GDP growth will drop by 2% because of gas quarrel

The World Bank has published preliminary estimates of the economic impact of the Ukrainian- Russian agreement on increased gas prices. Whereas previously bank experts predicted Ukraine’s GDP growth at 3.5-5.5 percent in 2006, now the range is down to 1.5- 3.5 percent, meaning growth will drop by 2 percent.

The World Bank’s forecast relating to the fiscal deficit has also changed. Since assumptions concerning certain factors influencing the budget were optimistic, the World Bank had predicted a deficit of 3.5-4 percent GDP (2.6 percent according to Ukraine’s state budget). At the moment, foreign experts believe that the gas price increase will add approximately 0.5 percent GDP to the fiscal deficit. Therefore, the prognosticated 2006 budget deficit is 4.0-4.5 percent.

The new gas prices will also have a negative effect on the current balance of payments. The World Bank predicts that this year the payment deficit will amount to some 3 percent GDP (1.7 percent being the direct result of the gas price increase minus the boosted transit prices, along with perhaps 1.3 percent as a direct impact via the export branch).

Despite the worsening of basic prognoses for Ukraine in 2006 (inflation was not investigated because changes to retail prices have not been announced, and there is no information on monetary policies), the World Bank believes that the negative effect of the gas price increase can be eased by appropriate measures stemming from economic policies. According to Paul Birmingham, World Bank regional director for Ukraine, Belarus and Moldova, it is necessary to start a gradual switch to market prices for energy carriers and full compensation for their value. World Bank energy expert Dejan Ostojic says that for a significant period of time prices were artificially maintained at a very low level. This expert warns, however, that an immediate switch to the new tariffs will be “shock therapy for Ukraine,” and the government will have to work hard on the “trajectory” of energy tariff changes.

Birmingham emphasized the need to carry out an all-embracing program of reforms in the energy sector in keeping with the World Bank’s recommendations. The next step must be the introduction of high standards of transparency within corporate management. “We think it is very important to keep the Ukrainian public fully informed about all of the gas accords and ownership of businesses involved,” Birmingham stressed. He also strongly recommends that the Ukrainian government develop a plan to develop the energy sector, which would allow experts to forecast possible changes, rather than respond to them after the fact. Thus, no unexpected developments (can Ukrainian-Russian gas relations be called that?) will pose a threat to the most vulnerable social strata.