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Ukraine will have to create a new economy — Oleksiy Kushch


Ukraine is experiencing the most significant economic crisis in its history. Over the past 25 years, today, we have the largest inflation and economic decline. In an interview with Gazeta.ua, the expert at United Ukraine, Oleksiy Kushch, expressed the scale of risks and prospects for the country's post-war recovery.


How does the Ukrainian economy cope with the main challenge of 2022 — a full-scale war?


— The economy is under the influence of several structural shocks. The first is the war, including the destruction of assets, the loss of logistics and transport communications, sales markets, particularly export markets, and a colossal outflow of the population. The second is energy. We had energy issues before the war, including high prices for electricity and gas. Now, we have problems with the availability and sufficiency of energy resources. The economic core, which was created in Ukraine during Soviet times, has either already been destroyed or is in the process of being destroyed. We see the deterioration of our infrastructural, energy, and transport potential, as well as the fall of the gross domestic product by 30 percent. In currency, the fall is even greater— from 200 billion dollars last year, GDP will decrease to approximately 120-130 billion.


Fighting continues in areas where many businesses are located. Will it be possible to restore the work of the destroyed industrial giants?


— Ukraine had three territorial economic districts, according to the Soviet system of placement of productive forces. Donetsk-Prydniprovsky is the most industrially developed one. Now it is torn in half. From the industrial aspect, Donetsk is almost destroyed. Prydniprovsky is more or less intact. After the war, it will be the industrial core of Ukraine. It runs along the Dnipro River. It is a Ukrainian industrial rhombus that connects Kryvyi Rih, Dnipro, Zaporizhzhia, and Kremenchuk. In addition, we have three nuclear power plants — the South Ukrainian, Khmelnytsky, and Rivne power plants. So far, the fate of the Zaporizhzhia power plant is not clear. After de-occupation, it may be unusable due to damages. Nuclear power plants are a prototype of future industrial platforms that can be created in a 30-kilometer zone around the plants. For example, placing energy-intensive industries there, completing power units, and increasing their capacity. It is not advisable to restore the old industrial base in the form it had before the war. In Mariupol, there were two metallurgical plants built according to the old Marteniv system of metal production. Of course, the owners invested money in their modernization. But new factories must be built based on new technologies. To sell not only metallurgical blanks but also to produce sheet steel and engineering products. Ukraine needs a cognizant industrial and investment policy. It is necessary to think about the development of an industry with a high level of added value, export potential, and a large number of jobs. Before the war, we had a raw economy.


How is the budget now being filled? Will there be enough money for subsidies and pensions next year?


— The general fund of the state budget for 2023 is 2.3 trillion hryvnias. Of them, 1.2 are internal sources of funding. That is, taxes, emissions (printing of money. — GPU), profit of the National Bank, state-owned enterprises, and revenues from privatization. The rest of the funds are international financial aid constituting approximately 30 billion dollars. At the expense of internal sources, we finance the defense sector — 120–130 billion hryvnias per month. With international financial aid, we cover social expenses — almost 100 billion hryvnias every month. That is, the payment of salaries and pensions to state employees depends on foreign aid. So far, it's a pretty good situation. The Western allies promise to finance us throughout the war. Next year, they plan to allocate 18 billion euros from the European Union to Ukraine. We still need to find 10 billion to fully finance the social part of the budget. Most likely, it will be help from the United States of America, Great Britain, the International Monetary Fund, the European Bank for Reconstruction and Development, the European Investment Bank, and the World Bank.


What is happening in the agricultural sector? Do grain corridors help?


— The main problems are logistics and transport, as well as hostilities in the territories that are in contact with the front line. Therefore, the export of large physical volumes of raw materials will not be available shortly. It is necessary to proceed to the export of added value. It is one thing to export corn in the form of grain. Another is bioethanol or alcohol processed from it. Therefore, it is necessary to create processing enterprises and give technology grants to small farmers. Processing will create demand for domestic raw materials. Conventionally speaking, a farmer in the Cherkasy region will be able to sell grain to a plant in the Zhytomyr region. It will make sense to sow large areas. Small farmers will not depend on narrow logistics routes. After all, now they cannot get access to the export of their raw materials. Grain corridors are limited and under the control of large grain traders. Due to logistical difficulties, domestic prices are low. This does not encourage farmers to sow grain and harvest new crops.


What inflation does Ukraine anticipate next year?


— In 2023, consumer inflation is forecast at 30 percent. It does not mean that all goods will rise in price by the same amount. Inflation associated with social goods will be much higher, constituting 50 percent. The average indicator is hampered by utility tariffs not increasing. The growth of inflation will be influenced by the energy factor. Many businesses are now switching to generators, providing additional costs.


How has the purchasing power of Ukrainians changed, what about consumer attitudes?


— We have classic inflation of supply, not demand. Otherwise, prices in Ukraine would rise due to increased incomes. So far, income has not increased. On the contrary, real incomes adjusted for inflation became smaller. Consumer spending exceeds earnings. The deficit is covered by debts, savings, property sales, and help from relatives. Supply inflation is treated by lowering the National Bank's discount rate and lending rates. It is necessary to saturate the domestic market with cheap national goods. In the short term, we can do this with the help of imported goods. In the long-term, we risk destroying domestic production. Unfortunately, there is no other way out except for imports. This was caused by the first months of the war when it was necessary to stabilize the front, stop the enemy and liberate part of the territories. Now the issue of the energy front is in the first place. After stabilizing the military and energy fronts, the government needs to create a mobilization model of the economy. At the expense of cheap loans and the low discount rate of the NBU, saturate the market with goods of own production as much as possible. Then it will be possible to guarantee the employment of the population and the growth of wages.


Many people returned to gardens, stocks, and conservation. They remembered they had a house in the village. Will this trend continue in the following years?


— It was a survival strategy in the first months of the war. It is not long-term. In the world, the economies of urban countries are developing the most. After all, in the modern economy, 70 percent is occupied by the service sector. It can fully develop in large cities.


Food prices doubled or tripled. What will happen next with prices?


— We will have another price record for all goods that depend on energy resources. For example, greenhouse vegetables. The dairy industry is experiencing a colossal energy shock. Due to the lack of electricity, the production of milk is falling. These products will also become more expensive. Most likely, we will see a higher price for bread. It depends on the cost of gas and electricity. Eggs have already broken all price records. So far, the cost of meat is kept up by imports. But there is a risk of a price increase.


In Ukraine, unemployment has increased, and wages have decreased. Will these trends continue until the end of the war?


— Approximately 40 percent of citizens lost their jobs or faced a significant deterioration in working conditions. About the same number of people do not receive wages. Payments were either not recalculated following inflation, or were reduced for various reasons. Next year, 20 percent of Ukrainians will maintain their pre-war level of income. Accordingly, the level of poverty will increase. Official indicators will differ from real ones. The latter will make up more than 50 percent. After the war, we will have a demographic crisis. About 30 million people remain in Ukraine, of which 10 million are pensioners. Ukraine will need a program of repatriation of citizens, similar to the one in Israel. It is necessary to create conditions so that it is easier for Ukrainians to do business or take a loan at home than abroad. Ukrainians should create jobs at home, not in Poland or the Czech Republic. Then, in 5-10 years, it will be possible to return to the pre-war demographic level. If we don't introduce a repatriation program, we will reach a demographic bottom between 2040 and 2050.


What challenges await the country next year?


— It is necessary to prepare for a difficult post-war recovery. Do not expect that our problems will be solved by the Western allies. They will give money to restore critical infrastructure so that Ukrainians do not go to Europe as refugees. A key to the country's recovery will be a successful economic model. War is a period for rethinking. We need to create a new economy. It will take five to 15 years of hard work. But with the constant improvement of life.


Source: gazeta.ua


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