+500 billion in spending on the army: how does the government plan to cover the budget deficit, and will there be economic consequences?

On 13 March, the Cabinet of Ministers supported a draft law to increase state budget expenditures by UAH 537 billion to be spent on the defence sector.

Spending had to be increased because the previous version of the 2023 budget was based on the assumption that the hot phase of the war would end in the middle of the year, comments Olena Bilan, Director of Research at Dragon Capital and member of the CES Supervisory Board.

“After the amendments have been approved, spending on the defence and security sector will actually equal last year’s spending in these areas,” she explains.

The increase in spending will lead to an increase in the budget deficit to about $42 billion. Where to get the money to cover it?

International assistance

Ukraine can currently count on only $30bn in grants and loans from foreign partners.

In addition, the government expects to receive about $5 billion from the IMF. However, this still needs to be confirmed.

Similarly, little is known about Japan’s assistance, which may provide $5.5 billion. Representatives of Norway have talked about another $7 billion of support over five years.

Revenues from the domestic market

The government expects to raise most of the additional funds from the domestic market.

Yesterday, the NBU announced a cut in the interest rate on certificates of deposit from 23% to 20%. This will encourage banks to buy government bonds.

The NBU will probably have to continue using administrative methods to keep the dynamics of government bond placement from deteriorating, says Olena Bilan.

As a reminder, the government cannot direct external funding to the army’s needs. Therefore, it is important to raise funds from the domestic market. At the same time, the assistance of partners is critical for other expenditure items.

Will the increase in spending affect the economy?

If the expenditures are covered according to the plan, the impact on inflation will be minimal.

“An important prerequisite for this is reducing or stabilising the money supply outside banks. Recent administrative decisions of the NBU are also aimed at making banks raise interest rates on hryvnia deposits,” explained Yurii Gaidai.

The expert added that at the same time, we should expect to see a boost in consumer demand. This, in turn, will increase imports and slightly worsen the trade balance. However, the situation will be maintained if external financing is received steadily.

Source: Forbes