Center of Public Finance and Governance

State Debt Review 2023 (full version)

Executive summary

In 2023, the combined state debt and state-guaranteed debt increased by 30.4% to $145.3 bn, representing 85% of the estimated GDP (up from 49% in 2021). The surge was predominantly fueled by a significant 49.1% rise in external debt, reaching $31.2 bn, while domestic debt experienced a more modest 10.0% increase, amounting to $3.8 bn. This disproportionate growth in external debt has altered Ukraine’s debt structure, with foreign exchange debt now constituting 73% of the total, up from 67% in 2022. 

The notable increase in Ukraine’s external debt to $31.2 bn was primarily attributed to $19.5 bn loan (or EUR 18 bn originally) from the EU’s Macro-Financial Assistance (MFA) package ($20.5 bn increase due to FX rate fluctuations and interests accrued). The MFA is expected to be succeeded by the Ukraine Facility Program, a EUR 50 bn fund, with EUR 38 bn set to be dispersed to the state budget over 2024-2027. Additional substantial contributions came from the IMF ($3.6 bn), IBRD ($4.8 bn) driven by projects like PEACE and INSPIRE, both featuring concessional terms and a grant component, and the Canadian government ($1.9 bn) under concessional terms, including a 4.5-year grace period and a 1.5% interest rate for tranches disbursed in 2023.

Ukrainian domestic government bonds (OVDP) brought a net inflow of $5.4 bn into the state budget (in contrast to an outflow of $4.2 bn in 2022), thanks to collaborative efforts by Ministry of Finance (MoF) and National Bank of Ukraine (NBU) aimed at revitalizing the local market, increasing primary market yields to 16-18%, and allowing banks to cover up to 50% of required reserves with benchmark OVDP. This resulted in a system-wide rollover rate of 150% in all currencies (67% in 2022). Strong demand from banks led to a cumulative increase of $4.7 bn in their bond portfolios over the year, reaching $17.3 bn (41% of total outstanding OVDP). The NBU attempted to encourage non-residents to reinvest OVDP funds in the primary market by allowing repatriation of OVDP interest after April 1, 2023 (previously banned). However, this only partially mitigated the outflow, resulting in a $0.4 bn reduction in their bond portfolio (compared to a $1 bn decrease in 2022) and accounting for 3% of total outstanding OVDP. 

The budget ran a deficit of $48.1 bn  (not considering foreign grants as a part of the budget revenues), amid large defense expenses and a limited ability to increase tax collection on a similar scale. In 2023, 52% of state budget expenditures went to the Ministry of Defense and an additional estimated 13% went to war-related security issues. The deficit was much higher than planned in the initially enacted Law on State Budget for 2023 ($35.4 bn), but foreign grants reduced it considerably – to $36.5 bn (20.6% of GDP). On average, expenditures exceeded budget revenues by $4.0  bn monthly – or $3.1 bn if foreign grants are considered as a part of budget revenues.

In total, 37% of budget expenditures (which reached $109.8 bn) in 2023 relied on external loans and grants. Another 5% were financed internally through the issuance of domestic government bonds. Only 56% were covered by budget revenues excluding foreign grants and 2% coming from changes in balances in the State Treasury accounts.

About 10.6% of GDP or $18.7 bn was directed to the service (interest $6.8bn and principal $11.9bn payments) of the  state  debt  in 2023. Most of it ($15.6 bn) was paid for domestic debt, while $3.2 bn went to foreign creditors.

Projections for 2024 estimate a similar debt service cost of 11.1% of GDP, totaling $20.8 bn. To address this, Ukraine contemplates the continuation of payment deferrals or restructuring, with a focus on fulfilling obligations to IFIs and other official creditors. While international financial aid, particularly the Ukraine Facility Program, is anticipated to play a crucial role in meeting credit needs of $38.6 bn in 2024, potential delays in fund inflows and the risk of reduced aid post-2025 pose challenges. Notably, the approval of grants for 2024 remains pending, emphasizing the importance of a balanced approach in commercial debt treatment to restore sustainability, address liquidity needs, and secure private financing for post-war development.

Fiscal Digest – 9M 2024

(executive Summary)

• In the third quarter of 2024, the government aimed to sustain fiscal stability despite a mixed performance in tax revenue collection and fluctuations in international financial assistance. In September 2024, Ukraine announced the successful completion of the restructuring of state and state-guaranteed debt amounting to $20.5 bn, a move expected to save $11.4 bn over the next three years and a total of $22.8 bn by 2033. Certain domestic taxes exceeded projections — corporate income tax (CIT) collection rose significantly, driven by strong banking sector profits. However, revenues from import-related taxes underperformed due to lower physical import volumes and tax exemptions introduced by Parliament to support households in achieving energy resilience. Meanwhile, international financial aid continued to play a crucial role for Ukraine’s budget. Notably, in August, after months of stagnation, Ukraine secured $5.5 bn in foreign grants — the highest monthly grant inflow since the beginning of the full-scale invasion. As a result, grants accounted for over half of the budget’s total revenues that month, providing critical relief.

• The need for increased defense expenditures became more pressing in the third quarter, as the initial budget underestimated the intensity of combat operations later in the year. In response, Parliament approved the first budget amendment of 2024, allocating an additional $12.5 bn for the armed forces of Ukraine. To finance these expenses and bolster domestic fiscal capacity for the following year, a landmark tax reform bill — the largest in Ukraine’s modern history — was passed. However, the bill remained unsigned for an extended period of time, causing uncertainties in funding critical defense and budgetary priorities. The president ultimately signed it in the final days of November.

• The financing of expenditures in the third quarter generally follows the trend of the first half of 2024. The defense and security sectors remain the primary focus of funding and  accounted for 65.3% of total expenditures in the first nine months of 2024. However, funding for the defense sector decreased by 8.5% in dollar terms compared to the same period in 2023, while in hryvnia the reduction was only 0.7%, thus exchange rate fluctuations remain one of the key factors in expenditure financing. Socio-economic sectors continue to receive funding at levels consistent with previous quarters. 

• Financing from international partners shifted from grants to loans, primarily due to a change in US policy, which provided Ukraine with $11 bn in grants in 2023 but only $5.2 bn as of November 19 of this year.This reduction in grants led to a 1% decrease in revenues in the first 9 months of 2024, which was partially offset by an increase in loans, of which $18 bn was received in the first 9 months of 2024.

• The budget deficit for 9M 2024 totaled $20.2 bn compared to $21.9 bn in the same period of 2023. However, in local currency terms, the deficit remained nearly unchanged, underscoring that the reduction in dollar terms was primarily driven by a 7.9% devaluation of the hryvnia during this period.

• Debt trends remain unchanged and public debt continues to grow due to the attraction of significant amounts of external financial assistance, mainly in the form of loans. State debt increased by 19.2% over the past twelve months – to $148.7 bn at the end of September 2024 (external debt +26.7% to $106.7 bn, domestic debt +3.7% to $42.0 bn). State-guaranteed debt, on the other hand, decreased by 21.3% to $7.0 bn due to minimal new borrowings under state guarantees and constant repayments of such debt.

Fiscal Digest – H1 2024

(executive Summary)

• Ukraine’s budget stabilized in the second quarter of 2024 after a challenging first three months of the year largely due to the unblocking of international financial assistance and improved domestic tax revenues. These developments allowed for a significant increase in government spending, particularly on military needs and social welfare, leading to one of the highest expenditure levels since the start of the full-scale war. Continued international financial support remains crucial for covering the non-military budget deficit, as such funds cannot be used for military purposes. However, the risk of insufficient internal financial resources to cover military expenditures in the second half of the year remains significant. This concern arises from the fact that the initial budget plan for defense spending in 2024 was lower than the actual amount spent on similar needs in 2023.

• The budget deficit in the first half of the year (H1 2024) amounted to $16 bn, a 9.9% increase compared to $14.6 bn in H1 2023. The primary reason for this rise was the significant reduction in grants received in H1 2024: only $1 bn compared to $7.4 bn in H1 2023.

• Revenues (excluding grants) increased sharply in H1 2024 compared to H1 2023 – by $4.5 bn or 15.8%. Tax revenues rose by 40.8% on the back of the economy’s adjustment to the war, changes to the tax code, and effects from inflation — thereby making the biggest contribution to overall revenue growth. However, the lack of internal resources might negatively influence revenues going forward.

• Expenditures in H1 2024 increased by 1.6% compared to the same period last year, reaching $49.6 bn. The most significant growth was observed in the public order, security, and judicial system sectors — +22.6% to $7.4 bn — and in the general government functions sector (mainly due to debt servicing) — +6.3% to $6.6 bn. The social protection sector is the only one that saw reduced funding in nominal terms compared to the same period in 2023 — -10.8% to $5.8 bn.

• State debt increased by 20.6% compared to the same period in 2023 to $144.3 bn by the end of the H1 2024. External debt rose significantly, with $23.9 bn in new debt, a 29.9% increase, bringing total external debt to $103.8 bn. Domestic debt grew by $0.7 bn, or 1.8%, reaching $40.5 bn. In contrast, state-guaranteed debt dropped by 14.3% to $7.8 bn, due to minimal new borrowing under state guarantees and ongoing repayments, including $2.5 bn in 2023.

Tax Digest July 2024

● Overall, taxes redistributed an average of 26.1% of GDP in Ukraine in 2021-2023. 

● Before the full-scale invasion, taxes were the primary financial resource for the state budget, covering 74.3% of state budget expenditures in 2021. 

● However, following the invasion, due to a significant increase in expenditures, the government was able to finance only 35.2% of expenditures in 2022 and 30% in 2023 from tax revenues. 

● At the end of 2023, the National Revenue Strategy until 2030 was adopted, which outlines the necessary reforms of tax and customs policies, as well as ways to improve the mechanisms for administering mandatory payments. 

● The main goals of implementing this document are to increase the financial independence and efficiency of tax collection in Ukraine, fight the shadow economy and reduce corruption risks in tax collection.

Fiscal Digest 2023

(executive summary)

● In 2023, Ukraine’s state budget deficit reached $36.5 bn (or 20.6% of GDP), broadly in line with original plans and 3.1 percentage points higher than in 2022 ($28.3 bn). Assistance from foreign partners was critical with grants of $11.6 bn representing 16% of total budget revenues. In addition, Ukraine received $30.9 bn in loans for budget financing in 2023. Net domestic bond issuance contributed $5.4 bn.
● Revenues (excluding grants) increased sharply compared to the previous year – by $20.2 bn or 49.1% y-о-y. Tax revenues rose by 12.1% on the back of the economy’s adjustment to the war, changes to the tax code, and effects from inflation. Non-tax revenues increased by more than 150% due to transfers from the NBU ($2.0 bn).
● Expenditures soared by 31.3% y-о-y to $109.8 bn, with military spending accounting for $57.4 bn alone. Additional expenses for security reached $14.0 bn. At the same time, expenditures decreased in the sector of Health care by 14% to $4.9 bn, in the Education sector by 8.6% to $1.7 bn and in the Social protection sector by 2.6% to $12.8 bn. Ukraine’s budget benefitted from the postponement of debt service on its commercial and part of public external debt, with interest payments reaching $8.1 bn in 2023.
● Total state debt (including guarantees) reached $145.3 at the end of 2023 – an increase of $33.9 bn or 30.4% vs. the previous year. At 85% of GDP, this is a sharp increase vs. 2021 when it was 49%. The structure of debt shifted significantly, with new external debt amounting to $31.2 bn and new domestic debt to $3.8 bn. As of end-2023, debt in foreign exchange accounted for 73% of the total.
● The 2024 deficit is expected to reach $38.6 bn as revenues are projected to decline to $43.5 bn (-40% vs. 2023) and expenditures to drop to $81.3 bn (-26%). Two key risks to the outlook are (i) higher military spending due to an escalation of the security situation; and (ii) revenue and financing shortfalls due to less assistance from international partners (currently planned to reach $37.0 bn).
Key

Draft State Budget 2025: Key Features and Strategic Priorities

On September 14, the government submitted the next martial law budget to the Verkhovna Rada on time, despite the fact that the issue of uncertainty for the next year remains extremely acute. At the same time, negotiations with international partners, on whom the country’s macro-financial stability largely depends, are ongoing. The main questions are whether there will be enough funds to cover the significant budget deficit and whether the planned expenditures will be sufficient if the war continues throughout the next year.

Budget Declaration 2025 – 2027

Draft Law on the State Budget for 2024: Key Features

On September 15th, the government submitted the second budget for a state of war to the Verkhovna Rada.

• What are the anticipated revenue increases and decreases?

• What expenditure priorities are outlined?

• How much is Ukraine’s national debt expected to grow in 2024?

• And what are the primary budget execution risks?

• Which taxes were on target and which were off?

• Is international support still stable?

• What are the risks to the sustainability of the budget system?

#Budget Barometer – March 2023

What happened to the Ukrainian budget in March?

• What are the peculiarities of budget revenues?

• What is the impact of international cooperation on the sustainability of public finances?

• What changes can be expected in the near future and what risks could arise?

#Budget Barometer – February 2023

What happened to the Ukrainian budget in February?

• Is the revenue plan meeting the deficit financing target?

• What are the expected changes in the public finance system and potential risks?

#Budget Barometer – January 2023

What happened to the budget in January?

• How did 2023 begin in the realm of public finance?

• What was the role of international aid, both refundable and non-refundable?

• How much were domestic tax revenues, and how much was received in customs payments?

Discover these and other details of the budget’s implementation in the Budget Barometer for January 2023.

Social Barometer 2023
Over the past two years of full-scale war in Ukraine, an increasing number of people are in need of state support. The number of persons with disabilities has increased by approximately 300,000 (reaching 2.7 million by the end of 2021). Additionally, 3.4 million individuals have become internally displaced due to ongoing hostilities, occupation of territories, and loss of housing and income (bringing the total to 4.9 million internally displaced persons (IDPs) in Ukraine as of the beginning of 2024 compared to 1.5 million at the end of 2021).

In 2023, the government actively reformulated social policy, focusing on assistance to the most vulnerable groups (veterans, persons with disabilities, and IDPs), including the development of specialized social services. Moreover, there has been a shift in the philosophy of social policy from providing assistance to individuals in dire situations to comprehensive support aimed at helping them reintegrate into social life and the job market. However, what about the funding?

What changes occurred in social protection in the second half of 2023? How are funds allocated for social welfare? How will expenditures on social protection change in 2024? How many internally displaced persons were there in 2023, and what proportion of them received the IDP subsistence allowance? Did the Pension Fund of Ukraine have enough funds in 2023 to fulfill its obligations? You can find answers to these and other questions in our review of social expenditures.

Social expenditures: what and why the state finances in the first half of 2023

The prolonged full-scale war initiated by russia against Ukraine has led to catastrophic consequences in the lives and well-being of the Ukrainian population. Millions of people have been forced to abandon their homes and relocate to safer communities within the country or leave the country altogether. According to the United Nations High Commissioner for Refugees (UNHCR Ukraine), there are currently 6.2 million Ukrainian refugees worldwide. According to the Ministry of Social Policy of Ukraine, in the first half of 2023, nearly 4.9 million citizens were registered as internally displaced persons (IDPs) within Ukraine. Among them, 1.3 million are elderly people, 1.1 million are children, and 200,000 are persons with disabilities. The World Bank estimates that 7.1 million people have fallen below the poverty line due to the loss of property and means of subsistence.

The UNHCR Ukraine reports that 17.6 million people in Ukraine are in urgent need of humanitarian assistance and protection. State support, including funding for social protection programs during the war, plays a crucial role in ensuring the safety, dignity, and well-being of people in conditions of extreme complexity and instability.

Read more

National survey on public perception and awareness of social policy in Ukraine

This year, Kyiv School of Economics in partnership with InfoSapiens, at the request of the Ministry of Social Policy of Ukraine and with the support of UNICEF, conducted a nationwide sociological survey, the first wave of which covered 2047 respondents and allowed to assess the accessibility, impact and problems of social programmes.

The survey results include information on the level of needs, satisfaction and convenience of receiving social services to which citizens are entitled, on the readiness and incentives of citizens to adopt children, and on attitudes towards the existing pension system and the current system of support for veterans.

Analytical report on the results of the first wave

Analysis of Mechanisms to Support Individuals in Difficult Life Circumstances

Summary

The research had a goal to analyze the mechanisms of social support for citizens who find themselves in a category of vulnerable groups, with special focus on people affected by the Chernobyl disaster, internally displaced persons, children, who have suffered from war, and veterans.

In the social protection system of Ukraine, the algorithm and results of supporting the people in need is not clearly defined. Support system of citizens primarily based on their status in the social protection schemes, rather than vulnerability criteria and actual needs. Social services are a more progressive tool of support, however, the government continues to give preference to cash payments as the main tool of support. One of the most common legislative guarantees is the provision of housing, but even before the full-scale invasion of russia, as a result of which thousands of Ukrainians were left completely or partially homeless, the government could not ensure the practical implementation of this guarantee. 

Legislation covering support for various categories, for example, persons who are victims of the Chernobyl disaster or children suffered from war, is outdated and does not meet their current needs. Children affected by the war with the russian federation do not have a clear and defined support mechanism from the state authorities. 

The government is more focused on supporting the urgent needs of IDPs, but certain areas of policy related to returning to the place of residence are neglected. The veterans’ support policy needs a clearer mechanism for determining the process of returning service personnel to civilian life with a list of the types of support they can count on and criteria for evaluating their effectiveness.

As recommendations, based on the research results, it is proposed to form a system of criteria that will determine which types of support will be the most effective for various vulnerable groups, considering an individual approach to assessing needs. It is important to link expenditures from the state and local budgets with indicators of their impact on solving actual problems of vulnerable groups. 

It is necessary to provide a connection between the motivational component and receiving benefits in order to encourage people to refocus receiving payments and compensation on receiving services, which from a practical point of view will have a more effective impact on overcoming difficult life circumstances. 

The existing system of social protection also needs updating of the category of recipients of support and the types of benefits distributed to them, because the model of social protection for the majority of the population was established back in the times of the Ukrainian SSR.

In accordance with the challenges associated with the war with the russian federation and the return of servicemen to civilian life, it is necessary to standardize the list of benefits and develop a clear algorithm for their receipt, the impact of their implementation. 

There is also a need to develop support mechanisms for children affected by the war with the russian federation with an updated definition of obtaining status for this category of children. As part of the recovery from the consequences of the war, it is necessary to update and supplement the list of types of support that will motivate IDPs to return to the de-occupied territories of Ukraine when they becomes safer.