Ukraine Economy

Ukraine Economy

Subchapters:

  • Basic data
  • Public finances and the state budget
  • Banking system
  • Tax system

Basic data

Since 2016 (excluding 2020, -3.9% due to the coronavirus pandemic), Ukraine’s GDP has grown by 2-3.3% per year. GDP grew by 3.2% in 2021. Inflation for 2021 was 9.4%. According to the methodology of the International Labor Organization, the actual unemployment rate increased to the level of 10.3% of the working population in 2021 and amounted to 1.79 million people. The volume of industrial production for 2021 increased by 1.1%. The main “driver” of the acceleration of the industrial sector was the processing industry (61.9%), where woodworking and paper production (105.7%), production of transport vehicles and equipment (108.0%) and metallurgical production (+ 105.5%). Agricultural production increased by 14.4%. The turnover of foreign trade in goods in 2021 amounted to EUR 125.37 billion. A significant share of the total import volume: engineering production (33.6%); chemical production (20.4%); mineral products (17.0%); production of the agro-industrial complex (11.6%); metallurgical complex production (5.7%); products of light industry (5.1%). On Ukrainian exports: production of the agro-industrial complex and food industry (31.6%); metallurgical complex production (23.5%); mineral products (15.4%); engineering production (10.1%); chemical production (5.5%). At the end of 2021, foreign direct investment reached EUR 5.53 billion, which points to the growing confidence of global investors in the Ukrainian economy.  The most economically developed regions in Ukraine include Kyiv and Kyiv region (where, among other things, most foreign investments were directed in 2021), as well as Dnepropetrovsk region, Kharkiv region, Odesa region and Lviv region (significant investments are directed here from March 2022).

According to cheeroutdoor.com, the Ukrainian economy is oriented more towards the supply of raw materials, semi-finished products and agricultural production, with a process of gradual reforms taking place with an orientation towards increasing the share of finished products and products with a higher added value. The agricultural and food sector and the IT sector, including digitization, are developing very quickly in Ukraine. On the other hand, the trend of reducing industrial production continues, which is part of the long-term trend of gradual “de-industrialization” of the Ukrainian economy. A significant factor is the gradual linking of the Ukrainian market with the EU internal market on the basis of the EU-Ukraine Association Agreement and, within its framework, the EU-Ukraine Free Trade Agreement (DCFTA). The EU is also Ukraine’s most important trading partner.

Pointer 2019 2020 2021 2022 2023
GDP growth (%) 3.2 -4.8 3.2 -46.5 24.9
GDP/population (USD/PPP) 13,385.40 13,059.20 13,939.50 8,060.00 10,340.0
Inflation (%) 7.9 2.7 9.4 32.3 17.1
Unemployment (%) 8.2 9.5 10.3 17.5 15.7
Export of goods (billion USD) 50.1 49.1 68.1 40.4 54.3
Import of goods (billion USD) 60.8 51.9 72.8 45.5 58.7
Trade Balance (Billion USD) -14.3 -6.8 -6.7 -6.1 -6
Industrial production (% change) -0.5 -5.2 1.1 -50 30
Population (millions) 42 41.7 41.7 40.1 40
Competitiveness 54/63 55/63 54/64 ON ON
OECD export risk 06.VII 06.VII 06.VII 06.VII ON

Source: EIU, OECD, IMD

Public finance and state budget

Public finance 2021
State budget balance (% of GDP) -3.8
Public debt (% of GDP) 52.3
Current account balance (billion USD) -2.1
Taxes 2022
AFTER ON
F.O ON
VAT ON

Social protection, debt service and health care dominated the planned pre-war budget expenditures. The war has halved exports and imports – iron ore accounts for a quarter, while metal exports from Ukraine have almost stopped. Traditionally, the largest source of foreign currency income for the state budget of Ukraine is the export of agricultural production, which has decreased almost fourfold. The decrease in budget revenues causes a lack of money in the state treasury. The budget saw significant increases in spending on defense and public order, a slight increase in spending on health care and social protection. There was also a reduction in the remaining items, with the exception of basic expenses for the state apparatus.

The state debt of the UA rose to EUR 72.70 billion, i.e. by 0.96%. The state foreign debt of the UA rose by 1.47% to EUR 40.01 billion as of 30/11/2021. UA’s public debt increased by 4.9% to EUR 32.69 billion. State-guaranteed debt rose by EUR 657 million to EUR 9.78 billion. The UA National Bank expects the public debt to decrease to 55.8% of GDP in 2021 (last year, the national debt rose to 60.8% of GDP). The volume of foreign exchange reserves as of 31 December 2021 is EUR 2738billion.

The amount of debt threatens the country’s economic stability, and that is why the UA party will continue to rely mainly on external financing (IMF, WB, EBRD, EU) to ensure the country’s financial stability. Although it seems that the UA National Bank was able to set the exchange rate in a more acceptable ratio in favor of the hryvnia through administrative measures, the probability that it will maintain this exchange rate in the short term without new loans is rather slim. The result may be another sharp rise in inflation, which will lead to significant problems in the real economy and deeper destabilization of the country’s financial sector.

Banking system

The banking system in Ukraine is two-tiered, comprising the National Bank of Ukraine (NBU) and licensed commercial banks. After the nationalization of Privatbanka in 2016 and some other banks (Ukreximbanka, Oščadbanka, Ukrgazbanka), the state’s share in the banking sector reached approximately 55%. In 2021, the Ukrainian banking sector was further consolidated and reported a net profit of EUR billion. A total of 69 banks operate here (as of April 1, 2022), approximately a third of them have foreign capital. Among the largest banks in Ukraine according to profitability are Privatbanka (the largest Ukrainian bank with a profit in 2021 at the level of EUR 1.08 billion (i.e. 45.2% of the profit of the entire banking sector), Raiffeisen Bank Aval (the Austrian bank that is the most successful a foreign bank in Ukraine), Oščadbanka (the Ukrainian state bank with the second largest assets),

Since the outbreak of the new Russian aggression in 2022, the Ukrainian banking system has shrunk significantly, almost by 50%. Businesses have stopped working, 10% of Ukrainians have left their homes, and some will not be able to repay consumer loans and mortgages. Currently, the banking system remains liquid and the situation looks stabilized thanks to the manual management and intervention of the National Bank of Ukraine together with European partners. With the gradual easing of restrictions, the sector’s key challenge will be insolvency – some banks will leave the market completely, systemically important ones will most likely be nationalized.

Bad loans from insolvent banks (non-performing loans) are transferred to the Guarantee Fund, which offers them for sale through the PROZORRO electronic system.

Tax system

During the war, a new tax model was introduced in Ukraine to support Ukrainian business under martial law conditions, in particular:

  • discount was applied to the sale of fuel, namely the reduction of the VAT rate on fuel from 20% to 7% and the abolition of consumption tax;
  • tax rates were reduced and companies were allowed to switch to a simplified tax system (2% turnover tax instead of VAT and income tax);
  • introduced benefits for landowners who are exempt from paying land tax and rent for land located in areas where combat operations are taking place;
  • incentives were created to help soldiers and charity – the import and delivery of helmets, bulletproof vests, medicines and other defense goods to Ukraine etc. was exempted from VAT and customs duties.

The tax system in Ukraine before the war could be characterized as standard. Its basic principles are defined by the Tax Code. The most important taxes and fees include:

  • value added tax of 20% and 7% for pharmaceutical products
  • corporate income tax of 18%
  • tax on the income of natural persons in the amount of 18% (for working pensioners in the amount of 15% of income exceeding 3 times the minimum wage)
  • military tax of 1.5%
  • also ecological tax, land tax, motor vehicle registration fees, agricultural tax, consumption tax, local taxes and fees, etc.
  • uniform social contribution 22% (social and health insurance)

The Tax Code also regulates issues related to double taxation agreements that Czech entrepreneurs may encounter when doing business in Ukraine. This applies, for example, to the provisions on the so-called permanent establishment, dividends, interest, license fees and income from dependent activities.

The current situation in the field of taxes is on the website of the State Tax Service of Ukraine: https://zir.tax.gov.ua/main/index/stavki

As part of the gradual strengthening of Ukraine’s international cooperation, simplification and improvement of the tax system can be expected in the future.

Ukraine Economy