Generous Support or Unpreparedness to Confront russia’s Aggression?

How many times have we explained to our international partners how an economy functions in wartime? How do businesses operate when cities are being destroyed and public finances are stretched to the limit? How is it even possible to ensure macroeconomic stability in such conditions? The answers lie not only in the efforts of the government and private sector but also in unprecedented international support.

Current economic situation in Ukraine has been determined by the war ravaging the country for almost three years. Evolution of the security environment will play a decisive role in shaping the country's fortunes in the years to come and afterwards. The exact amount of damage caused to Ukraine’s economy by the large-scale Russian aggression is extremely difficult to assess, but a recent joint survey by the World Bank, the UN, the European Commission, and Ukrainian authorities estimates its cost at 486 billion dollars, or nearly triple Ukraine’s 2023 GDP before the summer attacks on the energy sector and infrastructure.

The need for external financing in Ukraine amounts to $38.4 billion in 2025, with a budget deficit projected at 19.4% of GDP. Over the past year, Ukraine has received more than $100 billion in external support, forming the foundation for macro-financial stabilization. However, while these funds have helped stabilize the economy, they are insufficient to meet Ukraine's urgent needs. For example, expenditures in 2025 are planned at approximately $96 billion (UAH 3.6 trillion), and revenues are approximately $54.67 billion (UAH 2.05 trillion), highlighting a significant shortfall even with international assistance. Monthly budget execution projections reveal that deficits in individual months, such as October 2024 (approximately $26.54 billion, UAH 995.1 billion) and September 2024 (approximately $21.41 billion, UAH 802.9 billion), far exceed the scale of current external aid packages.

Despite the challenges, during the first 10 months of this year, Ukraine's economy has continued to grow, driven by transport (primarily due to the stable operation of the Black Sea export corridor for agricultural products, metals, and ore), construction, and the manufacturing industry (particularly the defense sector). Agriculture has also remained a key contributor, with increased grain and oilseed exports despite a nearly 10% decline in harvest yields. However, this growth, while a testament to the resilience of certain sectors, cannot fully offset the immense fiscal strain caused by the war, as ongoing destruction and extraordinary wartime expenditures continue to widen the budget gap.

The IMF program for Ukraine is a marker of trust in the country’s economic policy, demonstrating resilience and readiness for reforms during the war and Russian aggression, which has now lasted more than 1,000 days. While international support has been vital in providing a foundation for stabilization, the scale of Ukraine’s fiscal challenges highlights the pressing need for expanded and sustained assistance to ensure both immediate recovery and long-term economic stability.

Are the partners ready?

IMF Agreement, Foreign Assistance, and Key Challenges Ahead by IMF and Ukraine: A Milestone Staff-Level Agreement

The IMF and Ukrainian authorities reached a Staff-Level Agreement on the Extended Fund Facility Arrangement. This agreement grants Ukraine access to an additional US$1.1 billion, bringing the total disbursements under the program to US$9.8 billion. Ukraine's government has met all quantitative performance criteria, implemented structural benchmarks, and pursued policies that ensure macroeconomic stability despite the ongoing war. In a time of exceptionally high uncertainty, the program’s strong performance highlights the resilience and prudence of Ukraine’s economic governance.

Foreign Financial Assistance: Unprecedented Support Ukraine has received an impressive US$100.8 billion in foreign financial assistance from 27 countries and organizations, including the EU, USA, IMF, Japan, Canada, UK, World Bank, Germany, and Norway. Of this, 33% was disbursed as grants, while 67% came in the form of concessional loans. This significant support underscores the global commitment to Ukraine’s recovery and stability.

Economic Projections and Key Challenges

• GDP Growth: Real GDP is projected to grow by 4% in 2024, but challenges such as shaky energy infrastructure and labor shortages are expected to slow growth to 2.5-3.5% in 2025.
• Inflation: Inflation reached 9.7% y/y in October 2024 due to rising food and labor costs. It is expected to exceed 10% in early 2025 before declining to 6.9% by year-end and 5% by 2026 as energy conditions improve and agricultural outputs increase.
• Fiscal Deficit: The 2025 budget deficit is forecasted to reach 19% of GDP, reflecting war-related spending needs. Meeting these demands will require sustained external support and careful fiscal planning.

Monetary Policy and Financial Stability The National Bank of Ukraine (NBU) maintained the key interest rate at 13%, though price pressures may lead to a temporary increase to 14%. International reserves stood at US$36.6 billion by end-October 2024, supported by external aid. Despite the war’s impact, the hryvnia remained relatively stable. The exchange rate is expected to continue absorbing shocks, with the NBU maintaining adequate reserves and gradually liberalizing foreign exchange policies.

Banking Sector: A Resilient Foundation The banking sector showed resilience, with deposits from households and businesses increasing in volume. Deposit interest rates are expected to decline further, while loan demand, particularly for corporate and SME financing, reached its highest level since 2021. Consumer loans are also on the rise, driven by improved sentiment, lower interest rates, and a robust real estate outlook.

Anti-Corruption and Institutional Reforms The independence, competence, and credibility of Ukraine’s anti-corruption and judicial institutions remain pivotal. The restoration of the full supervisory board of Ukrenergo is anticipated in December 2024, with independent evaluations of key energy SOEs planned for early 2025. These steps underscore Ukraine’s commitment to transparency and effective governance.

Looking Ahead: Opportunities and Risks

As Ukraine navigates its recovery, significant challenges and opportunities lie ahead. Sustained international support will be crucial for addressing fiscal risks, stabilizing the energy sector, and maintaining macroeconomic and fiscal resilience.In 2025 economic growth of Ukraine – in the absence of cataclysmic security shifts - will persist, though at a slower pace than projected earlier. EBRD says that the destruction of electricity generation and transmission capacities is impacting Ukraine’s economy and has interrupted four quarters of solid GDP growth, leading it to revise down its forecast for the country’s GDP growth in 2025 to 4.7% from the 6.0% it forecast in May.
Ukrainian businesses should pursue opportunities in internal investments, as the most realistic investors in the war-time period, and seek external opportunities in the neighbouring markets. Taking care of personnel and its mental well-being remains the key priorities for employers, along with the transformation and innovation of the real and banking sectors.

IMF Engagement with Ukraine: Key Steps Towards Stability and Reform by Sixth Review of the Extended Fund Facility (EFF) An International Monetary Fund (IMF) team led by Mr. Gavin Gray held discussions in Kyiv with the Ukrainian authorities during November 2024 on the Sixth Review of the 4-year Extended Fund Facility Arrangement. Upon the conclusion of the discussions, the staff-level agreement has been reached with Board consideration expected in the coming weeks.

Enhancing Anti-Corruption and Judicial Institutions The independence, competence, and credibility of anti-corruption and judicial institutions should continue to be enhanced. The recent parliamentary adoption of the law reforming the Accounting Chamber of Ukraine is a welcome step in this direction. Strengthening the criminal procedural code and establishing a new high administrative court are key near-term priorities. Timely completion and publication of the inaugural external audit report of the National Anti-corruption Bureau of Ukraine (NABU) will contribute to effective anti-corruption enforcement. The full supervisory board of Ukrenergo is expected to be restored in early December, with independent evaluations of the supervisory boards of key energy SOEs to be undertaken in the first quarter of 2025. Hopefully, no other boards fall apart in the meantime…

Financial Sector Stability During Martial Law "The financial sector is stable and liquid, with reforms continuing apace despite challenges under Martial Law. To preserve financial stability and enhance preparedness for potential shocks, priorities include strengthening the bank rehabilitation framework, contingency planning and risk-based supervision. Until the end of this 2024 year, the focus was meant to be on inter alia contributing to long-term financial stability, including by preparing a deeper assessment of the banking sector health and further promoting central bank independence.

Tackling Non-Performing Loans (NPLs) Going forward in financial sector policies will need to preserve financial stability and prepare for the postwar recovery, including contingency planning, bank diagnostics, as well as tackling troubled banks and non-performing assets. The NPL ratio remains a burden for state-owned banks (SOBs), which still hold about 80 percent of the sector’s NPLs (60 percent are accounted by PrivatBank). IMF and other partners remain committed to strengthening the governance of SOBs. Everyone recognizes that sound governance arrangements are key to preserve financial stability, protect public finances, and maintain the confidence of international partners and people of Ukraine.

Strengthening Governance in State-Owned Banks The IMF remains fully committed to upholding the spirit of governance reforms in SOBs and ensuring their operation on a professional and commercial basis, without political interference on operational matters. A procedure for conducting annual business planning and performance assessments for all SOBs should be introduced asap. In parallel, the NBU is going ahead with asset quality review (AQR), viability analysis, and the diagnostics steps needed to design a Non-Performing Loan (NPL) resolution strategy. Let us all hope this will turn out to be a meaningful exercise leading to the ultimate NPLs resolution and enhancing the governance of the banking sector including SOBs even further.

The Hardest Months Are Yet to Come'

As Ukraine stands resilient against Russian aggression, the coming months promise to be the most challenging yet. Escalating military brutality, combined with delayed military support and the strain of war, is intensifying both economic and humanitarian pressures. While generous international financial assistance, including IMF programs, has been instrumental in stabilizing Ukraine’s macroeconomic landscape, it remains insufficient to address the country’s vast fiscal needs.

The situation is further complicated as the whole world, and Ukrainians most of all, are waiting for the transfer of the U.S. presidency—a period traditionally marked by a shift in priorities and potential delays in key international decisions. This transition in American leadership, coupled with intensified Russian offensives aimed at exploiting any perceived gaps in global support, puts Ukraine under immense pressure to navigate the coming months with limited resources and heightened military aggression.

The stakes could not be higher. Failure to act decisively now risks not only prolonging Ukraine’s suffering but also drastically changing the global security landscape. The world has yet to recognize that Ukraine's battle is not an isolated struggle but the very frontline for defending democratic values. The next few months will demand not only resilience from Ukraine but also unwavering commitment and timely action from its international partners.

Are we ready?

Resources:

1. https://suspilne.media/890789-marcenko-rozpoviv-aki-zovnisni-nadhodzenna-finansuvatimut-budzet-2025/

2. https://index.minfin.com.ua/ua/finance/budget/gov/

3. https://index.minfin.com.ua/ua/finance/budget/gov/