Coronavirus tsunami hits the Ukrainian economy

The lockdown restrictions and the state of emergency declared by the Ukrainian government are ravaging the already faltering economy of Ukraine. At the end of March 2020, Ukrainian Prime Minister Denys Shmyhal presented a new macroeconomic forecast for this year, taking into consideration the consequences of the pandemic.
Coronavirus tsunami hits the Ukrainian economy

CDC/Alissa Eckert, MS; Dan Higgins, MAM, Public domain

According to the forecast, instead of the assumed 3.7 per cent growth, GDP is expected to fall by 3.9 per cent. Ukraine’s nominal GDP, instead of UAH4.5 trillion (USD169bn), is to amount to only UAH4 trillion (USD150bn), and the average annual hryvnia exchange rate is expected to fall to UAH29.5/USD1, versus the previously forecast UAH27. Inflation, instead of 5.5 per cent as predicted by the government, will have climbed to 8.7 per cent by the end of the year. Unemployment will increase to 9.4 per cent versus the 8.1 per cent predicted, and the average pay of Ukrainian employees will shrink from UAH12,500 (USD469) to UAH11,000 (USD413) per month.

This is a rather bleak picture, and yet taking into consideration the real economic situation, the forecast is probably too optimistic. Ukraine, instead of the announced economic growth, should brace for a return of the dark times of massive declines in GDP. Except that this time there will be no cushion in the form of economic migration to foreign labor markets.

Business in a trap

The European Business Association (EBA), an organization of Western investors operating in Ukraine, estimates that the fall in GDP will be much worse. EBA experts estimate the baseline decline at 4 per cent, or as much as 9 per cent in the pessimistic scenario. This will be the result of the severe restrictions imposed by the government due to the coronavirus pandemic. At the same time, EBA appealed to the government to apply “well-balanced and constructive measures”, pointing out that otherwise it will have to expect a wave of job cuts in the order of hundreds of thousands. “In a few months the cost of the lockdown of the economy could have devastating effects on the whole population, ever worse than the pandemic itself, experts say, and its rebuilding will take many years,“ EBA commented.

“The restrictions imposed by the government have seriously hampered economic activity,” estimates the Ukrainian Chamber of Commerce and Industry (TPPU). On a daily basis, businesses are dealing with disrupted supplies of raw materials, components and finished goods. Many enterprises are working at half throttle. Some members of staff have difficulty getting to work because of the restrictions on the number of passengers allowed to travel on municipal transport at a time and the introduction of categories of commuters authorized to use means of public transport. Some employees have taken leave from work out of health concerns. “While the companies which have simply been prohibited from working will be able to allege force majeure as justification for failure to perform their contracts, for those enterprises which are formally allowed to work the situation is dramatic — they have to fulfil their obligations but are unable to,“ alarms the TPPU.

Ukrainian exporters are facing problems with exporting finished goods due to both: obstacles on the Ukrainian border and limits imposed by specific countries. In addition, the TPPU reports that the number of non-performance contracts by foreign counterparts has increased. The majority of small businesses have a reserve that allows them to stay afloat for several weeks, while medium-sized and big businesses have a relatively greater reserves that suffices them to survive for two to three months.

The results of the survey conducted by the online newspaper “Ukrayinska Pravda” at the end of March 2020 among Kiev entrepreneurs provide an insight into the situation at microeconomic level. As many as 80 per cent of the respondents expect a disaster. Due to the imposed lockdown, 35 per cent of company owners have already been forced to suspend their activity. The most severe consequences of the pandemic-related restrictions are being felt by small businesses employing up to 5 people — as many as 45 per cent expect they will suspend their business in the short run. 27 per cent of companies employing 100-500 people and only 14 per cent of big companies with over 500 employees expect a suspension of activity.

As many as 24 per cent of companies have sent all their employees on unpaid leave and 27 per cent of companies have done the same with part of their staff; 12 per cent have dismissed some people, and 4 per cent have terminated all the employment contracts. Within companies employing over 100 people, approximately 40 per cent have actually got rid of some employees by sending them on an unpaid leave, while 52 per cent of micro-enterprises have done so. Every fourth entrepreneur estimates that company turnover will decline by 50-80 per cent, 18 per cent of entrepreneurs expect a 30-50 per cent decline, and only one per cent hope that turnover will increase.

Half of the small businesses in Kiev have come to a complete halt, and a further 25 per cent have lost most of their working capital. New companies, which have recently started their operations, are in a particularly difficult time. “After the lockdown is lifted, a significant number of small companies will probably be unable to resume operations,” the authors of the survey conclude.

Shrinking labor market

Former Minister of the Economy, Tymofiy Milovanov, estimates that 170,000 up to 500,000 Ukrainian employees may lose their jobs. And, as he points out, this is a conservative estimate. The starting point for Mr. Milovanov were data from China, where unemployment soared from one per cent to 6.2 per cent over a month. Extrapolation for Ukrainian conditions yields 170,000 jobs per each per cent of unemployment. The economist emphasizes that the Chinese data relate to official employment, whereas in Ukraine some 20 per cent, or 3.4 million people, work illegally, and some 700,000 of them in the sectors the most vulnerable to the crisis caused by the pandemic – trade, gastronomy, hotel industry and transport. “In effect, one fourth to even half of the illegal workers are at risk of losing their jobs,” Mr. Milovanov estimates.

According to the Ukrainian Chamber of Commerce and Industry, from 500,000 to 700,000 people have lost their jobs since the beginning of the lockdown. Out of 3.5 million people employed in the shadow economy before the pandemic, one million accounts for the workers of the sectors the most vulnerable to the restrictions imposed, and 2.9 million are legally employed in them. This totals almost 4 million people waiting in line for layoffs. According to the TPPU President, Gennadiy Chyzhykov, the government should introduce a rescue plan aimed at retaining the existing jobs because retaining an existing job costs five times less than creating a new one.

All this is happening amid a gigantic wave of repatriations of Ukrainian economic migrants who have lost their jobs abroad because of the pandemic — an estimated number of up to 1.7 million returnees. In all likelihood, they will join the ranks of the unemployed as the predicted global economic slowdown will result in a reduced interest in Ukrainian workforce among foreign employers.

Scarcely any aid

For the time being, the state aid, as compared to rescue plans implemented across the globe, including in Poland, is scarce. Although the Ukrainian parliament has urgently passed a law mitigating the adverse impact of the pandemic on the economy, but the actual needs are much greater. Enterprises have been granted a two-month exemption from property tax. Bank customers may suspend loan repayment without contractual penalties and prolongation fees. Sole traders, farmers and companies that report zero income have been exempted from social insurance contributions. There will be no penalties for breaches of tax legislation or statutory interest for delayed tax payment until the end of May.

A moratorium on business audits has been introduced. The deadlines for the submission of tax returns and tax payments for 2019 have been extended. Citizens have been exempted from default interest for municipal bills. However, Ukrainian commentators report that the exemption from property tax is not so much a relief for small businesses which usually do not have to pay it anyway but rather a concession to the major payers — the big corporations. Moreover, it is a blow to the finances of local governments — the beneficiaries of this tax — which are now left with hollow budgets.

Meanwhile, the Ukrainian central bank NBU suggests that Ukraine could profit from the coronavirus pandemic. “As far as the balance of payments with export and import transactions above all is concerned, the impact will most probably be neutral or even positive,” NBU Deputy Governor Oleg Churiy assesses. He stresses that the prices of fuels imported by Ukraine (oil accounts for 30 per cent of total imports) are falling, while the prices of agricultural products, constituting the lion’s share of exports, are essentially the same.

CDC/Alissa Eckert, MS; Dan Higgins, MAM, Public domain

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