Ukrainian economy continues its recovery path


More, Ukraine

Article by: Robert Kirchner, Dr Ricardo Giucci, Anne Mdinaradze
After a massive decrease in GDP during 2014/2015, the Ukrainian economy is now recovering: Economic performance increased by 2.3% in 2016 and in 2017 GDP is expected to increase by 2.0%. An important reason for this positive development is the increase in investment, which reflects growing confidence in the country.

This recovery process is accompanied by a general stabilisation trend. The exchange rate has been stable for a considerable amount of time and is now backed by significantly larger foreign exchange reserves. Inflation is still high at currently 15.6%, but will decrease significantly this and next year. Thanks to the fact that the Naftogaz deficit has been eliminated, the budget deficit amounted to only 2.2% of GDP in 2016. However, expenditures for the recovery of the banking sector amounting to 5.4% of GDP are not included in the budget. Nationalising the country’s largest bank was, without doubt, a necessity.

In spite of these economic policy success stories, economic growth is with a meagre 2% far below potential. The speed of reforms has to be significantly accelerated in order to achieve tangible improvements for the population, thus securing its further support for the reform process

Investment supports economic growth

After the heavy crisis in 2014/15 the Ukrainian economy grew by 2.3% in 2016. In 2017, the recovery continues; GDP is forecast to increase by 2.0%. On the demand side, this trend is mainly driven by increasing investment – especially in agriculture. Investment increased by 18% in 2016 and by 20% in the first quarter of 2017. On the supply side, agriculture is a key factor. It grew by more than 6% in 2016; production and export of grain reached record levels. The industrial sector, being the most important one, also recorded positive growth (2.4%) for the first time since 2011.

The fact that economic growth is slowing down in 2017 compared to the previous year can mainly be attributed to the trade blockade in the Donbas. In the area not controlled by the government of the country several enterprises have been seized in March 2017. In response, the government officially stopped trade with this area. This dampened economic growth by 1.3%. The GDP reduction mainly relates to the energy and steel industry and will diminish over time.

ukraine real gdp growth

Stable exchange rate and increasing external trade

Stabilisation continues also in the external sector. The flexible exchange rate develops smoothly since 2015, with a positive impact on confidence. Also foreign exchange reserves increased thanks to international credits and interventions on the foreign exchange market, and are currently at their highest level since 2014 (USD 18 bn in June 2017).

This enabled the National Bank to gradually loosen the foreign exchange restrictions introduced during the crisis. Thus, dividends from 2014/15 can gradually be transferred abroad since June 2016 and since April 2017 also dividends from 2016. Furthermore, Ukrainian exporters have to exchange “only” 50% of their foreign exchange proceeds in Hryvnia instead of 75% earlier.

Exchange rate and foreign currency reserves

A positive trend can also be observed in external trade: After four years in a row of decreasing exports, they are expected to increase by around 9% in 2017. The main reason for this is the recovery of international commodity prices. Also imports will grow significantly this year – by almost 11%. This development reflects higher investment in the context of economic recovery.

National Bank brings inflation under control

Inflation has been decreasing since 2015. Although the current value of 15.6% in June 2017 is again slightly higher than the level at the end of 2016, the National Bank has in general regained control of the price development. It is expected that inflation will continue to decrease gradually in this year and the next. Accordingly, the National Bank has continuously reduced its policy rate: While it amounted to 30% in June 2015, its current level is at 12.5%. It can be expected that this will have a positive impact on lending, although other factors like the protection of creditors’ rights play a more important role for lending.

The National Bank has also conducted a successful reform of the banking sector: The former Governor Gontareva accomplished a good job in thoroughly cleaning up the sector, which led to the closure of 87 banks. The country’s largest bank, Privatbank, was nationalised. After Gontareva has paved the way for a positive development of the banking sector in the long run, she quit her job at her own will. The question about her succession still remains to be answered.

Public finance: After Naftogaz comes Privatbank

In 2016, the budget deficit was lower than agreed with the IMF, amounting to 2.2% of GDP. The deficit of the public gas provider Naftogaz, which had amounted to 5.6% of GDP in 2014, could even be completely eliminated. Both developments can be assessed positively. A new fiscal burden is, however, the already mentioned nationalisation of Privatbank at the end of 2016. The funds needed for this measure as well as other funds needed e.g. for the deposit guarantee fund or other state-owned banks amounted to 5.4% of GDP in the last year. More costs will incur in 2017.

Currently, an amount equal to 1.4% of GDP has already been identified as additionally needed funds in 2017; in total they will most probably reach 3.6% of GDP. Even though these expenditures do not count as part of the budget deficit, they are a heavy fiscal burden that leads to higher government debt.

budget deficit


The Ukrainian economy is on a clear path of economic recovery that is reflected by the positive development of several economic sectors. Accordingly, the current problems around the trade blockade in the East of Ukraine have no serious macroeconomic impact: Growth has slightly slowed down this year, but this does not lead to an end of the generally positive trajectory. Furthermore, the negative impulse will diminish in the course of time as enterprises find new ways of dealing with the negative consequences. At the same time, it needs to be said that annual growth rates of 2% are too low after the heavy crisis in 2014/15, especially taking into account the vast potential of the Ukrainian economy.

A sharp acceleration of the speed of reforms is the only way to improve the living standards and thus make sure that people’s willingness to support the reform process will be preserved.

Source: German Advisory Group Ukraine

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  1. Avatar Screwdriver says:

    And we need to remind that recently there was in increase of Ukrainian export to Russia. Russia remained the biggest exporter of Ukrainian products. Ukrainian expert says that western orientation of Ukrainian economy is failing.

    1. Avatar Микола Данчук says:

      It seams you didn’t comprehend the article!

      Considering that Russia has a very poor manufacturing ability (you could find that at it needs Ukrainian products (which are less expensive then EU) to maintain their needs.
      Ukraine does not need to compete with the EU in the markets it dominates but find a market where it is competitive and Ukraine dominates the Russian market!

    2. Avatar veth says:

      Ukraine-EU trade turnover up 22% Trade turnover between Ukraine and the European Union in the first quarter of 2017 increased by 21.6%, the press service of the Ministry of Economic Development and Trade reported.

      Read more on UNIAN:

    3. Avatar Murf says:

      Wrong again kiddo.
      From a high of 15 billion in 2013 to a low in 2016 of 3.6 in 2016 or just 8%. Meanwhile trade with the EU has climbed to 38%.

      1. Avatar Screwdriver says:

        Link to the article ( Ukrainian site) was included,

        1. Avatar Murf says:

          Yes i read that.
          All it says is that trade has increased but is still only a fraction of the pre 2014 level.
          “the EU is now by far the largest export partner of Ukraine, representing 37,1% of Ukraine total exports in 2016. (Ukrainian exports to Russia represent now only 9,9% of the total). Taking into account imports, total trade between Ukraine and the EU has increased by 8,1%.”

          1. Avatar Screwdriver says:

            Your link is with the older data then my link. Few months off .

          2. Avatar Murf says:

            The data is still accurate and timely.
            Now that the Association Agreement has been approved look for trade to increase as the finical situation is clarified.
            The increase with Russia represents an increase in commodity prices related to oil and anthracite coal. Both of which will decrease as Ukraine continues to develop its domestic production of coal and imports more from the US.
            UA/RU trade will continue to decrease in the future. Ukraine will be buying up to 55% of it;s nuclear fuel from Westinghouse. They are contracting to have a Czech firm finish a reactor project that Russia was building. By 2020 they will have completed a domestic spent fuel disposal site in the Chernobyl Exclusion Zone that will save Ukraine( and cost Russia) 200 million dollars a year.
            Meanwhile Russia is having to spend 100 million a month to support “Little Russia”.

          3. Avatar Screwdriver says:

            Destruction of Carpathian woods (for export) is part of your trade “increase” ?

    4. Avatar Brent says:

      Was that an increase in the export of Russo Nazzi filled zinc coffins?

      Soon, more of your “friends” will be repatriated in Cargo 200 convoys….

  2. Avatar veth says:

    Lavrov: Trump and Putin may have met more times – NBC News U.S.

    President Donald Trump may have held more meetings with Vladimir Putin at the G-20 summit earlier this month, Russia’s Foreign Minister Sergei Lavrov said Friday — but he shrugged off the importance of the encounters, according to NBC News.

    Trump is deputy-President of Russia.

  3. Avatar Screwdriver says:

    Drinking without zakuska is very bad for Ukraine. 🙁

  4. Avatar Tony says:

    poor ruskies are terrified by a successful Ukraine because it will highlight the failure of their fascist kleptocracy. So they tried everything in their power including war, land grabs, sanctions but to no avail, Ukraines GDP is growing faster than russias and Ukraine has a more diversified economy than russias petro state.

    1. Avatar Screwdriver says:

      Yes, sure, big success 🙂 «На самом деле, евроинтеграцией просто хотят заменить идею коммунизма, светлого идеального будущего, которое вот-вот наступит. А сами по себе методы остались по форме большевистскими – массовость, народный «одобрямс» и концертики, – согласен Якубин. – Увы, но для президента это – единственная положительная повестка, которую возможно показать за три года правления»

      1. Avatar veth says:

        Ukraine sees 3.8% increase in industrial production in June Industrial production in Ukraine in June 2017 not adjusted for the calendar effect grew by 3.8% year-over-year (y-o-y) against 1.2% in May 2017 from May 2016, according to the State Statistics Service of Ukraine.

        Read more on UNIAN:

  5. Avatar zorbatheturk says:

    The ousting of the Putin needs to be accelerated. PutIN must become PutOUT.