IMF updates baseline forecast for Ukraine: what will change by the end of 2025

The International Monetary Fund has updated its baseline scenario for Ukraine, UNN reports.

Details

“The scenario continues to assume the war winds down by end-2025 and assumptions regarding energy sector developments and major policy objectives are maintained,” the IMF said following the 6th review of its cooperation program with Ukraine and listed the following:

• For 2024, revisions to the baseline mainly reflect the integration of recent data releases:

o Strong outturns have been incorporated into full-year projections, lifting 2024 real GDP growth to 4 percent y/y, up 1pp from the Fifth Review.

o The economic consequences of the winter energy deficit may be more limited than previously anticipated (despite the recent attacks) due to business investments in own generation capacity, increased potential for imports from Europe, and efforts to repair and install additional generation capacity and distribution.

o End-year inflation has been revised up 1pp to 10 percent, primarily due to continuing pressures from accelerating raw food prices, which also affected food-related core items, as well as the passthrough of past depreciation, rising wages and energy costs.

o The wider current account deficit (8.4 percent of GDP) reflects data updates to primary income which are partially offset by a stronger trade balance. Official financing, and to a smaller extent stronger net FDI inflows driven by reinvested earnings, supported international reserves which are broadly unchanged at US$42.3 billion. Credit growth has been revised up to 11.6 percent, Dec/Dec, reflecting favorable recent data releases.

• For 2025, revisions to the baseline are minor relative to the Fifth Review:

o The projection for real GDP growth is unchanged at 2.5–3.5 percent as the higher potential from faster repairs of energy capacity in 2024 and new capacity in 2025 would be offset by the effects of a tighter labor market, supporting stronger income and consumption growth amid easing price pressures in the second half of the year. Accommodative fiscal policy is a further factor supporting economic performance.

o Average inflation has been revised upwards by 1.3pp to 10.3 percent y/y from a more marked acceleration in 2024H1 due to the carryover of accelerating business costs and adverse base effects. The largely transient inflation pressures are expected to subside in 2024H2, which, together with appropriate policies, is expected to bring end-of-year inflation to 7½ percent.

o The current account deficit remains at around 14½ percent of GDP as a somewhat stronger trade balance helps to offset lower primary income; the increase relative to 2024 primarily reflects lower grants and elevated import needs. International reserves are expected to reach US$43.3 billion, somewhat lower than at the Fifth Review but still adequate (100.5 percent of ARA metric).

o The overall fiscal deficit remains broadly unchanged, reflecting the Parliament-approved 2025 Budget.

• Over the medium term, projections for major economic variables are little changed. In line with the expectation of a measured recovery, real GDP growth would rise in the years right after the war, before gradually converging to its potential of 4 percent; inflation would gradually converge to the NBU’s target level of 5 percent by 2027 as war-related inflation volatility subsides. The current account would begin to normalize a bit faster than at the Fifth Review reflecting expectations of a somewhat faster post-war external adjustment; reserves will remain fully within adequate ranges assuming increased private investment flows and policies supporting the resolution of external imbalances. Overall fiscal balances are modestly wider over the forecast horizon, continuing to reflect somewhat more elevated spending needs over the medium term; however, offsetting changes to other macroeconomic variables are containing the impact on projected public debt ratios.

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