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Ukraine economy to contract sharply in 2022 due to Russia invasion, IMF report says

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WASHINGTON — Ukraine’s economy is expected to contract by 10% in 2022 as a result of Russia’s invasion, but the outlook could worsen sharply if the conflict lasts longer, the International Monetary Fund said in a staff report released on Monday.

The report, prepared ahead of the IMF’s approval of $1.4 billion in emergency financing, said Ukraine’s economic output could shrink by 25% to 35%, based on real wartime gross domestic product data from Iraq, Lebanon and other countries at war.

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The report, dated March 7, said Ukraine has an external financing gap of $4.8 billion, but its financing needs were expected to grow and it would require significant additional concessional financing.

The country’s public debt was expected to spike to 60% of GDP in 2022 from around 50% in 2021, the report said.

“Staff expects a deterioration in the growth outlook of at least 13.5 percentage points relative to a pre-war baseline, with output falling 10% this year, assuming a prompt resolution of the war, and substantial donor support,” it said.

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That compares to a 6.6% drop in output in 2014, the year that Russia annexed the Crimea region of Ukraine, and just under 10% in 2015.

IMF staff said there was massive uncertainty about the outlook, given the intensity of the conflict, and warned that increasing loss of physical capital stock and huge refugee flows could result in “significantly more pronounced output contraction,” a collapse in trade flows and lower tax revenues.

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The war – the biggest in Europe since World War Two – has sparked a massive humanitarian and economic shock, the IMF report said, citing rapidly increasing loss of life and significant infrastructure damage across the country.

It said Ukrainian authorities had continued to service their external debt obligations and the country’s payment system remained operational, with banks open and mostly liquid.

It said authorities had implemented appropriate emergency measures to stabilize markets and the economy, but the downside risks were “exceedingly high” and the country faced large fiscal and external financing gaps.

Vladyslav Rashkovan, alternate executive director for Ukraine at the IMF, told the IMF’s board that Ukrainian authorities were in broad agreement with the IMF staff’s assessment of the economic situation, and underscored the need for more financial support.

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He said liquidity buffers adopted after the Russian invasion were sufficient for financing expenditures and repaying liabilities, with most Ukrainian companies still paying taxes and some even paying in advance to support the budget.

In his statement, Rashkovan said Ukraine had spent the equivalent of $1.4 billion on servicing and repayment of its foreign exchange public debt since the start of the war. (Reporting by Andrea Shalal and David Lawder in Washington and Natalia Zinets in Lviv; Editing by Paul SImao)

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