Ukraine: political shows and economic realities / News / News agency Inforos
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Ukraine: political shows and economic realities

Yulia Tymoshenko: the country's economy is collapsing, finances are upset

Ukraine: political shows and economic realities

In the first half of 2019, the whole of Ukraine was fascinated first by the "show" called presidential elections, and then by the Verkhovna Rada elections. In such a situation, all the state regulators tried to find positive trends in the development of the economy that would confirm the accurateness of the course towards European integration.

Thus, according to the Ministry of Finance, over the five months of 2019 the state budget of Ukraine was executed with a surplus of 8.6 billion hryvnia (316 million dollars), with the approved annual deficit ratio accounting for 90 billion hryvnia (3.3 billion dollars). However, the Ministry of Finance noted that the income plan was only fulfilled by 97.4 per cent.

In the monthly review of the state of the Ukrainian economy, the National Bank of Ukraine (NBU) noted that in May the current operation account was brought into correlation with the 249-million-dollar surplus, as compared to the nearly zero balance in April (33 million dollars) and a deficit of 79 million dollars in May 2018. This result was facilitated by the reduced commodity trade deficit and the primary income surplus growth.

However, some improvement in foreign trade indicators was achieved due to seasonal and one-time factors as well, namely the growing exports of oil, soybeans, corn and oilseed meal, the increased physical export volumes for ferrous metals (cost indicators decreased as compared to the last year due to lower prices for metallurgical products) and iron ore supplies. The balance was favorably affected by the reduction in purchases of petroleum products against April due to the earlier launch of the sowing campaign and expenditures for gas imports due to lower prices in the European market and a shift in the schedule of its injection into underground storages. The net inflow of foreign direct investment over the five months of 2019 amounted to 844 million dollars as compared to 678 million dollars over the same period last year.

At the same time, according to the NBU, there was a number of alarming trends. Thus, there was a significant outflow of capital – about 1 billion dollars. It was only partially offset against investments of non-residents in hryvnia sovereign bonds. Accelerated growth of cash holdings outside banks, the volume of which exceeded the receipt of debt and investment capital in the real sector, and capital inflow into the banking sector, which is indicative of capital outflow from the private sector. Over the five months of this year, its volume increased by 1.306 billion dollars, five times more than over the same period in 2018 (274 million dollars).

As a result, the five months of 2019 saw the net liquidity balance of Ukraine brought into correlation with the 466-million-dollar deficit against the 284-million-dollar surplus in January-May 2018. Due to the net liquidity balance deficit and the payment of IMF loans, Ukraine's international gold and foreign exchange reserves decreased to 19.4 billion dollars.

Data presented by the State Statistics Service of Ukraine testifying to stagnation in the economy "spoiled the picture" either. Thus, in the first quarter GDP growth amounted to 2.2 per cent as compared to the 3.5 per cent in the fourth one and the 3.3 per cent in 2018. The real GDP, seasonally adjusted, did not show any growth actually (an increase of 0.2 percent against Q4). The negative trade balance has increased, amounting to 390.5 million dollars in the 1st quarter, 75% higher than a year ago. As for trading with CIS countries, imports exceeded exports by 14.5 per cent (13.8-billion-dollar deficit).

The balance of trade with EU countries is also negative, although the deficit is lower – 3 billion. These results forced the National Bank and the Ministry of Economic Development and Trade to revise the GDP growth forecast downward. The approved budget provides for it by 3 per cent in 2019, but the NBU lowered it to 2.4 per cent, and the Ministry of Economic Development - to 2.5 per cent. The main factors of such a forecast cut were: Russia's ban on the import of some types of engineering products, the acceleration of inflation and devaluation processes. The ongoing confrontation in the Donbas region and the effect of the new Russian sanctions imposed on June 1 have also contributed to this. Besides, having a negative effect on the business was uncertainty associated with the presidential and parliamentary elections.

According to Ukrainian experts, these negative trends are no surprise - they were formed at the end of 2018, but did not get into the focus of public attention because of the elections. This opinion was confirmed by leader of the All-Ukrainian Union "Fatherland" Yulia Tymoshenko in the Freedom of Speech talk show on the Ukrainian TV channel ICTV, saying that the economic situation in Ukraine continues to deteriorate, the country's economy is collapsing, finances are upset.

According to her, state budget revenues had ceased to be formed at the expense of tax revenues and were replaced by printed money. She noted that September marks the peak volume of foreign debt repayment - 2 billion dollars. But now there is hardly anyone in the government seeking ways to resolve this situation, with everybody occupied with issues of power redistribution and Verkhovna Rada elections.

The structure of foreign trade provides clear evidence of the country's ongoing deindustrialization and that the economy of Ukraine is confidently moving into the category of underdeveloped third world countries. According to the State Statistics Service of Ukraine, as of January-May 2019 the country became even more dependent on low-tech industries creating products with minimum added value. More than 20 "top" exports positions are agricultural products and iron sources. High-tech products (turbines) appear only in the 25th place accompanied by a very modest figure of about 300 million dollars.

Earlier, before setting the course towards European integration, Ukrainian enterprises supplied their turbines to the Russian shipbuilding and gas transportation system. Then Kiev decided not to sell military and dual-use products to the "aggressor", and cooperation was ceased. As a result, Russia equipped all the new ship projects with the advanced Rybinsk-produced turbines. And the Ukrainian economy is meanwhile reaping the fruits of the "patriotic leaders'" "far-sighted" policy: while in 2013 the export of turbines yielded more than 1 billion dollars, now it has collapsed 3.5 times and continues to decline.

Having a negative impact on economic development in the second half of 2019 will be the need for lump-sum foreign debt payments against the backdrop of cooperation with the IMF as the key donor having actually come to a standstill. The IMF ceased the relief program which had been in effect since 2015, without fulfilling even half of it (8.7 billion dollars allocated), even though it provided a new loan to cover the old debts. In light of this, the hryvnia is under threat. According to a number of Ukrainian experts, it may begin to slump in the second half of the year.

So, despite all the assurances by Prime Minister Groysman in the "everything-in-the-garden-is-rosy" style, the legacy of the new government is unenviable, with austere times of a stagnating economy to come.

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