Covid-19 crisis in Ukraine

Das Coronavirus gefährdet die Bevölkerung in den Volksrepubliken im Osten der Ukraine besonders. Nirgends sie die Menschen so alt wie dort. Nikolaus von Twickel berichtet für LibMod / Zentrum Liberale Moderne
Desin­fek­tion von human­itären Hil­f­s­gütern des Roten Kreuzes bei seiner Ankunft an der DNR, © Alexan­der Rekun/​ Imago

As part of our project “Eastern Part­ner­ship 2.0” we publish a series of arti­cles about the three EU asso­ci­a­tion states (Ukraine, Georgia, Moldova). Three authors from the region (Veronika Movchan, Irina Guruli, Sergiu Gaibu) analyse the health, polit­i­cal, eco­nomic and social impact of COVID-19 in their countries.

It is too early to assess a full-scale impact of the Covid-19 pan­demic on Ukraine. This crisis is not close to its end neither in the world nor in Ukraine. However, it is already clear that the effect will be highly harmful and likely long-lasting.

The spread of the disease has not been curbed yet. As of June 7, Ukraine reg­is­tered 27 thou­sand cases, over half of which still being active, and 788 deaths. The number of new infec­tions has remained high. A mod­er­ate down­ward trend of early May turned into an upward-sloping pattern later on. The first week of June fea­tured +3650 new cases, the highest number ever reg­is­tered in Ukraine.

More­over, despite the notice­able accel­er­a­tion recently, the number of tests per capita stayed the second-lowest in Europe (9,693 per 1 million). The latter causes con­cerns that the actual spread of the disease could be more exten­sive than detected. The high rate of infec­tions among medical per­son­nel reach­ing about one-fifth of total cases further exac­er­bated the disaster.

However, the uncer­tain epi­demic sit­u­a­tion has not pre­vented the gradual lock­down easing start­ing early May as the eco­nomic hard­ships, and general lock­down fatigue inten­si­fied demands for the re-opening.

The author­i­ties have intro­duced the con­tain­ment mea­sures in mid-March when only a few first cases have been detected. The mea­sures included the closure of edu­ca­tional and enter­tain­ment estab­lish­ments, retail stores (except those selling food, pharma and per­sonal pro­tec­tive equip­ment), open markets, restau­rants, sports facil­i­ties, and – most impor­tantly – trans­port. The country stopped inter­na­tional and domes­tic pas­sen­ger trans­porta­tion, except for selected munic­i­pal routes though acces­si­ble only by special permits.

These mea­sures, con­tribut­ing to the disease spread con­tain­ment, has had a dev­as­tat­ing blow on the national economy, espe­cially on SMEs working in ser­vices. The domes­tic eco­nomic hard­ships were ampli­fied by the very neg­a­tive Covid-19 impact on the neigh­bour­ing coun­tries includ­ing the EU, the largest trade partner of Ukraine, the dis­rup­tions in global supply chains, and increased global price volatil­ity. More­over, the return of labour migrants could cause a reduc­tion in the inflow of remit­tances, aver­aged at ca. 8% of GDP in 2015–2019.

April figures confirm the hard eco­nomic hit of the Covid-19 crisis. The monthly retail sales dropped 15% in April over a year earlier, while pas­sen­ger trans­porta­tion by bus mea­sured by passenger/​km reduced by 95%, and pas­sen­ger rail and under­ground trans­porta­tion ceased utterly.

Although neither indus­trial pro­duc­tion nor freight trans­porta­tion was stopped, they were affected by second-round eco­nomic effects. The freight trans­porta­tion mea­sured by ton/​km dropped by 27% in April over a year earlier, with the par­tic­u­lar hit taken by truck­ing.  The indus­trial pro­duc­tion was down by 16% in April dragged by reduced man­u­fac­tur­ing of metals, machine build­ing, textile and leather prod­ucts, and con­struc­tion mate­ri­als. The only indus­tries demon­strat­ing pos­i­tive trends were man­u­fac­tur­ing of chem­i­cal and phar­ma­ceu­ti­cal prod­ucts, the demand for which boomed.

As in other coun­tries, the crisis hurts the labour market. The number of newly reg­is­tered unem­ploy­ment doubled to 156 thou­sand in the period between mid-March and end-April, while the total number of unem­ployed reached 457 thou­sand vs 7,346 thou­sand hired employ­ees. Apart from layoffs, employ­ers have been actively using partial employ­ment or tem­po­rary leaves. As a result, a total working time dropped by 15% in April over a year earlier, with much deeper slumps in selected sectors like hos­pi­tal­ity sector (-68%), trans­port (-24%), trade (-20%).

As a result, the real GDP dropped by 1.5% already in the first quarter of 2020. In com­par­i­son, the annual drop is esti­mated at 6–11% depend­ing on the sce­nar­ios of both dura­tion of the domes­tic con­tain­ment mea­sures and the deep­ness of the global recession.

Still, the macro­eco­nomic picture of this crisis has been dif­fer­ent com­pared to the other crisis episodes in Ukraine. Thanks to the immense efforts aimed at banking system clean­ing and the estab­lish­ment of sound mon­e­tary policy, the exchange rate and infla­tion have remained so far stable. The con­sumer price index was at healthy 2.1% in April over a year earlier. The initial panic causing a depre­ci­a­tion of the hryvnia from UAH/​USD 24.6 in end-Feb­ru­ary to 28.1 a month later calmed down as the NBU sold some of its inter­na­tional reserves, and the exchange rate returned to below UAH/​USD 27 levels in May. More­over, the NBU managed to restore its inter­na­tional reserves, and it has been grad­u­ally reduc­ing its policy rate to stim­u­late eco­nomic growth with mon­e­tary easing.

The current account balance has also been stable. The much sharper reduc­tion in imports of goods and ser­vices com­pared to a very mod­er­ate drop in exports resulted in a pos­i­tive balance, coun­ter­bal­anc­ing the finan­cial account outflow.

The fiscal sit­u­a­tion has not been as reas­sur­ing. The state deficit is expected to reach about 7% of GDP, as the country needs higher spend­ing to cope with the Covid-19 crisis, while the rev­enues have been declin­ing. More­over, 2020 has been one of the years with peak exter­nal public debt repayments.

Thus, the resump­tion of coop­er­a­tion with the IMF has become an absolute pri­or­ity. The ful­fil­ment of several vital pre­con­di­tions – the lifting of the mora­to­rium on agri­cul­tural land sales and the adop­tion of the law banning the return of nation­alised banks to its owners – allowed Ukraine to achieve a staff-level agree­ment with the IMF regard­ing a new USD 5 billion Stand-By Arrange­ment in May. Its approval is expected already in the first half of June. The IMF support has also unblocked the MFA from the EU, and the World Bank credits. Still, the much needed foreign direct invest­ments and large-scale pri­vati­sa­tion are unlikely to realise this year.

The Covid-19 crisis has not con­tributed to the sta­bil­i­sa­tion of domes­tic pol­i­tics. The Cabinet of Min­is­ters headed by Oleksiy Hon­charuk was dis­missed in early March when the first signs of the forth­com­ing Covid-19 crisis started to show up. The new Gov­ern­ment formed by Denis Shmygal has already wit­nessed several changes of min­is­ters, includ­ing the Min­is­ter of Health­care, and has still been working without the approved Program. The Gov­ern­ment activ­i­ties have been accom­pa­nied by scan­dals, includ­ing the alle­ga­tions of cor­rup­tion in medical pro­cure­ments and the failed police reform. The judi­cial reform is stalled, the process of com­mu­ni­ties’ amal­ga­ma­tion under the decen­tral­i­sa­tion reform halted. At the same time, the peace ini­tia­tives in the con­flict with Russia have been hardly accept­able for a part of the society. However, the public approval of Pres­i­dent Zelen­sky has remained high, while the neg­a­tive sen­ti­ments are directed towards the Gov­ern­ment and the Parliament.

Ukraine has not yet entered a perfect storm, but the com­bi­na­tion of the deadly virus, eco­nomic hard­ships and polit­i­cal unease do not promise easy and quick revival.

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