The IMF predicts that in 2007, Ukrainian GDP will grow by only 4.3%, while in 2006 it grew by 6% (see table). The budget deficit will grow, and the current account will worsen. The official forecast is much higher – the Ukrainian budget includes economic growth of 6.5%, and the budget deficit will be 2.6%. Inflation, according to the Ukrainian government, will also be lower – 7.5%. The IMF is optimistic only regarding the growth of direct foreign investment. But here, too, the Ukrainian government expects more in 2007 – 7% of GDP. In its September forecast, the World Bank was also pessimistic – it expected GDP growth of 4.5% due to the rise in the price of Russian gas from $95 to $130 per 1,000 cubic meters and excessive taxes.

A year ago, the IMF was also skeptical about Ukraine. At that time, the fund predicted that Ukraine’s GDP would grow by 2.3% in 2006. And the World Bank predicted 1.5–3.5%. But Ukraine presented a surprise – starting in the second quarter of last year, it began to grow rapidly and, according to preliminary estimates by the State Statistics Committee, by the end of the year, GDP will increase by 7% (the IMF expects 6%). The IMF explains last year’s mistake by unexpectedly high world prices for metals and the consumer boom caused by the sharp increase in pensions and salaries in 2004–2005.

Now metals will become cheaper, gas has already become more expensive and the terms of foreign trade for Ukraine will deteriorate significantly, the IMF justifies its pessimism. The fund also expects a sharp slowdown in the growth rate of incomes of the population - this is a consequence of the efforts of the Viktor Yanukovych cabinet to limit budget expenditures. If in 2005 the minimum wage in Ukraine was increased by 40%, in 2006 - by 20%, then according to the 2007 budget - only by 13.5%. Real wages, the IMF expects, will grow by only 1.8%.

The IMF is also concerned about the rapidly growing Ukrainian banking sector. In recent years, Ukraine has experienced a credit boom, with the volume of loans issued increasing by an average of 40% per year since 2001. The debt of Ukrainian companies is also growing, with two-thirds of it denominated in foreign currency. The debt of companies has reached 50% of GDP. The Fund is calling on officials to tighten control over the state of the banking sector.

This time the IMF forecast may be closer to the truth than the government's expectations, says Dmytro Boyarchuk from the CASE-Ukraine analytical center. CASE estimates the growth rate in 2007 at 4.5%. Boyarchuk explains the rapid growth in 2006, like the IMF, by an unexpected surge in demand for metals and a consumer boom, but in 2007 both factors will disappear, he is sure. At the same time, investment growth will continue, and the rise in gas prices will only spur it on. Ukrainian companies will return funds from foreign accounts, directing them to technical re-equipment of production, says Boyarchuk.

According to Elena Bilan, an economist at the investment company Dragon Capital, growth will not slow down as much – to 5.7%. Dragon Capital expects metal prices to be stable in 2007, and the slowdown in household income growth will have a negative impact on growth.

Ukraine's GDP growth to slow down