IMF Warns Ukraine May Not Recover From Virus Slump Until 2024
(Bloomberg) -- Ukraine’s recovery from its coronavirus-induced slump may take four years, the International Monetary Fund warned, after approving $5 billion of aid for the eastern European nation this week.
“Under the baseline, the pace of economic growth is projected to pick up only gradually in the years ahead, to around 4%, as some further progress is made in implementing structural reforms,” the IMF said Thursday. “Output isn’t expected to reach its pre-crisis levels until 2023–24.”
The Washington-based lender cited enduring risks from Covid-19, the government’s limited fiscal space and weak consumer demand in predicting a 1.1% rebound in gross domestic product in 2021 after a projected 8.2% contraction this year. That’s despite the IMF financing, which will support rescue efforts via the budget and which unlocks an additional $1 billion from the World Bank and 1.2 billion euros ($1.4 billion) from the European Union.
Highlighting the deeper than expected recession and its aftermath, the central bank slashed interest rates Thursday by 2 percentage points to their lowest level since independence from the Soviet Union in 1991.
Read more: Ukraine Cuts Rates to Post-Independence Low After IMF Boost
A slow recovery is bad news for holders of the Ukrainian government’s GDP warrants -- instruments issued as part of a 2015 debt restructuring that reward investors when economic expansion tops 3%. Even so, the warrants have surged more than 75% since mid-March after earlier losing more than half their value, buoyed by rallies in global asset prices and the state bonds to which their price is linked.
The first review of the IMF program is planned for September, according to the memorandum signed between the two parties.
Ukraine is targeting $3.5 billion from the loan this year, which the lender says would require the government to increase anti-corruption efforts and broaden the tax base. It must also work to recover cash from failed banks and hold their former shareholders accountable. The most notable is Privatbank, the country’s biggest, whose billionaire ex-owner Igor Kolomoisky has sought to reverse its nationalization.
“Despite some initial successes under recent IMF-supported programs, reforms increasingly faced resistance from vested interests, and court rulings undermined reform progress, especially in tackling corruption and financial-sector reforms,” the IMF said. “As a result, investment, and notably foreign direct investment, continued to be held back by a difficult business environment, and growth was too low to noticeably close the income gap with Ukraine’s peers.”
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