A five-year period of rebuilding Ukraine after the war will require additional investment of about $50 billion a year thanks to inflows of foreign capital, including private capital, the European Bank for Reconstruction and Development (EBRD) laid out this scenario in its Regional Economic Outlook report published on Tuesday.
“For a rapid recovery, foreign capital inflows need to reach $50 billion a year within five years,” the bank pointed out, citing lessons from history.
It noted that a quick recovery is not the norm: historically, most economies that emerge from armed conflict do not experience a long-term quiet period for 25 years afterward, nor do they recover to prewar per capita income levels even in the long run.
At the same time, the report says, 29 percent of economies do reach prewar per capita GDP levels within five years.
“For Ukraine to recover within five years, its economy would have to grow at a rate of 14% per year for the entire period. This would raise average GDP to $225 billion from about $150 billion in 2022 at constant prices,” the EBRD stressed.
In the meantime, the bank has kept Ukraine’s GDP growth forecast for 2023 and 2024 at 1% and 3%, respectively.
The bank added that the main common feature of the periods of stable extremely high economic growth is a high investment-to-GDP ratio. He reminded that before the war the moderate levels of investment in Ukraine were mainly financed by domestic savings: capital inflows were only 3% of GDP per year in 2010-21, while foreign direct investment tends to fall substantially after a war and takes a long time to recover.
This is why the report cites the example of Central and Southeast Europe in the 2000s, where domestic savings were low, but foreign financing helped sustain the investment boom.
In the case of Ukraine, doubling the level of investment (as part of GDP) would require a significant increase in the country’s absorptive capacity, as well as the governance structure needed to develop complex projects and contracts, the EBRD notes.
“In this scenario, the difference between the required level of investment and available domestic savings would probably need to be covered by external financing (net capital inflows) of 20 percent of GDP, or $50 billion per year,” the report summarizes.
The bank draws attention to the importance of private investment, as the private sector provides much-needed technological expertise, management know-how and a focus on economic efficiency.
“In addition to energy-efficient industrial capital and agricultural machinery, the private sector can make an important contribution to the rehabilitation of housing, as well as transport, energy and municipal infrastructure, provided that individual individuals and entities have adequate access to financing,” the report said.
The EBRD reminded that it had committed to invest EUR3 billion in Ukraine in 2022-2023, supporting the real economy, and is ready to play a key role in the recovery when circumstances permit.
As reported, Ukraine’s international financing to cover the state budget deficit is expected to rise to $42.5 billion in 2023, up from $32 billion in 2022.
According to the National Bank of Ukraine, direct investment in the country was $51.1 billion at the end of 2022, and peaked at $65.7 billion at the end of 2021.
