Where does Ukraine get its money during the war?

The war initiated by Russia has crippled the economy without giving it a chance to recover from the COVID-19 quarantine. Due to hostilities, businesses were shut down and destroyed, infrastructure was destroyed, and entire industries were paralyzed. The damage already accounts for hundreds of billions of dollars during the fourth month of the full-scale war. And if Ukraine’s reconstruction after the war can be called a maximum task, the minimum task now is to cover the current needs of the state: from the army and social payments to medicine and state employees.

The funds from Western donors are not yet able to keep up with the needs of the treasury. Grants and loans from partners since the beginning of the war accounted for half of the funds that the Ministry of Finance has managed to secure.

“As of June, Finance Minister Serhiy Marchenko deferred to the amount of USD 4.8 billion. This is essentially the delayed funding that we were underfunded in April and May. In fact, we have heard about all these decisions. As far as I’m concerned, they should technically be executed in June. This will allow us to finance the June budget deficit and even create a little reserve,” explained Hlib Vyshlinsky, executive director of the Centre for Economic Strategy (CES).

The National Bank remains the biggest donor to the treasury. Together with state banks, private banks and, to a lesser extent, the population, the NBU buys military bonds, helping the Finance Ministry to cover its budget needs.

Given this, the latest decision of the National Bank to sharply raise the discount rate from 10 to 25% was clearly not to the liking of the Ministry of Finance. The Ministry of Finance responded to the NBU’s decision by refusing to raise the interest rate on military bonds. The latest auction on Tuesday attracted over UAH 800 mln, which is a drop in the bucket given the current situation.

The NBU will not stop financing the budget in any case. According to Hlib Vyshlinsky, the rate does not play the main role when we talk about the NBU buying bonds, not the market placements.

“This is a transfer from one pocket to another. In fact, the Ministry of Finance will conditionally pay 25% or less, but then this profit of the NBU will be transferred to the state budget back to the Ministry of Finance,” said the executive director of the CES.

So far, in the next few months we are counting on foreign inflows. But of course, there is no guarantee that the amount of budget requests will not grow. In conditions of war, the sums of the deficit depend directly on the situation at the front, on how active the combat operations are.

“This affects both the number of military personnel and those who receive additional combat pay. This, unfortunately, is also affected by the number of families of the deceased military, who receive state aid of UAH 15 million,” says Hlib Vyshlinsky.

At the same time, according to the expert, it is also important what decisions will be made on state policy – for example, whether the tax benefits will be cancelled, or the authorities will go for populist decisions, which will demand even more payments from the budget.

The full material is published on RBC-Ukraine in ukrainian.