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World Bank cuts Ukraine 2013 economic growth forecast to zero

Natalia Zinets

By Natalia Zinets

KIEV (Reuters) - The World Bank cut its 2013 growth forecast for Ukraine's economy to zero on Monday and warned of economic risks in coming years if the government does not quickly implement structural reforms.

The Washington-based lender had previously forecast 1 percent growth for the former Soviet republic this year.

Ukraine's export-oriented economy, dominated by steel production, dipped into recession in the second half of 2012 due to declining global demand for metals and it continued to contract in the first half of this year.

"We expect that growth of GDP will resume in the second half of this year because of a good agricultural harvest and low statistical base," World Bank analyst Anastasia Holovach told a news conference in Kiev.

"But it will not be enough to compensate the fall in the first half," she said.

Ukraine has been under scrutiny by ratings agencies on concerns that it could default on its debt.

Its $15 billion loan programme with the International Monetary Fund was suspended in 2011 after Kiev failed to raise domestic gas prices in line with the Fund's demands.

Loan repayments to the IMF are eroding the country's foreign exchange reserves. The government said last week it would seek to borrow $1.5 billion abroad this year and try to raise another $4 billion next year to help it service its foreign debt.

The World Bank forecast the economy would grow 2 percent next year but Holovach warned it would slide back into recession in 2015 and shrink 1 percent if there were further delays in reforms, and its external and fiscal gaps would widen.

It urged Kiev to commit to structural reforms, underpinned by an IMF bailout programme, under what the bank called a "Reform-Now" scenario. That would include gas price adjustments, energy sector reforms, cutting the fiscal deficit and a flexible exchange rate policy.

"Under the 'Reform-Now' scenario, growth would initially be slightly lower in 2014 (1.5 percent) because of tighter macro policies but fiscal and external deficits would shrink," Holovach said.

Economic growth would then accelerate to 3 percent in 2015 and 4 percent in 2016 due to the improved investment climate and strengthened energy sector, she added.

Ukraine's GDP declined by 1.1 percent and 1.3 percent in the first and second quarters of this year respectively from a year earlier, according to the State Statistics Service.

Falling consumer and producer prices since last year are another problem as they encourage consumers and companies to delay spending if they expect prices to fall. In September, consumer prices fell 0.5 percent year-on-year, according to official figures released on Monday.

Analysts forecast economic growth of no more than 0.1 percent this year.

The government has not revised its forecast for GDP growth this year of between 2.5 and 3.4 percent.

It approved a 2014 draft budget last month that projects economic growth next year of 3 percent.

(Additional reporting by Pavel Polityuk; Editing by Richard Balmforth and Susan Fenton)