Analysis of the Economic Environment of Ukraine
Updated: Feb 2
Ukraine is well-known for its high dynamism of various market factors. In the past years, the country’s rank in the Global Competitiveness Ranking has suffered and worsened. Although the per capita GDP (PPP) improved by 17.7%, it remains deficient. The most adverse situation concerning the development of the financial sector and macroeconomic stability is foreseeable (Kochkina, 2019). Nevertheless, over the past three years, the country has improved continuously in its ease of doing business. Significant positive developments in the sector of construction have taken place. The chief obstacles faced while doing business in Ukraine are governmental instability, fiscal policies, taxation levels, corruption, low financial availability, inflation, and inefficient government bureaucracy. The country’s forthcoming economic developments largely depend on the execution of market reforms.
National Income (GDP)
According to the IMF, the country’s GDP growth fell to -7.2% according to estimations in 2020, which was previously 3.2% in 2019. It is expected to increase to 3% in 2021 and subsequently 3.2% in 2022, depending on the economic recovery post the COVID-19 pandemic. This growth in GDP is predictable as Ukraine may benefit from foreign trade in the coming years. The benefits are likely to arise from the significant improvement in the trading term of the country. The prices of several agricultural goods, steel and iron ore that are all exported from Ukraine, have seen a hike while that of energy imported by the country fell. The graph below shows the GDP growth of the country over the years.
Source: World Bank national accounts data, and OECD National Accounts data files.
Main Sectors of the Industry
The agricultural segment holds a significant role in the economy of the country. In 2019, it contributed to approximately 9% of the GDP and employed 14% of the working population. Ukraine is the 5th largest exporter of grains, the main crops being cereals, milk, sugar, and meat. The reduction of customs duties on agricultural goods of Ukraine by the European Union might be a boon for the country.
The secondary sector employs 1/4th of the working population and accounts for 22.6% of the GDP. The country’s manufacturing industry is dominated by iron and steel industries, making it the 6th largest iron producer and accounts for 30% of the industrial productions.
The country’s service sector employs 61% of the working population and provides 54.4% of the GDP. The country transports Russian and Caspian oil and gas to the Balkans and countries west of Europe as it is a country of energy transit. Ukraine is presently facing problems due to Russia’s tensions and looking for alternate routes to the south via Turkey and to the north via Germany. The table below shows the breakdown of economic activities in Ukraine by sector.
Fiscal and Monetary Policies (Inflation)
Inflation is a critical threat to the country’s economy. Ukraine has been facing fiscal loosening, although rising inflation and widening current accounts have led to budgetary tightening. Apart from the loose fiscal policies, the nominal exchange rate constancy and the hefty foreign capital entries have caused rapid money supply growth. To shield the peg, the country’s national banks have to acquire substantial foreign exchange volumes, injecting vast amounts of Hryvnias into the economy. This leads to the steady growth of the monetary base and becomes a cause of inflation. The analysis of these policies in the country’s economy proves a lack of a positive synergetic effect, mainly because of the Ukrainian banks’ futile attempts to apply inflation targeting (Zavadska, 2017) The table below shows the changes in inflation and consumer prices annually.
Source: Compiled according to the reports of the Ministry of Finance, 2019.
International Trade and Capital (Imports and Exports)
We can comprehend the trade and capital of the country in two ways. The country’s foreign exchange’s negative trend is visible and increased by imbalances in imports and exports. The intense competition and use of protectionism methods and inadequate marketing policies to inform prospective consumers of Ukrainian goods have led to a week presence of the country in the global markets.
To appreciate the positive side, the imbalances in the commodity and geographical structure of international trade have helped the country ascertain promising countries where they can export Ukrainian products. Several structural indicators of international trade have made significant problems like mono-import countries or partners with a non-equivalent volume of exchange operations. Marketing activities should focus on making potential consumer countries aware of Ukrainian products to aid the country’s international trade. (Dekhtyar et al., 2018).
Foreign Direct Investments (FDI)
During the last few years, the country’s FDI stocks fell as Russian investors withdrew assets they previously held. The primary focus of foreign investments was on financial services, retail trade, wholesale, real estate, manufacturing, and financial services. The countries that make significant investments in Ukraine are Switzerland, Cyprus, Netherlands, Germany, and the United Kingdom. We can now observe the government simplifying and reducing the registration process’s expense for foreign trading entities’ representative offices to invite more foreign investments. The flow of assets to Ukraine crashed in the previous year due to the COVID-19 pandemic and political measures that undermined the investors’ confidence. Despite administrative difficulties, Ukraine is still an appealing country for investments because of the agricultural potential, enormous internal market, strategic geographical location, and energy and mineral resources. The country shows consistent improvement in the investment environment indicators of the World Bank’s Doing Business Index. The following table shows the FDI for the country in the years 2017, 2018, and 2019. The following table shows a comparison to the other countries.
Trade Balance (Current Account Balances)
Although Ukraine had favorable economic conditions that increased the export of goods in the first half of 2019, domestic demands led to its import growth. The trade deficit widened in 2018, risking the price stability and currency of the country. The increase in the foreign trade deficit and dividend payments led to a rise in the current account deficits. Remittance plays a crucial part in restraining the widening of current account deficits. It supports the people’s purchasing power and household incomes growth, balancing the external payment and support consumption in Ukraine. It is also a significant source of income for a significant number of households in the country.
Human Development Index (HDI)
The country’s HDI value has increased by 7.4% as it rose from 0.725 to 0.779 in the last ten years. Although the country has seen improvement, as per reports by analysts, there is “a pronounced unevenness in the level of human development of Ukraine regions” ( Nazarova et al., 2019, p. 5). An average and low level of human development potential exist in Ukraine. To have a consistent HDI value, the regions with constant high values should share their positive experiences with others. Parts that keep fluctuating show that they have potential and need to be put into force effectively. Areas with average HDI value do not have systematic policies for growth and efficient utilization of all sources that can influence living standards (Kuzyshyn, 2017). The tables below show the HDI trends of Ukraine and the HDI trends of selected countries and groups, making a comparison to Ukraine, respectively.
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5. Zavadska, D. (2017). Investigation of the interaction of fiscal and monetary policies in the conditions of economic growth in Ukraine. Технологический аудит и резервы производства, 6(5 (38)). https://cyberleninka.ru/article/n/investigation-of-the-interaction-of-fiscal-and-monetary-policies-in-the-conditions-of-economic-growth-in-ukraine
6. The World Bank (2020, March 30). Economic Policy & Debt: National accounts: Growth Rates.
7. The World Bank (2020, March 30). Financial Sector: Exchange rates & prices.
Cover image: Source
About the author: Vanshika Agarwal is a second-year student enrolled in the B.B.A. LL.B. (Hons.) programme at Jindal Global Law School. Her primary fields of research are Economic and International Affairs.