The EBRD worsens its contraction forecast for Ukraine and its entire zone

Posted 10 May, 2022

The European Bank for Reconstruction and Development (EBRD), which is holding its annual general meeting this week, has sharply worsened its economic contraction forecast for Ukraine in the face of the protracted Russian invasion.

It now expects a brutal contraction of 30% of the Ukrainian economy this year instead of the 20% expected in March, at the very beginning of the Russian offensive.

The international organization also still anticipates a 10% contraction of the Russian economy, targeted by a series of sanctions, and because of the cost of its war in Ukraine.

The EBRD is also revising its growth forecast for its entire zone downwards to 1.1% against 1.7% in March.

After a sharp contraction in the economy of the countries covered by the European finance institute in 2020 due to the pandemic, then a sharp rebound last year with the post-covid recovery, "the war in Ukraine has had an impact deep into the economies" of the area, according to a press release on Tuesday.

The downward revision of the regional forecast is due "mainly to a stronger than expected contraction of the Ukrainian economy because of the lasting war", adds the EBRD.

For Ukraine, the contraction is "probably the worst since the Second World War", remarks Beata Javorcik, chief economist of the organization in an interview with AFP.

As for Russia, the expected contraction of 10% is equivalent to that observed by "Western countries at the height of the Covid pandemic, so it is severe", she adds.

The institute, which launches its annual general meeting in Marrakech for three days on Tuesday, also anticipates a rebound in the economy of its region to 4.7% next year, driven by the hypothesis of reconstruction in Ukraine. which would lead to a 25% rebound in the country's gross domestic product.

However, the regional economy is expected to suffer next year from "inflationary pressures" that are felt across the global economy, according to the EBRD report.

The organization, founded in 1991 to help countries of the former Soviet bloc transition to a market economy, has since expanded its scope to include countries in the Middle East and North Africa.

 

Threats to food security

 

The EBRD stresses that its forecasts are subject to the risk of sharp downward revisions in the event of "an escalation of the conflict or if exports of gas or other raw materials from Russia become more restricted".

The organization also notes that the prices of raw materials and food have soared in recent months with gas prices at historic highs in Europe, while the prices of essential foodstuffs such as wheat, corn, and soy have also surged, threatening food security in many countries, particularly in Africa and the Middle East.

This surge in food prices is also fueling inflation, which reached almost 12% in the region in March, the highest since the end of 2008, in the midst of the financial crisis. An escalation in prices should be felt first and foremost by the most vulnerable households, who devote a larger part of their budget to essential expenses.

Russia and Ukraine are two major exporters of wheat, corn, rapeseed, and sunflower oil. Russia is also the world's largest supplier of fertilizers and gas.

“Many economies in the regions of the EBRD are also very dependent on gas in their energy mix,” continues the bank, which however criticizes certain government support measures in the face of soaring energy prices.

Beata Javorcik explains in particular to AFP that direct subsidy measures for gasoline or heating are very costly for public finances and give the wrong message in the midst of energy transition.

Rather, it encourages the establishment of financial assistance in the face of the cost of living crisis by specifically targeting the most vulnerable households.

The EBRD also notes that the Russian invasion of Ukraine has led to the largest population displacements in Europe since the Second World War, with "more than 5 million Ukrainians having left the country" since mid-April.

If in the short term this influx of refugees will weigh on the resources of the host countries, "in the longer term it could stimulate these countries with aging populations", concludes the institute.

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