KYIV, Aug 25 – Ukraine’s economy has slid into recession in the second quarter suggesting the government’s measures have been largely failing to stimulate growth amid soaring prices and rising interest rates, data show.

The economy contracted a seasonally adjusted 0.8% in the second quarter from the previous three months after shrinking 1.2% in the first quarter, according to the State Statistics Service.

A recession, which is typically recognized as two consecutive quarters of economic decline, may have significant impact on annual growth targets, reduce the government’s revenue and corporate profits, and boost unemployment.

This is the second time that Ukraine falls into recession after the outbreak of the COVID-19 pandemic in March 2020. Ukraine’s dismal economic performance comes as most other economies throughout the world show strong economic recovery.

“This is bad,” Serhiy Verlanov, the former head of the State Tax Service, said. “It shows the government’s measures have been failing to restart economic growth, and this may have serious implications.”

Although shrinking on a seasonally adjusted quarter-on-quarter basis, the economy has grown 5.4% in the second quarter compared with the same period a year ago, according to the statistics service. This expansion, however, was much weaker than the government had expected, another indication that economic slowdown is underway.

The International Monetary Fund has suspended its lending to Ukraine in February due to the government’s persistent failure to restart economic reforms.

However, instead of accelerating the reforms the government has resorted to heavy borrowing on capital markets this year at much higher interest rates, which has created a set of new economic problems.

The rampant borrowing boosted Ukraine’s public debt almost 10% in the past seven months to $92.5 billion as of June 30, up from $84.2 billion as of November 30, 2020, according to the Finance Ministry. The debt shot up 18% over the past 25 months.

The heavy borrowing accelerated inflation, which hit an annualized rate of 10.2% in July, the highest level in years, exceeding the National Bank of Ukraine’s inflation target of 5%. This forced the NBU to raise key interest rates three times this year, most recently by 50 basis points to 8% on July 22, to cool off the inflationary pressure.

The high interest rates increase the cost of borrowing for businesses and individual consumers and eventually slow down Ukraine’s economic expansion, creating a vicious circle that may spell serious economic problems ahead.

“The stalled reforms and the policy of heavy borrowing at high interest rates is the worst combination possible,” Verlanov said. “This is a recipe for economic disaster.” (tl/ez)