Frankfurt, Germany — Even as Ukraine celebrates recent battlefield victories, its government faces a looming economic challenge: how to pay for the enormous cost of the war effort without raising prices out of control for ordinary people or piling up debt that could hamper postwar reconstruction. .
The fight is to find loans or donations to cover next year’s huge budget deficit – and avoid using central bank bailouts that risk crippling Ukraine’s currency, the hryvnia.
Economists working with the government say that if Ukraine manages to shore up its economy by the end of next year, Russia will face financial difficulties if oil price caps proposed by the US, the European Union and allies cut Moscow’s income.
Here are key facts about Ukraine’s economic war against Russia:
How is Ukraine paying for its defense so far?
In the early days of the Russian invasion, the Ukrainian government turned to foreign aid that arrived at irregular intervals. When that wasn’t enough, the central bank used the newly printed money to buy government bonds. The alternative would have been to stop paying public pensions and state salaries.
Economists say printing money – a much-needed stop-gap measure at the time – could cause inflation to spiral out of control and devalue the country’s currency if it continues.
Ukraine has painful memories of hyperinflation since the early 1990s, economist Natalia Shapoval said. As a child, before it was replaced by today’s hryvnia, she saw large bills used for everyday purchases as the currency lost value day by day.
“Ukraine has been through this, so we know what out-of-control inflation looks like, and we don’t want it again,” said Shapoval, vice president of policy research at the Kyiv School of Economics. “The government and the central bank are already on a slippery slope by printing too much.”
Price stability and the ability to pay pensions will have an enormous impact on ordinary people and society at a time when Russia is trying to depress the population by knocking out power and water during the winter.
With inflation already high at 27%, rising prices have made it difficult for low-income people to afford food.
Halina Morozova, a resident of the recently liberated southern city of Kherson, said the equivalent of 50 US cents a loaf of bread has doubled.
“It’s very depressing, and we’re scared. We’ve been living with old stocks (of food), but now the light is off, the refrigerator doesn’t work and we have to throw away the food,” the 80-year-old said recently.
She said the Russians continue to pay her Ukrainian pension in rubles, but she has received nothing since they began withdrawing in October. She wants the government to return the lost pension money.
Tetiana Weinstein in Kherson says natural gas is too expensive to heat her home. “I’m cold. I like warmth and I am very cold,” the 68-year-old said.
Bank closures during the Russian occupation deprived her of pension cash, forcing her to carefully ration every hryvnia for food, she said.
How much support does Ukraine need?
President Volodymyr Zelenskyy says Ukraine needs $38 billion in full aid from Western allies such as the US and the 27-nation EU, along with $17 billion for a reconstruction fund for war damage.
Economists affiliated with the Kyiv School of Economics say a total of $50 billion from donors is enough to get Ukraine through the year.
The 2023 budget recently approved by Ukraine’s parliament calls for a six-fold increase in defense spending compared to last year. Military and security expenditure accounts for 43% of the total budget or a whopping 18.2% of annual economic output.
The 2.6 trillion hryvnia budget has a deficit of 1.3 trillion hryvnia, meaning the government needs to find $3 billion to $5 billion a month to cover the gap. Recent attacks on energy infrastructure since the budget was passed will only increase the need for financing because repairs cannot wait for post-war reconstruction and hit this year’s budget.
How does finance affect the outcome of war?
Despite Western sanctions, Russia’s economy is faring better than Ukraine’s because higher oil and natural gas prices have bolstered the Kremlin’s budget.
The EU and allies in the Group of Seven Democracies intend to change the price cap on Russian oil sales.
Economists of the Kyiv school “We believe that by the middle of next year, the economic situation will change in Ukraine’s favor, at which time strong partner support will be very important.”
How much financing does Ukraine already have?
The US was the leading donor, providing $15.2 billion in financial aid and $52 billion in total aid, including humanitarian and military aid, through Oct. 3, according to the latest data compiled by the Ukraine Support Tracker at the Kiel Institute. The global economy.
EU institutions and member states have committed $29.2 billion, although “their promises are reaching Ukraine too late,” said Christoph Trebesch, who leads the tracker team.
The European Commission, the EU’s executive arm, has proposed 18 billion euros in interest-free, long-term loans next year, which still require approval from member governments. The US will also contribute more.
But Ukraine is appealing for grants on loans. If all financing came in loans, debt would now rise from 83% and 69% before the war to 100% of annual economic output. That burden could constrain spending on war recovery.
According to the Ukraine Support Tracker, total global aid to Ukraine of $85 billion is less than 15% of the support pledged by European governments to protect consumers from higher energy costs as a result of Russia’s natural gas cuts.
To get the loans, the commission proposed that Ukraine improve its record on corruption. Since 2014, Ukraine has increased its score on Transparency International’s Corruption Perceptions Index from 26 out of 100 to 32 — not great, but improving.
US officials have praised Ukraine’s online procurement platform for introducing transparency into government contracts – a major source of corruption and collusion – and saving $6 billion.
The prospect of EU membership gives Ukraine an incentive to clean up corruption.
Can the International Monetary Fund help?
The IMF provided Ukraine with $1.4 billion in emergency aid and $1.3 billion to cushion the shock from lost food exports.
IMF Managing Director Kristalina Georgieva told The Associated Press that the Washington-based fund is working on more aid in cooperation with the Group of 7 wealthy democracies chaired by Germany this year.
“With the support of the G-7 and German leadership in particular, we are coming up with a good and substantial program for Ukraine,” she said.
However, for a large loan program of $15 billion to $20 billion, it would be contrary to IMF practices to lend money where the debt is unsustainable, and the war would raise questions about it. The organization is reluctant to lend to countries that do not control their territory, a situation Ukraine has yet to meet.
The IMF “needs to radically twist its existing framework or change it to provide significant amounts,” said Adnan Mazare, a senior fellow at the Peterson Institute for International Economics and former deputy director of the IMF’s Middle East and Central Asia Department.
As a prelude to a possible aid package, the IMF is holding a four-month consultation period and enhanced monitoring of Ukrainian economic policies to help Kyiv establish a track record of good practice. That can build confidence for other donors to step in.
Associated Press writer Sam Mednik contributed from Kherson, Ukraine.