The struggling Ukrainian economy can survive for a few months until outside help comes in, but things will undoubtedly get harder in 2024 and Kyiv will have to rely more on its own resources.

The majority of the $43 billion budget deficit that Ukraine expects to close in the upcoming year will come from outside funding, notably 18.5 billion euros from the European Union and more than $8 billion from a U.S. package that also includes crucial military support.

Both measures should eventually pass, though there is still uncertainty around U.S. financial assistance, according to economists and foreign diplomats. Republicans in the U.S. Congress and Hungary in the European Union have stalled them thus far.

All of Kyiv’s income since the Russian invasion in February 2022 has gone into defence and the armed forces, while tens of billions of dollars in foreign aid have been used to pay for everything from social payments to pensions.

According to Olena Bilan, chief economist at Dragon Capital, Kyiv may not have all the money it needs by several billions in 2024, but a $10 billion gap would pose a threat to macroeconomic stability and the country’s IMF plan.

A significant drop in external funding might put the IMF’s programme in jeopardy because it needs solid financial assurances for the ensuing 12 months—the IMF approved a fresh $900 million tranche this month, according to her.

“The government has a liquidity reserve for January and February,” said Yurii Haidai, senior economist at the Centre for Economic Strategy, a think tank in Kyiv.

According to Dragon Capital’s Bilan, closing a large budget deficit might require Ukraine to increase taxes, which would be detrimental to the country’s economy, or possibly print money for the budget, which would carry further dangers.

Governor of the Central Bank Andriy Pyshnyi has made it plain that the bank does not intend to manufacture money this year and that doing so would be an extreme measure.

Additionally, Ukraine must figure out how to restructure its roughly $20 billion in foreign debt by the end of 2022, as sovereign bondholders had previously consented to a two-year payment suspension in August 2022.

Finance Minister Serhiy Marchenko stated that if the war continued longer, “the scenario will include the need to adapt to new conditions.” He added that the administration hoped to secure all foreign financing in 2024.

After falling by nearly a third the previous year, the GDP is expected to grow by about 5% this year. This year, foreign aid has been coming in on a regular basis, foreign reserves are almost at an all-time high, and inflation has dropped to single digits.

Businesses from both abroad and Ukraine have adjusted to the new circumstances of the war; some have even announced the opening of new production facilities in the west and centre, distant from the fighting in the more industrialised east and south.

While German drug-to-pesticide major Bayer intended to invest 60 million euros starting in 2023 in maize seed production in the central Zhytomyr region, Nestle put 40 million Swiss francs, or roughly $46 million, in a new plant in the western Volyn region.

The economy fueled by commodities is still smaller than it was prior to the war, and risks and other limits still exist despite some signs of improvement this year.

Following the invasion, millions of Ukrainians fled, and many have remained abroad. This has caused a labour shortage, particularly for highly qualified professions, which has been lamented by many enterprises.

Russian efforts to blockade the Black Sea have also hampered the economy, although analysts say that a shipping route established by Ukraine last summer in defiance of Moscow has aided in the sale of commodities and might show a noticeable improvement in development the next year.

There is still uncertainty about how the war will turn out, and the fact that refugees are still overseas complicates export logistics. According to the National Institute of Agrarian Economics, transportation and logistical issues caused a 7% year-over-year decline in agricultural product exports in November and increased the price of imported food. 60 percent of Ukraine’s exports are food-related.

According to the Kyiv-based investment firm ICU, growth will slow to 5.0% in 2024 from 5.8% in this year, and inflation will likely increase the next year. After growing by 5.2% this year, Dragon Capital projects GDP to expand by roughly 4% in 2024.

Economists predict that even if there are worries that Western financial support may be declining, Kyiv will always need foreign funding.

“We see the deficit (before foreign aid and loans) exceeding 10% of GDP at least until 2027, and going below 5% only beyond 2030,” ICU stated in its research note.

In the first ten months of 2023, Ukraine’s trade imbalance grew to a record $22.3 billion, demonstrating how imports were rising while exports were still declining.

Marchenko urged people to reduce their import consumption this month in remarks that were posted on Ukraine’s LB.UA portal.

According to him, placing the economy on a war footing entailed raising public awareness of the issue as well as developing the military industry.

“This reality will need to be corrected if we want to go on a military footing. It is a limit on public consumption,” he said.

“If we do not draw conclusions, the economy will draw them on its own – as a rule, quite quickly and painfully.”

(Adapted from GazetInternational.com)

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