Can Ukraine’s economy survive without foreign aid? Experts aren’t sure

Origin: The Kyiv Independent, by Alexander Query

As Russia’s full-scale war approaches the two-year mark, Ukraine is headed for economic turbulence as vital external financial help hangs in the balance.

As the Ukrainian government spends all of its revenue on the military, it relies on international aid from its Western partners. The budget deficit is expected to reach $44 billion and Kyiv is hoping to cover it with both domestic borrowing and financial aid from abroad.

The Finance Ministry says the country will need around $37 billion in external financing next year, a slight decrease from the previously expected $41 billion. The total has been trending downward as the ministry ostensibly looks to cut costs where it can.

Ukraine’s needs will likely look closer to somewhere between $6-6.5 billion per month in 2024 to cover expenses, according to a former Ukrainian lawmaker with knowledge of current budgeting issues who asked not to be named due to the sensitivity around this issue.

Low reserves 

If Ukraine doesn’t manage to secure foreign aid in time, the government and the National Bank of Ukraine (NBU) will have to resort to various solutions, but none of them can replace foreign aid in the long term, experts told the Kyiv Independent.

The government may have just enough reserves to last January and February, Hlib Vyshlinsky, the head of the Center for Economic Strategy, told the Kyiv Independent.

Dragon Capital estimates that the government finished 2023 with an estimated liquidity balance of $3-4 billion, Vyshlinsky said.

“Currently, we have reserves for the first months and are awaiting funding from our partners,” Svyrydenko said.

Manipulating money

Some fiscal solutions exist to mitigate the lack of funds, but most of them come with harsh consequences, economists say.

Ukraine could attract funding by selling domestic bonds, meaning getting loans from households and businesses in exchange for future reimbursement with interest, or selling some to friendly foreigners, but the process is limited because it’s cumbersome, Vyshlinsky said.

The government could resort to printing money like in December 2022 when faced with the EU’s potential failure to meet its commitments, but inflation went up 27% at the time, an experience the NBU is not eager to repeat.

Pyshnyy dismissed the idea of printing money, referring to last year when the central bank managed to avoid such an extreme solution.

“I do hope that our efforts will make it possible to come through 2024 the same way,” he said.

Vyshlinsky and Fursa warned against printing money as it could result in high inflation and growing poverty in the country.

“If you print money, you will destroy the country’s stability, and you will have huge devaluation,” Fursa said.

But devaluating the hryvnia could be another solution, an unavoidable one if external funding does not cover Ukraine’s needs, Vyshlinsky said. A weaker hryvnia would mean the hryvnia equivalent of international aid could become larger, allowing for more spending.

Still, the hryvnia devaluation will not be able to compensate for the shortfall of tens of billions of dollars in the budget.

“It is not a solution to the funding problem itself.”