Report on Ukraine’s Economy at Midyear

Ukraine’s economy has been deeply dependent on international financial aid from allies during the war. At the same time, the government uses internal reserves to support the economy. Below is an overview of Ukraine’s economy at midyear. 

Economic growth

Despite the electricity cutoffs and smaller harvests compared to the previous year, the National Bank of Ukraine (NBU) has improved its expectations for economic growth from 3.0 to 3.7% in July. Businesses in Ukraine are now much more prepared for electricity cutoffs because they have generators and batteries. 

Inflation

Inflation remained at a moderate level. In July 2024, the consumer price index from the beginning of the year amounted to 4.3%. This figure was 5.4% for the previous 12 months (a year ago, it amounted to 4.8%). The National Bank of Ukraine has increased its inflation expectations from 8.2 to 8.5%. But inflation is expected to start rising in the fall. At the same time, the NBU expects inflation to slow down in the next two years, returning to the target level of 5% in 2026. 

Since the beginning of the year, the NBU has gradually decreased its interest rate from 15 to 13%, as inflation was moderate and within the expected range.

Budget

In the first half of 2024, the Ukrainian budget had a $14.5 billion deficit, which is a quarter more than during the same period of 2023. Revenues were almost at the same level, but expenditures were 8% higher than during the same period a year ago. 

At the same time, income tax revenue in the first half of 2024 was $6.5 billion more than the year before. This compensated for the drop in international financial aid. From January to July 2024, Ukraine received $16 billion ($15 billion in loans and $1 billion in grants) in external financing, compared to $23 billion during the same period in 2023.

As of the end of July, the available funds in state and local budget accounts were less than at the end of February, when Ukraine had not received international financial aid for two months. However, in August, the country received $3.9 billion from the United States and $4.6 billion from the EU, mainly in loans. This should improve budget liquidity until October or November.

Taxes

In July, the government submitted a bill to raise the tax burden up to 4 to 5% of GDP. On September 3, parliament failed to pass the bill, lacking only one vote of the 225 votes needed, so it will be revised. If the bill passes and becomes law, this will be the most significant tax increase in recent years. New tax rates are planned not only for the period of martial law but also for the foreseeable future. 

The bill stipulates, among other things, an increase of military tax, collected together with personal income tax, from 1.5 to 5% and the introduction of a 1% military tax for businesses. Earlier, parliament passed a law to increase fuel excise taxes, which was a controversial issue, as this step will affect all prices and push inflation up.

The government submitted a budget bill and the tax amendment bill stipulating an increase of $12 billion in expenditures on security and defense. The government believes the two bills must be passed simultaneously. 

The proposed tax increase probably comes out of fear of a decrease in international aid in the future, rather than a lack of funds this year. The NBU anticipates this funding decrease in the coming years. International partners are expected to provide Ukraine with about $38 billion in soft loans and grants this year and about $31 billion next year.

National debt

As of July 1, Ukraine's state and guaranteed debt amounted to $152 billion—just $7 billion more than the amount of the debt at the beginning of the year. Such a slight increase in the national debt is caused by the relatively small amount of external financing ($12 billion); the devaluation of the hryvnia from 38 to 41 per dollar, which reduces the debt in US dollars; and the reduction of the debt guaranteed by the state by $1 billion.

At the end of July, Ukraine agreed to restructure foreign commercial debt for $23.4 billion. The agreement reduces budget costs for debt service by about $3.5 billion in 2024.

The balance of payments

The balance of payments worsened in the first half of 2024 compared to the same period a year ago. In the first half of 2023, international reserves rose from $28.5 to $38.8 billion. These reserves decreased from $40.5 to $37.9 billion this year. Despite the drop, this amount is enough to maintain an acceptable balance in the foreign exchange market and to respond to possible crises. This reserve will most likely rise, thanks to more international aid in the second half of the year. 

The opinions expressed in this article are those solely of the author and do not reflect the views of the Kennan Institute.