War may last longer: IMF unveils negative scenario for Ukraine
IMF unveils negative scenario for Ukraine (photo: Getty Images)
Experts of the International Monetary Fund have updated the negative scenario for Ukraine in case of a more intense war. The scenario assumes that the war will last until mid-2026.
The negative scenario assumes a longer and more intense war and a longer and more intense shock to the economy than the baseline scenario, which assumes that the war will end in the fourth quarter of 2025.
IMF unveils negative scenario for Ukraine
The total external financing deficit in the negative scenario is $177.2 billion compared to $148 billion in the baseline scenario. The forecasts of key macroeconomic variables for this scenario are significantly worse than in the baseline scenario, implying a decline in real GDP followed by a slow recovery and higher and more persistent inflation.
The scenario assumes that the shock will start in the first quarter of 2025 and will have a strong impact on corporate and household sentiment, as well as on the rate of migrant return, and will cause further large-scale damage to energy infrastructure and power outages compared to the baseline scenario.
As a result, real GDP growth will be weaker than in the baseline scenario, i.e., -2.5% in 2025 (compared to 2.5-3.5% in the baseline scenario).
High defense spending and weaker economic activity will lead to a further increase in the budget deficit in 2025-2026. The imbalance in the FX market will reappear and is expected to persist for a longer period of time given the poorer export performance.
The subsequent recovery will be more subdued than in the baseline scenario, given the even greater damage to fixed assets and deterioration in labor force dynamics, as well as weakened balance sheets, which will keep output below pre-war levels for a longer period of time.
The current negative scenario assumes some convergence to the baseline in the medium term, supported by the anchor of EU accession, return migration flows, and private investment.
“Overall, the extensive discussions with the authorities on contingency plans during the sixth review confirm that the program remains robust even in the event of such a negative scenario. The authorities' very strong political commitment and track record, as well as renewed funding guarantees from international partners and expected debt relief, inspire confidence that even in this updated negative scenario, the program's objectives of maintaining macroeconomic and financial stability, restoring debt sustainability, and ensuring medium-term external viability can be achieved,” IMF experts say.
The IMF has updated its baseline scenario, according to which Russia's war against Ukraine will be over by the end of 2025. This scenario assumes that Ukraine's economy will grow in 2025 and accelerate to 5.3% in 2026.
