Module: Please add Faculty Name
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Due Date: January 5, 2015
Macro Economics: Ukraine
1. Executive summary
Geo-political tensions have pushed Ukraine into a deep crisis. Real GDP is in sharp decline, expected to contract by 8% in 2014 with a continued retrenchment in 2015. The conflict in the East has disrupted economic activity, which in its turn made the collection of taxes difficult. The exports have declined and the overall consumer and investor confidence fell significantly. At the same time weak national revenue performance, rising expenditure to tackle the crisis along with a growing Naftogaz deficit make fiscal adjustment more challenging. Ukraine government has allowed a free floating exchange rate resulting in a
50% devaluation of the currency (figure 4). Import gas prices are high and energy efficiency of the national industries is poor. The balance of payments pressure remains high due to large external debt refinancing needs, low FDI and limited access to external financing. This means that challenges are ahead of Ukraine with deteriorating relations with Russia, a weak banking sector, low FX reserves, large debt repayments needs (for the next 2 years) together with constrained domestic consumption altogether pose risks and affect prospects for recovery. Positive factors for Ukraine are as follows: (i) the strong external support for Ukraine ($27bn in the next 2 years), (ii) authorities are motivated to reform, (iii) trade relations with EU have improved and (iv) the economy has a high long-term potential. To overcome current recession Ukraine has to: (i) stick to the floating exchange rate, (ii) stabilize public finances, (iii) improve country competitiveness and (iv) develop new export markets. Besides this, the “ease of doing business” with Ukraine has to
