Gloomy economy projections for Eastern Europe and Central Asia by World Bank

The cost of reconstruction and recovery in Ukraine has now risen to 411 billion US dollars, more than double the size of the country’s pre-war economy in 2021, the latest World Bank projection shows.

According to the World Bank’s Economic Update for the region, published on April 6, economic activity in Central and Eastern Europe (CEE) and Central Asia is likely to remain calm this year due to the ongoing repercussions from Russia’s war against Ukraine, persistently high inflation, and tighter financial conditions.

Regional output is now estimated to expand by 1.4 per cent in 2023, up from 0.1 per cent previously predicted. The optimistic, albeit deeply anxious, economic activity in 2023 reflects a lesser downturn in Russia and an improvement in Ukraine’s outlook.

Uzbekistan (5.1%), Tajikistan (5%), and the Caucasus states of Armenia and Georgia are expected to have the highest growth rates in 2023, both 4.4 per cent. Trade and investment diversion following Russia’s invasion of Ukraine has helped bolster growth throughout Central Asia and the Caucasus, balancing a drop in consumption as rising inflation reduced spending, the EE reported.

Poland, a former regional growth champion, is predicted to see GDP rise by only 0.7% this year, with Hungary seeing even weaker growth – 0.6% – as the eurozone crisis lowers foreign demand, producing a further drag on growth.

Regional growth is predicted to accelerate to 2.7 per cent on average between 2024 and 2025 as inflation falls, domestic demand recovers, and the external situation improves.

A sharp rise in consumer prices, particularly for food and energy, resulted in median annual inflation in the emerging markets and developing economies (EMDEs) of CEE and Central Asia reaching 15.9 percent by late 2022, the highest in more than 20 years and the highest among all developing regions of the world. Before peaking in 2021, inflation in CEE and Central Asia EMDEs averaged less than 4%.

The outlook remains exceptionally bleak. Growth in 2023 could be weaker if the war sparked by Russia’s invasion of Ukraine intensifies more, food and energy costs continue to rise, interest rate hikes accelerate globally or in the region, or capital flows to the region abruptly reverse. The current banking developments in several advanced economies may impact growth.

The Ukrainian economy

Ukraine’s GDP is expected to increase by 0.5% this year after contracting by 29.2% in 2022, the year of Russia’s invasion of the country.

While Ukraine’s economic toll from the invasion has been considerable, the reopening of its Black Sea ports, the return of grain exports, and significant donor funding are helping to maintain economic activity this year. 

According to the latest World Bank projections, the cost of reconstruction and recovery in Ukraine has now risen to 411 billion US dollars, more than double the size of the country’s pre-war economy in 2021.

In light of poor development and high inflation, the study includes a particular emphasis chapter on the cost-of-living crisis, which investigates the impact of high inflation on people’s living standards in the region.

Governments around the region responded to the cost-of-living problem with social assistance and subsidies, including restrictions on energy price rises, decreased public transportation fares, and caps on electricity and natural gas prices for individuals and companies.

However, the report’s analysis demonstrates the excessive weight of the cost-of-living challenge. It discovers that inflation was two percentage points greater for the poorest 10% of the population than for the wealthiest 10%. The disparity approached five percentage points in other nations in the region, such as Moldova, Montenegro, and North Macedonia.

According to the paper, policies that do not account for the varying inflation rates that households encounter are likely to provide insufficient support to vulnerable groups and may wind up being both inefficient and ineffective. 

It suggests going beyond the traditional consumer price index (CPI) to assess inflation to represent the actual cost of living for the poorest people. This is critical for developing more robust economic and poverty-reduction initiatives.