Ukraine is preparing for the biggest reconstruction since World War II

Ukraine is preparing for the biggest reconstruction since World War II

People help clear debris at a bus station damaged after shelling during the Russian attack on Ukraine in Kherson, Ukraine February 21, 2023.

Lisa Niesner | Reuters

A year after the start of the full-scale Russian invasion, Ukraine’s economy and infrastructure lie in shambles, and the government and its allies are preparing for the biggest reconstruction effort since World War II.

The World Bank estimates that Ukraine’s GDP shrank by 35% in 2022 and forecast in October that the share of the population living below the national poverty line would rise to almost 60% by the end of last year – up from 18% in 2021.

The World Bank has mobilized $13 billion in emergency financing for Ukraine since the war began so far, including grants, guarantees and related parallel financing from the US, UK, Europe and Japan.

The International Monetary Fund estimates that Ukraine’s economy shrank by 30%, a less severe contraction than previously forecast. Inflation has also started to slow, but ended 2022 at 26.6% yoy, according to the National Bank of Ukraine.

IMF Managing Director Kristalina Georgieva visited Ukraine this week and met with President Volodymyr Zelenskyy and NBU Governor Andriy Pyshnyy, among others.

In a statement on Tuesday, Georgieva said she sees “an economy that is functioning despite the enormous challenges” and praised the government’s vision to move from recovery to a “transitional phase of reconstruction and EU accession”.

“Shops are open, services are being provided and people are going to work. This is remarkable evidence of the spirit of the Ukrainian people,” Georgieva said, also noting that government agencies, economic institutions and the banking system are fully operational.

“Despite the attacks on critical infrastructure, the economy is adjusting and a gradual economic recovery is expected later this year,” she added.

This handout picture, taken and released by the Ukrainian President’s Press Service in Kiev on May 16, 2022, shows Ukrainian President Volodymyr Zelensky (R) and Managing Director of the International Monetary Fund (IMF) Kristalina Georgieva (on screen). a video conference.

STR | AFP | Getty Images

Georgieva reiterated the IMF’s pledge to support Ukraine, and the Washington-based institution provided $2.7 billion in emergency loans last year. However, it is also working with Ukraine under an economic surveillance program, a precursor to establishing a full-fledged IMF lending program as Kiev seeks a multi-year $15 billion support package.

“The international community will continue to play an important role in supporting Ukraine, including helping meet major financing needs in 2023 and beyond,” Georgieva concluded.

“The war in Ukraine has far-reaching consequences for the local, regional and global economy. Only by working together as a global community can we build a better future.”

Massive reconstruction of the infrastructure

At a G-20 meeting on Thursday, US Treasury Secretary Janet Yellen urged the IMF to move “quickly” toward the fully funded lending program, with Washington providing $10 billion in economic aid in the coming weeks.

According to the Kiel Institute for the World Economy, between January 24, 2022 and January 15, 2023, the US provided a total of $76.8 billion in bilateral military, economic and humanitarian assistance to Ukraine.

That includes $46.6 billion in military grants and loans, arms and security aid, far exceeding the rest of the world. Britain was the second largest military contributor at $5.1 billion, followed by the European Union at $3.3 billion.

As the conflict enters its second year with no signs of abating, Russia increasingly attacks critical infrastructure and ongoing power shortages, Ukraine’s economy is expected to contract again this year, albeit at a low single-digit rate.

A recent estimate by the Kyiv School of Economics puts the total damage to Ukraine’s infrastructure at $138 billion, while Zelenskyy estimates that the country could end up costing more than $1 trillion to rebuild.

Destruction from a broken car window in Lyman, Ukraine, on February 20, 2023.

Anadolu Agency | Anadolu Agency | Getty Images

“Since the beginning of the war of Russia against Ukraine, at least 64 large and medium-sized enterprises, 84.3 thousand agricultural machines, 44 social centers, almost 3 thousand shops, 593 pharmacies, almost 195 thousand private cars, 14.4 thousand public transport, 330 hospitals, 595 state and local government administrative buildings were damaged, destroyed or confiscated,” the CFE report pointed out.

Meanwhile, Ukraine’s budget deficit has risen to a record $38 billion and is expected to remain high, although strong external support from Western governments and the IMF is likely, according to Razan Nasser, emerging market government analyst at T. Rowe Price.

“This should help close the funding gap, which in turn should help reduce reliance on monetary funding this year,” Nasser said.

At their policy meeting in January, NBU officials discussed a number of measures aimed at avoiding a return to monetary financing of the budget deficit.

Outside creditors agreed to a two-year sovereign debt standstill in August, acknowledging the immense pressure the war is putting on the country’s public finances.

“This will likely be the first step in the restructuring, with a likely deep debt haircut. ‘ Nasser said.

In view of the colossal damage to the infrastructure to date, a “political decision” is required as to how much private creditors should contribute to the reconstruction costs.

A worker inspects the damage near a Kharkiv freight yard that was partially destroyed by a missile attack during Russia’s invasion of Ukraine September 28, 2022.

Yasuyoshi Chiba | AFP | Getty Images

“When this war finally ends, the scale of the reconstruction and recovery effort will likely dwarf anything Europe has seen since World War II,” he said.

That view was shared on Wednesday by Deputy Prime Minister Julia Svyrydenko, who told Politico during an interview in Brussels that reconstruction should start later this year, although there is no immediate end to the conflict in sight.

“This will be the biggest change [since] World War,” she said. “We have to start now.”

Although starting reconstruction while the war is still ongoing and Russia continues to target civilian infrastructure may seem counterintuitive, Open Society executive director Daniela Schwarzer told CNBC on Thursday that it was essential.

Short-term reconstruction of Ukraine is an immediate priority for Germany, says BMZ State Secretary

“Ukrainians are arguing very clearly that reconstruction must begin in some parts of the country while the war is still ongoing because the country has to deal with the destruction of infrastructure – which is really happening every day – or people cannot do it “If I don’t live, the economy can’t pick up, so there’s a huge task,” she said.

“We will see how international financial institutions, including European ones like the International Bank for Reconstruction and the European Investment Bank, along with governments and the EU as well as the United States, over the next few months, but the next important question is how private investment will eventually be channeled into brought back Ukraine because governments alone cannot rebuild the country.”