Ukraine’s economic output is set to contract by at least 10 per cent this year, according to the International Monetary Fund, as Russia’s invasion causes widespread destruction.
In an updated staff report, completed March 7 and released Monday, the IMF warned Ukraine will experience a “deep recession” this year, as the growth outlook deteriorates by a minimum 13.5 percentage points versus pre-war estimates and real gross domestic product falls by 10 per cent.
The fund expects the economic impact of the war to be “upfront and severe”, with consumption limited to “basic needs” given the surge of refugees, large-scale wreckage of key infrastructure and other supply disruptions. Inflation, which is already running at an annual pace of 10 per cent in January, is expected to worsen.
Prior to Russia’s attacks, Ukraine faced fiscal financing needs of roughly $19.5bn and relied heavily on domestic sources. The IMF now predicts the deficit will widen to about 3 per cent of GDP and once official support is factored in – including the fund’s $1.4bn of “rapid financing” agreed to last week – the country will face a fiscal shortfall of $7.4bn.
Further issuance of war bonds (which Ukraine has already used to fund its armed forces) and “large-scale mobilisation” of new financing from multilateral entities, with concessional terms, will be necessary to fill the gap, the IMF said. The financing estimates are a “bare minimum”.
The new forecasts broadly assume a “prompt resolution” of the conflict with “substantial” economic support provided by the official sector, and are therefore subject to “massive uncertainty”.
“Increasing loss of physical capital stock and mass migration would result in a significantly more pronounced output contraction, a collapse in trade flows, further diminished tax collection capacity, and a greater deterioration in the fiscal and external positions,” the report said.
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