What does a 4.6% increase in GDP suggest, and what should we do to support Ukraine's sustainable economic growth in the long run?
Ukrainian economy has been growing for 14 quarters in a row. However, the most rapid Q2 growth has become a major topic recently. According to the latest data of the State Statistics Bureau of Ukraine, GDP grew 4.6% in Q2, annualized. This is really good progress, though somewhat unexpected for many. The National Bank of Ukraine has already modified its macro forecast for 2019–2021 by upgrading GDP growth from 2.5% to 3% this year, and from 2.9% to 3.2% in 2020.
What brought about these results and what does it mean for the public?
Reasons for growth
According to the State Statistics Bureau, the main factors behind 4.6% of GDP growth include continued investing activity, which encouraged the development of construction, in particular, at industrial production facilities and transport infrastructure projects, more intense activity in metal production and agriculture.
Another important factor was higher domestic consumption as a result of growing household incomes (with average wages adding 15% H1 2019), more foreign currency money transfers by Ukrainians working abroad, and a significantly improved consumer sentiment with people beginning to spend more because of positive expectations after the presidential election.
While such a rapid growth offers many reasons for optimism, it makes sense to systematically address the risks that may hold back economic growth in the future.
Risks in the future
Key foreign risks include weak economic activity worldwide. Many economists are already speaking about signs of a global economic crisis and recession, which will also affect Ukrainian economy, whose main trading partner is the European Union. Another risk is that of Ukraine reducing its natural gas transit from 2020 on as a result of the construction of bypassing gas pipelines.
We also run many risks domestically. For example, the risk of "eating away at" the revenue generated by purchasing imported goods instead of promoting domestic investment and production. Or the risk of changes in the current accountable monetary, lending, and fiscal policy in pursuit of quick and easy solutions to economic issues.
Further notable is the risk of restraining domestic drivers of economic growth or, in other words, slowing down economic reforms.
Drivers of economic growth
President Volodymyr Zelenskyi recently came up with a rather resonant statement that Ukrainian economy will be growing 5–7% (GDP) a year. To achieve this, Ukraine needs to prove itself as a reliable player in the world market to investors. After all, foreign direct investment is obviously one of the key driving factors of economic growth.
Let's have a look at what we should begin with.
First, we need to make Ukraine more attractive for doing business.
This involves meeting key requirements. For example, maintaining the rule of law, fair and predictable behavior of regulators, lack of regulatory barriers and the arm-twisting of businesses by law enforcement agencies. What it takes instead is a clear standardization and accountability of business to consumers. All of this will promote entrepreneurship in the country and attract investments.
Secondly, it takes the implementation of land reform, which directly contributes to a better investment climate referred to above.
As estimated by The World Bank, opening up the land market in Ukraine could increase its GDP by 1% to 2%. So it's worth getting down to business. A regulated agricultural land market will be introduced in 2020; the state program will be implemented to grant partial credit guarantees for the acquisition of land for agricultural purposes; raiding should be done away with.
Thirdly, it takes the long-overdue privatization and reform of state-owned enterprises.
Today Ukraine has too large a portfolio of state-owned assets: based on the latest data, there are 3,363 enterprises in the public sector. Their business spawns corruption and produces losses for the state through inefficient mechanisms of control and lack of transparency. The solution to this problem is very simple — the privatization of most state-owned enterprises and banks, and the introduction of an effective management at the few companies that will remain public.
Keep up the pace
Rather than an exhaustive list of initiatives for a new economic policy, the drivers above are only part of top-priority steps that have the greatest positive effect towards a better investment climate and a more sustainable economic growth in Ukraine.
Foreign experts emphasize that the invariable acceleration of growth of Ukrainian economy remains a challenge. For example, the 4.6% growth in Q2 2019 and 14 quarters in a row is an outstanding result, but some of our neighbors have been showing such progress for almost 25 years.
To maintain positive dynamics and continue moving along rapidly, resolute and accountable decisions are required from the country's new political leadership.