Ministry of Social Policy for the social protection of children and families, protection of citizens in difficult life circumstances, and support for low-income families;
• UAH 172.2 billion (in September - UAH 12.5 billion) - for the servicing of the state debt, or 8.1% of the total amount;
• UAH 112.4 billion (in September - UAH 12.1 billion) - for transfers to local budgets or 5.3% of the total.

Foreign exchange market

A significant decline in demand for foreign currency from bank clients after a surge the week before last amid a steady supply of foreign currency resulted in a significant reduction in net demand for foreign currency in the interbank market, which was closed by the NBU's interventions to sell foreign currency. At the same time, the volume of the NBU's net interventions fell by half compared to the week before last (to USD 575 million from USD 1,152 million). The interbank hryvnia exchange rate strengthened by 0.3% over the week.

"Ukraine's international reserves, which, according to preliminary data as of 1 October 2023, amounted to USD 39.7 billion, remain sufficient to finance 5.3 months of future imports. In September, they decreased by 1.7% due to the NBU's interventions to sell foreign currency to cover the difference between supply and demand in the Ukrainian foreign exchange market and to make debt payments by the state, which were not fully offset by receipts from international partners."

Financial sector

According to the National Bank, the capital adequacy ratios of banks in September remained at the level of the previous month, significantly exceeding the regulatory requirements. In particular, the regulatory capital adequacy ratio was 25%, and the core capital adequacy ratio was 14.8%, exceeding the minimum regulatory requirements (10% and 7%, respectively). This was driven by moderate levels of loan loss provisions made by banks in 2023 and lending mainly under government programmes.

The banking sector's liquidity (in the form of balances on correspondent accounts and NBU certificates of deposit) increased to UAH 680 billion. Expenditures from the Government's Unified Treasury Account continued to be the main factor behind the high level of bank liquidity, while the NBU's interventions to sell foreign currency partially reduced the amount of free liquidity in the banking system.

Last week, banks issued 235 concessional loans totalling UAH 1.3 billion under the Affordable Loans 5-7-9% programme, of which about one third were issued by state-owned banks. The total number of loans issued under the programme since the start of large-scale military operations in Ukraine has exceeded 39,000, totalling UAH 152.3 billion. Given the priority of wartime goals, the majority of loans were issued by banks to support agricultural production and anti-war purposes.

Especially for Espreso

About the author: Bohdan Danylyshyn, professor at the Kyiv National Economic University named after Vadym Hetman, former head of the NBU Council.