Covid-19 crisis in Ukraine

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.