The European Bank for Reconstruction and Development (EBRD) has worsened its forecast for the reduction in Ukraine's GDP in 2013 from 0.5% to 0.8%, while maintaining the forecast for economic recovery in 2014 at 1.5%.

"Ukraine is expected to exit recession after virtually no growth in 2012 and an output contraction in 2013. However, the economy's medium-term prospects remain highly uncertain given large external imbalances, which in the short term will be partly financed by the package agreed with Russia," the bank said in an overview of the countries on the region on Tuesday.

It notes that it expects GDP to grow by 0.3% in the fourth quarter 2013 compared to the fourth quarter of 2012 after five quarters of decline.

The bank's experts predict that the average deflation of 0.3% in 2013 will be replaced by inflation of 2.6% in 2014.

The EBRD said that in Ukraine, the economy has been in a shallow recession since the second half of 2012, due to the decline in traditional exports, the contraction of private and public investments, and weakening growth in consumer spending.

The bank estimates that investment activity and construction remain subdued, affected by tight monetary conditions, an unfriendly business environment and more recently social unrest and political uncertainty.

The bank noted that short-term external pressures had been relieved for the time being by Russia's pledge to cut gas prices for Ukraine by a third and to provide loans of $15 billion, amounting to a total package of $20 billion.

"The announced cuts in domestic gas tariffs and possible fiscal and monetary loosening in the run-up to the March 2015 presidential elections may provide a short-lived boost to the economy," EBRD experts said.

At the same time, they said that in the absence of comprehensive structural fiscal transformation such policies could exacerbate the vulnerability of the stretched public finances and lead to greater macroeconomic volatility over the medium term. They believe that any boost to growth from the deal with Russia would likely be offset by the deterioration of private investment.

"In light of these uncertainties, we leave our 2014 growth forecast for Ukraine unchanged at 1.5 per cent," the bank said, recalling its forecast made last October.

Interfax