War budget. Will Ukraine have enough Western aid in 2023?
To defeat Russia, Ukraine needs not only external military support but also financial assistance. This was proven in 2022, but this year will be just as challenging. The US and EU have promised Ukraine more than USD 29 billion, although the country needs up to USD 10 billion more. The shortfall in 2023 should be covered by the IMF. Without this money, it will be difficult for Ukraine to finance key budget expenditures.
Although Ukraine’s main partners have already announced their support commitments for 2023 and have even begun to fulfil them, the fiscal year is expected to be difficult. The European Union, which in 2022 delayed the disbursement of funds, provided the first tranche of macro-finance in 2023 on January 17.
The EU has transferred EUR 3 billion (USD 3.25 billion) to Ukraine to finance January budget expenditures. The EU plans to provide the remaining EUR 15 billion out of the promised EUR 18 billion (USD 19.28 billion at the current exchange rate) in equal monthly instalments.
As in 2022, these funds are provided as a loan, so they will continue to increase Ukraine’s external debt, which grew by 33% last year. In hryvnia terms, the external debt increased by UAH 1 trillion, while the total public debt increased by UAH 1.4 trillion.
The repayment period of the macrofinance has been extended from 25 to 35 years. The EU countries will pay interest and other debt service payments instead of Ukraine if Ukraine fulfils the conditions agreed upon by the parties, which include the implementation of the rule of law, continued structural reforms and improved governance, energy reforms, and macro-financial stability.
The United States has pledged less than the Europeans this year, USD 9.9 billion, but the grants should flow regularly – the first USD 1 billion was received in January. “We have about USD 33.2 billion in funds already received and promised for this year. This does not cover the needs in full, but the revenues can also come from other countries or international financial organizations,” says Maksym Samoiliuk, economist at the Centre for Economic Strategy.
Another potential source of external support is the International Monetary Fund, which is expected to provide a new program worth USD 12-14 billion. However, these funds have not yet been approved, so they are not a “guaranteed” source to cover budget expenditures.
The three largest “donors” – the US, the EU, and the IMF – are to provide USD 38 billion to Ukraine in 2023, according to Prime Minister Denys Shmyhal. Accordingly, the monthly budget deficit was expected to be between USD 3-3.5 billion. However, in February, Finance Minister Serhiy Marchenko estimated the uncovered budget deficit at USD 10 billion out of the USD 38 billion deficit.
This budgetary funding estimate may become outdated. “In October, Ukrainian officials said that in 2023 Ukraine would need USD 38 billion, but that was before the Russian terrorist attacks on the energy system,” says Samoiliuk. “According to IMF estimates, the amount of financial assistance Ukraine will need in 2023 ranges from USD 39.5 billion to USD 57 billion.
The need for additional funding may arise for various reasons.
“The deficit could increase if the budget receives less tax and customs revenues, which could be affected by, for example, power outages or the expansion of the war zone. The deficit may also increase if unplanned expenditures increase, for example, due to the need to finance repairs to the energy system, additional military spending, etc.”, expects Maksym Samoiliuk.
The IMF’s financing terms are the least favourable compared to those of the US (grants) and the EU (concessional loans with a repayment period of decades).
Fulfilment of the commitments made to the IMF will not only guarantee the receipt of the next tranches of the Fund but can also be synchronized with the reforms necessary for Ukraine’s accession to the EU and will also be a signal to private investors to stay in the country.
“The value of cooperation with the IMF is primarily that it serves as a signal to other potential lenders and grantors: the Ukrainian government is stable, proactive, and can cooperate and receive funding,” explains Maksym Samoiliuk.
As for the financing terms themselves, IMF funds are the least favourable compared to those of the US and EU. “IMF funds are less favourable for us than the same assistance from the US (grant funding) or the EU (concessional loans with a repayment period of decades).
Additional IMF loans will increase Ukraine’s debt burden, as they will definitely need to be repaid. However, the availability of financing is better than its absence, and any amount of it will be useful this year,” says Maksym Samoiliuk.
The already promised funding should come to Ukraine more rhythmically than it did in 2022. Greater predictability of external financing in 2023 is a prerequisite for the government’s decision not to continue emission financing of the budget.
“The main problem with receiving aid in 2022 was the irregularity of inflows. The amount of funds transferred varied from month to month; this made it much more difficult to finance budget expenditures.
In addition, the funds were constantly delayed: the USD 4.2 billion that we received in January 2023 was actually supposed to be received in 2022. Both Ukraine and our Western partners are aware of this problem, so they are taking the financing of the 2023 budget seriously, and we need to avoid such fluctuations,” Samoiliuk said.
The article was published on Financial Club in Ukrainian.