Despite robust real GDP growth in 2024-27, and especially after the end of the full-scale war, Ukraine is expected to lag behind its convergence path to the EU. The reasons are insufficient investment, uncertain external financing, and low productivity gains. To change this trajectory and achieve the objectives of the Ukraine Plan, it is crucial to boost investments – from projected $140 billion in 2025-27 to $200 billion – as well as exports. In addition, additional foreign funding is needed to ensure budgetary stability. This KSE Institute report outlines a detailed forecast for key economic indicators and highlights opportunities and challenges with regard to Ukraine’s economic recovery in 2024-27.

Additional external financing from bilateral and multilateral partners is needed as Ukraine’s budget deficit is expected to remain considerable. Defense spending will keep budget deficits high, peaking at 21.1% of GDP in 2025. As the war’s intensity subsides and war expenditures slowly decline, the lack of committed foreign assistance will become a major challenge. Ukraine needs $90 billion in external aid for 2025-27 to finance the budget but only $62.5 billion are expected as of now and only $27 billion is fully committed. In 2025 alone, Ukraine faces a budget financing gap of $25 billion, followed by a shortfall of almost $40 billion in 2026-27 although the budget deficit is expected to decline to 12% and 10% of GDP, respectively. The EU’s recently announced €35 billion ERA macro-financial assistance package may partially address this issue, but additional funding sources are needed.

Ukraine’s real GDP is projected to remain about 10% below pre-invasion levels by 2027. KSE Institute forecast growth of 3.9% and 3.6% in 2024-25 before increasing to 5.2% and 6.5% in 2026-27. Importantly, this is based on the assumption that the full-scale war will cease by the end of 2025. Private and government consumption will drive growth in 2024-2025, while investment, even if it lies below needed levels, will be key to post-war recovery. By 2026, net exports’ contribution is expected to shift from negative to positive. However, government spending will decline sharply due to a major decrease in defense spending, and private consumption’s role will decrease somewhat as well. Per-capita GDP is forecast to exceed 2021 levels, driven by population decline.

The inflation outlook remains concerning, with inflation set to stay above the National Bank of Ukraine’s target until 2027. Rising wages and high producer price inflation will push up production costs, leading to higher consumer prices in 2024-2025. Energy prices will stay elevated due to heavy reliance on imports following infrastructure destruction. Headline inflation is expected to rise above 10% year-over-year in early 2025 before moderating towards the end of that year. Further inflationary pressure is expected in 2026-27 as the post-war recovery gains pace and increasing demand pushes up prices.

Ukraine’s current account deficit will widen over the forecast period, peaking at $20.6 billion in 2025, driven by declining foreign grants as partners shift their assistance towards loans. Goods exports are forecast to grow by 53% over 2023-27, with imports rising by 40%. The services balance will improve significantly by 2027, aided by reduced travel-related payments. A decline in committed financial assistance will create some external financing challenges and, thus, reserve losses. The situation is particularly critical in 2025 when KSE Institute sees a financing gap of $10 billion. However, the new €35 billion support package recently announced by the EU would go a long way to address such issues.

The Hryvnia is forecast to depreciate by around 10% annually during the war, with stabilization expected afterwards. Stable financial support would help the NBU to keep exchange rate depreciation at a moderate level. The additional €35 billion from the EU could further strengthen the currency, depending on the package’s specifics and timing. The National Bank of Ukraine’s policy rate is predicted to gradually decrease to 11% by 2027 as the central bank is unlikely to rely on interest rate hikes to control inflationary pressures.

KSE Institute’s Ukraine Macroeconomic Handbook provides a comprehensive overview of Ukraine’s economic situation in 2024-27, offering detailed forecasts and insights on the country’s recovery path in the years ahead. It also identifies key risks, one of which are energy shortages caused by Russia’s infrastructure attacks in early 2024. Ukraine’s electricity generation capacity was effectively halved and the situation will remain extremely challenging throughout the winter of 2024-25. In addition, Ukraine has been turned into a net importer of electricity, which puts pressure on the country’s external accounts.