KSE Institute’s newly released Ukraine Macroeconomic Handbook shows that the G7’s ERA assistance package helps to ensure the financing of Ukraine’s budget until 2027 and significantly improves macroeconomic stability. $75 billion in loans and $18 billion in grants are expected for budget financing from partners through 2025-27, with more than half of it accounted for by the ERA mechanism. This will also provide critical support for Ukraine’s external balance and offset a larger trade deficit, still suppressed foreign direct and portfolio investment, as well as outflows of resident capital, and allow Ukraine to accumulate $12 billion in reserves, thereby boosting macroeconomic stability. Actions by Ukraine’s partners have, thus, led to a dramatic improvement in our outlook.

This report provides a detailed forecast for Ukraine’s economic outlook in 2025-27, including key assumptions and an assessment of important risks. Most importantly, we assume that the full-scale war will end by late 2025, followed by a low-intensity conflict or a full cessation of hostilities, driven by Ukraine’s diplomatic efforts and supported by international partners. The analysis underscores the critical role of foreign financial assistance, with ERA funds expected to finance the budget while reconstruction funding will require separate and substantial commitments. Ukraine’s heavy reliance on external financing is expected to persist, raising concerns about its growing debt burden, which may exceed the forecasted range. The report covers economic developments in key areas such as the budget, external accounts, and economic activity, and highlights challenges related to electricity supply and the labor market. 

Additional foreign financial assistance will likely be sufficient to finance the budget over 2025-27. Ukraine’s budget deficit is projected to reach UAH 2.9 trillion over the next three years, driven by defense spending, which will peak in 2025. Foreign loans covered 80% of the UAH 1.6 trillion deficit in 2024 and will remain critical for budget financing. The largest disbursement of $41 billion is planned for 2025 and $34 billion will be provided over 2026-27, supported by the G7’s ERA package and the EU’s Ukraine Facility. Domestic debt issuance and a gradual return of foreign investors are expected to complement this financing. Assistance from abroad is also important for Ukraine’s external accounts and will allow the accumulation of an additional $12 billion in reserves over 2025-27, leading to comfortable reserve coverage. This increases policy space for Ukrainian authorities.

Inflation increased significantly towards the end of 2024, prompting Ukraine’s central bank (NBU) to tighten monetary policy. Consumer inflation reached double digits and is expected to rise further by mid-2025 due to higher electricity prices from ongoing Russian attacks, a drought in the summer of 2024, and rapid wage growth. In response, the NBU raised its key rate for the first time since the early stages of the full-scale invasion and is expected to increase it further to 15% in the first half of 2025. The central bank also intervened heavily in the foreign exchange market to manage Hryvnia depreciation, supported by BoP inflows from foreign partners. Inflation is projected to moderate in the second half of 2025, falling to around 9% by year-end and approaching 5% by 2027.

Ukraine’s economy is forecast to grow at approximately ~4% annually during the war and at around ~6% afterwards. Growth in 2025 will be driven by private and government consumption, with investment becoming the key driver of post-war recovery thereafter. By 2026, net exports are expected to contribute positively to growth, while government spending will decline. However, the economy will remain about 10% smaller than pre-war levels by 2027. Total investments over 2025-27 will be ~$100 billion, which is insufficient to fully fund reconstruction and recovery needs, which are estimated at over $500 billion based on the World Bank’s RDNA3 and KSE Institute’s expert assessment. Securing additional funding, including through the confiscation of frozen Russian assets abroad is a key objective in 2025.

Renewed Russian attacks caused record electricity imports in 2024, but Ukraine projects recovery by 2025-26. Ukraine’s electricity imports hit a record 4.1 TWh in 2024 due to severe damage to energy infrastructure from renewed Russian attacks. Rising energy costs pushed inflation from 4.8% y-o-y in June to 11.2% in November, while higher external payments pressured the currency. Power shortages hindered economic recovery, with GDP growth slowing from 4.0% in September to 0.7% in November. However, imports are projected to decrease to 2.7 TWh in 2025 and 1.9 TWh in 2026 as restoration progresses. By early November 2024, 3 GW of the 9 GW of damaged generation capacity had been restored, with an additional 1 GW of new capacity connected to the grid. Another 1 GW of new capacity is planned to be operational by spring 2025, marking significant steps toward energy resilience and reduced external dependency.