Interview EBRD Regional Lead Economist Dimitar Bogov

Text: Diana Pavlenko

 

So Ukraine's GDP growth forecast for 2024 from the EBRD is more optimistic, due to updated REP, than the government, International monetary fund expectations. What growth factors do you rely on that can lead to these positive results?

I would say that most of the international institutions gravitate now around 3% growth for this year. For example, the last IMF press release from the fifth review stated 2.5 to 3.5%. So we are in the middle of that range, 3%. Therefore, we are in line with the views of other institutions for 2024.

But maybe we are a bit more optimistic for 2025, because we project 4.7%, GDP growth while other institutions are still a bit lower than that. We don't differ in the assumption about the war. We all assume that the war will continue with a similar intensity in the next year.

However, our view is that the energy situation will improve compared to this year. This year the economy suffers because of lack of electricity caused by large scale destruction that started in March and continued. There are a lot of efforts to improve this situation that will likely bring results next year. Also, recently EU announced more support to increase domestic capacities and more export of electricity to Ukraine. We expect that next year situation will be much better concerning electricity supply and it will have impact on domestic output.

At the same time, we already saw this year, Black Sea corridor is working for export of Ukrainian products, military production is taking traction and all this actually could materialize in better outcome next year.

 

Have EBRD included in forecast factor of external funding, and how Ukraine can improve the level of abroad investments to the country before the end of war?

External financing is very important for Ukraine at this time because since the start of the war Ukraine is actually spending more than it produces. So this difference is coming from abroad and it has to be financed. We saw 2022, 2023, and this year external financing was substantial in the range between $30 and $40 bln. The estimated external financing needs for 2025 are approximately $38 bln.

However, that is financing for budgetary needs. Concerning investments, realistically, we could not expect a lot of private sector foreign investments for obvious reasons. But international financial institutions and bilateral partners are supporting Ukraine for urgent needs in terms of repair of electricity infrastructure, railway, road infrastructure. EBRD among them, is one that supports especially the energy sector, logistics and private sector investments in vital sectors.

 

Nevertheless, maybe it is some way how we can grow our private investments in Ukraine before the end of war?

It would be very difficult. The key here maybe is to provide war insurance for investments because the risks are higher than usually. If a successful scheme for war insurance is put in place, maybe it would encourage some private investors to invest in Ukrainian economy during the war. Otherwise, the risks are too high and private investors are usually quite cautious.

Therefore, at the moment we see most of investments coming from official sector, from international financial institutions and some bilateral partners of Ukraine.

 

In the new forecast is already mentioned level of GDP, but I want to ask you about dynamics of inflation. Which are ERBD's expectations of the inflation level in Ukraine at the end of 2024 and 2025 years?

Yes, inflation recently started increasing again. Last reading for August was 7.5%. We saw last year Ukraine brought inflation down, but this year, after low inflation in the first half of year it is already growing again in the second half. The main reason probably is depreciation of currency. Since October last year, it depreciated by about 10% and this has some impact on prices, because now Ukraine is very dependent on imported foreign goods.

This year inflation would probably go to 8-9%, but next year I would expect some moderation. So, I would not expect inflation to go back to levels that we saw in 2022, definitely not, situation is now under control. It may reach a temporary peak this year, but next year inflation should be somewhat lower again, and it would be reasonable to expect around 6-8% next year.

 

Now our discount rate is in the level of 13% and to your mind, it is justified level, or it need to be changed according to the inflation expectation, which is going to get increase during this year?

The National Bank of Ukraine probably has the best view on the situation. Recently they decided to keep it at 13% and actually have paused from changing discount rate from June this year when they made the last reduction.

Bearing in mind current inflation trend, I would expect this level to be kept for some period of time. We don't expect significant deterioration in inflation situation, but also it will not decline very soon to the target level of 5% +-1%.

The rate of 13% seems appropriate at the moment, but how the situation will develop remains to be seen.

 

Mr. Dimitar, and what about monetary policy of National Bank of Ukraine at all? How do you assess it in general?

We have to recognize that NBU did a terrific job in extremely difficult situation. It is exemplary what they did, they preserved macroeconomic stability, maintained the stability of the financial sector they basically did everything that is possible and even went beyond it. So, they deserve a prize for that. I think many will learn from what NBU did at war time under such unfavorable circumstances.

 

You already have mentioned the sustainability, so, for many ordinary Ukrainians a sustainability in the foreign exchange market plays a very important role. Recently NBU started to easing currency restrictions, which were implemented in the start of the Russian invasion in Ukraine in 2022. How do you think, it is the right time now for such actions and have it any risks for the stability of the hryvnia?

Since the start of the war, NBU introduced capital controls to stabilize the situation, but once the external financing became predictable and stable, they started with gradual removing of these capital controls, so they have a clear strategy how they will do this and precise sequencing of moves.

I would expect they will continue sticking to this as long as foreign financing continues flowing to Ukraine, because it is critical in this moment and we already see the first signs that the external financing package for next year is already being put in place. If this is successful, then I don't think there's reason to discontinue this process of loosening the capital controls.

It was a policy agreed also within the framework of the IMF program so the process is done in very gradual and controllable fashion so I would expect this to continue.

 

As you know, now in the Ukraine it is a big debate about the appropriateness and effectiveness of the tax increases during the wartime because we need more money in our budget, and now there is some ideas to increase taxes, including the windfall tax on the banks. What do you think about this and how do you assess currently proposals of our authorities? If you are agreed with point, that taxes should be raised, to your mind, which of them would be the best start with?

Well, it's clear that budget is short of revenues. Currently external financing is covering almost all of it. Ukraine can try to increase revenues as much as possible and it's a right policy to have, a kind of burden sharing. It's extraordinary situation and it's clear that everyone should bear some of the burden, and we see some efforts to increase budget revenues.

The most justified is to increase taxation on some goods that have characteristics of luxury goods in the war situation, those that are not so necessary could be taxed more. It is clear that the state of war justifies temporary expansion of the standard definition of luxury goods.

Concerning the windfall tax on profit, it could be justified but it has to be balanced well with the soundness of the banks. As long as the capital position of the banks is not endangered, then yes, banks can pay more taxes while the war is going on. Also, bearing in mind that in the last couple of years banks realized a lot of revenues from government securities it could be justified that some of this profit is returned to the budget because of the situation.

And as far as I know, this does not threaten capital position of banks. Actually, stress tests that were done by NBU showed that most of the banks are well capitalized.

 

So, this initiative will not have a bad influence for the bank system of Ukraine, to your mind?

It should be balanced well with capital needs of the banks. The authorities probably have better data than I have. And as far as this is not endangered, then, it is fine to go with such burden sharing.

 

One more very essential question for Ukraine's bank system it is privatization of government’s banks. There is a big discussion around the SenseBank and the Ukrgasbank. Does EBRD involved in the negotiations about their privatization or not?

To be honest, I'm not sure. Probably, my banking colleagues are better informed concerning this. However, EBRD in general is ready to support and before the war, EBRD was actively involved in another bank in the pre-privatization efforts. But then, that was interrupted with the war. Certainly, it is in the interest of Ukraine to reduce the share of state-ownership in banking sector. Probably, this would be one of the first tasks after the war, but it does not mean that some efforts should not be made even at this period.

 

Now in Ukraine it is a big deal with the shortage of labor. And it affects all businesses, all sectors. In the future, as war is going to prolong, the situation expected get worse. In which way can we improve the situation with our labor forces to get our economy more sustainable?

Yes, you're right. This is a very urgent issue at the moment for obvious reasons. Some sequential approach should be applied to the resolution of labor issue. During the war, what can be done is maybe to increase the available labour through inclusion efforts. Policies to include war veterans into the labor force through re-skilling, adjusting working places, so more war veterans can be productively engaged in the economy.

The other effort could go to engage parts of the not active female population, into the economy. After the war, the crucial issue would be how to encourage population that emigrated during the war abroad, to return in Ukraine and to be actively engaged in the reconstruction of the economy. It will be a huge task, but it will be a crucial one, because this would mean more productive labor in the economy. While this cannot be done at the moment, many policies could be designed in this period of time so they can be applied after the end of the war.

 

Mr. Dimitar, what is more, war has seriously affected our education system. Can you tell, how this fact can affect our economy system?

Yes, you are right. This is also a huge issue because if gap in education is created, then it will be difficult to overcome and the lost years of education would cost the economy a lot. I know that there are efforts to continue educational process, even distant education of Ukrainian children abroad, but obviously it is not the same as education in normal situation.

Even education in Ukraine that currently goes on, despite all efforts for normal continuation, the war situation and frequent aerial bombardments certainly are a huge disruption to educational process.

I am not an expert for education, I cannot offer any solution, but certainly it is a very important sector, it is good that you mention it, something that deserves attention and after the war well-designed policies should try to compensate for lost years education.