As Ukraine prepares to enter its third year of direct military conflict with Russia, the country is facing a huge budget gap. More than ever, the Eastern European country is in dire need of money.
It is therefore no surprise that Kiev will be closely watching the European Union (EU) leaders' summit early next month, hoping to secure a €50 billion ($54 billion) aid package for four years, from 2024 to 2027.
After nearly three years of fighting, one of Ukraine’s biggest strategic uncertainties revolves around whether international aid will arrive, and arrive in time, to prevent a “very, very painful” economic collapse.
Ukraine’s 2024 budget allocates nearly $40 billion – nearly half of its total spending – to defense, almost entirely funded by taxes. The remaining $40 billion will go toward maintaining the functioning of the state apparatus, from social security to the health care system.
“Do not exaggerate the dependence of the Ukrainian budget on external assistance,” experts from the Center for Public Finance and Governance at the Kyiv School of Economics (KSE) said in a response to questions from Politico EU.
According to the International Monetary Fund (IMF), Ukraine will need at least $37 billion in external assistance this year, most of which will come from the EU and the US. But neither of these donors has made a final decision on the amount of aid or the terms.
EU leaders are due to meet on February 1 to hammer out support for Ukraine, hoping to overcome – or circumvent – Hungary’s objections.
Workers clear debris at the site damaged by a missile strike in central Kharkiv, January 2024. Photo: Al Jazeera
In an interview with Politico EU last November, Ukrainian Finance Minister Serhiy Marchenko called on European allies to “unlock” this crucial support package, warning that his country’s economic collapse would be “very, very painful not only for Ukraine but for the whole of Europe.”
Ukraine will be able to survive some delays in Western support by raising taxes, selling government bonds or receiving piecemeal support from other international partners, experts from KSE said, but warned that such solutions would only be temporary.
In the long term, “there is no equivalent alternative to external financial assistance to meet all budgetary obligations in Ukraine,” the experts said. “If the country survives some delays in Western assistance, despite the negative economic consequences, a complete cessation of assistance will lead to the collapse of the budget system.”
So how bad is the financial situation for Ukraine? Politico EU analyzed the numbers on Kiev's state budget to get a closer look.
The cost of war is expensive
Specifically, according to the official revised budget, spending on the Ukrainian Ministry of Defense is the main expenditure item in 2023. The amount spent on this item alone exceeds the entire expenditure for 2019.
At the start of the war with Russia in early 2022, Ukrainian President Volodymyr Zelensky significantly increased the salaries of soldiers on top of their basic salaries, putting an increasing strain on the government budget. Despite a salary structure overhaul last March that limited bonuses for soldiers fighting on the front lines, military salaries will still account for nearly a third of current government spending in 2023.
A blank sign that displays exchange rates at a currency exchange point in a grocery store in Kiev, Ukraine, Dec. 19, 2023. Photo: Bloomberg
The initial budget allocated to the Ukrainian Ministry of Defense for 2023 was $39.4 billion. It was later revised to $56.3 billion to cover the growing costs of the conflict.
The 2024 budget has allocated about $28.6 billion to the Ukrainian Defense Ministry – this is equivalent to the amount spent in the first 7 months of last year. According to KSE, if the war continues until the end of 2024, the budget will most likely have to be reviewed.
The amount currently allocated to the Ukrainian Ministry of Defense accounts for the majority of Ukraine's defense spending budget for 2024.
Borrowing has kept the state budget afloat since the start of the fighting, causing government debt to rise significantly. According to the IMF, Ukraine's debt will become unsustainable without restructuring and financial reform.
Main funding source
Until 2022, Ukraine will finance its spending mainly through domestic borrowing — selling government-issued bonds to individual or institutional investors. Loans from other countries or international organizations such as the IMF were popular last year and will likely continue to be so in 2024.
In July 2022, the Ukrainian government negotiated a suspension of payment obligations to external creditors, which is expected to last until 2027. As a result, the country's access to international capital markets has been suspended, leaving it dependent on piecemeal agreements with governments and international organizations.
Since the start of the conflict, the EU has been the main source of external funding for Ukraine's state budget, providing $27.5 billion in loans and grants, or 37% of total funding.
Despite efforts to mobilize internal resources, Ukraine will remain dependent on external financing in the coming years. IMF estimates from November 2023 show that the country’s external financing deficit will reach at least $85.2 billion in 2024-2027. The shortfall could widen in an “adverse scenario” amid a more prolonged and intense conflict.
In fact, the IMF was already one of Ukraine’s main international creditors even before the conflict with Russia. Since the start of the conflict, the IMF has stepped up its support even further through the Extended Fund Facility (EFF).
The IMF will disburse the funds in tranches until 2027, after regular reviews. At the same time, Ukraine will have difficulty repaying its significant debts, which amount to more than $30 billion.
Looking forward to positive signals
Amid the ongoing war and the uncertain fate of international aid, Ukrainian Prime Minister Denys Shmyhal made positive comments after meeting with his Slovak counterpart Robert Fico in the western Ukrainian city of Uzhhorod.
Mr. Shmyhal announced that all 27 EU member states have given preliminary support to the bloc's 50 billion euro four-year support program for Ukraine, called the Ukraine Facility, Euromaidan reported on January 26, citing information from the official website of the Ukrainian government.
The Prime Minister of Ukraine hopes that the EU will be able to provide financial assistance in 2024 at a level close to that of 2023, covering the Ukrainian budget deficit. The funding program will allow the Government in Kiev to receive 12.5 billion euros per year in 2024-2027, supporting macro-financial stability and contributing to the recovery and modernization of Ukraine in the process of European integration.
Slovak Prime Minister Robert Fico and Ukrainian Prime Minister Denys Shmyhal in Uzhhorod, western Ukraine, January 24, 2024. Photo: Kyiv Independent
The Ukrainian Prime Minister also announced that the US President Joe Biden Administration plans to provide an $11.8 billion aid package to Ukraine this year, with optimism about the "green light" from the US Congress.
Notably, Hungary has not publicly abandoned its veto of the €50 billion aid package to Ukraine. However, Bloomberg reported that Hungary may drop its opposition to the creation of a €5 billion annual defense fund for Kiev. According to Finnish Foreign Minister Elina Valtonen, Budapest has given a “positive signal” that it will no longer oppose the funding for Ukraine.
Politico EU also said EU leaders are ready to strip Hungary of its voting rights in the European Council if Budapest continues to block aid to Ukraine at the February 1 summit.
Meanwhile, Slovakia has recently changed its stance on Ukraine and pledged not to join Hungary in blocking the aid program .
Minh Duc (According to Politico EU, Euromaidan)
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