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EBRD outlines successful Ukraine reconstruction scenario

What a swift recovery in Ukraine might look like

EBRD sets out the lessons of history for a successful Ukraine reconstruction

For swift recovery, foreign capital inflows need to reach US$ 50 billion a year for five years

EBRD is Ukraines biggest institutional investor

What could a successful reconstruction look like in Ukraine? The latest Regional Economic Prospects (REP) report from the European Bank for Reconstruction and Development (EBRD) sets out a scenario, drawing on the lessons of history, which shows that a five-year recovery would require extra investment of around US$ 50 billion a year from inflows of capital from abroad, including private capital, in that time.

A swift recovery is not the norm. Historically, most economies emerging from an armed conflict neither enjoy 25 years of lasting peace afterwards nor recover to their pre-war trend level of income per capita, even in the long term. But, the report says, 29 per cent of economies do achieve their pre-war trend level of gross domestic product (GDP) per capita within five years. This research combines common features of successful reconstructions that could guide Ukraine and extrapolates pre-war trends based on the performance of economies similar to those at war.

For Ukraine to recover within five years, its economy would need to grow by 14 per cent a year throughout that period. This would raise average GDP to US$ 225 billion from around US$ 150 billion in 2022, in constant prices.

The main feature that periods of sustained, exceptionally high economic growth have in common is high ratios of investment to GDP.

Before the war, moderate levels of investment in Ukraine were mostly financed by domestic savings. Inflows of capital amounted to just 3 per cent of GDP a year from 2010–21. And foreign direct investment typically drops substantially after a conflict and takes a long time to recover. When domestic savings were low, foreign financing helped sustain a number of investment booms, including in central and south-eastern Europe in the 2000s.

In Ukraines case, doubling its levels of investment (as a share of GDP) would require a major increase in the countrys absorption capacity, including governance structures needed to design and contract out complex projects. It would also require appropriate financing.

«In this scenario, the difference between the required levels of investment and the available domestic savings would likely need to be covered by external financing (net inflows of capital), to the tune of 20 per cent of GDP or US$ 50 billion per annum,» the report says.

The report by the EBRD, Ukraines biggest institutional investor, also stresses the importance in earlier post-conflict reconstructions of an appropriate balance of private-sector and public-sector involvement, along with the important role played by external assistance from bilateral and multilateral agencies.

«Private and public investment tend to be highly complementary, in the post-conflict situation and more generally. Beyond financing, the private sector contributes much-needed technological expertise, management know-how and a focus on cost-efficiency,» the REP comments, adding:

«In addition to the energy-efficient industrial capital stock and agricultural machinery, the private sector can make an important contribution to rebuilding housing stock as well as transport, energy and municipal infrastructure, provided that individuals and firms have adequate access to finance.»

The report also touches on the usefulness of foreign assistance both in alleviating short-term funding shortages and in enforcing reform conditionality.

The absence of such impetus for reform and of wider efforts at building robust economic and political institutions, it adds, may obstruct private investment, leaving «bureaucratic gridlock, corruption or a high degree of informality caused by an institutional vacuum».

The EBRD has committed to investing EUR3 billion in Ukraine in 2022–23, supporting the real economy to ensure the lights stay on and the trains keep running in wartime, and stands ready to play a key role in reconstruction when circumstances allow.

16.05.2023


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