February 3, 2023

Money News PH

The Premier Blog Where Money Talks

Ukraine’s struggling economy makes it more dependent on foreign aid.

Kyiv, Ukraine – Ukraine’s government has struggled to raise money in bond markets during the war, paying investors more than it takes in, according to a statement from the central bank, noting the country’s increasing reliance on foreign aid .

About a fifth of Ukraine’s territory is occupied by Russian forces. Important sectors such as steelmaking and agriculture were directly damaged by the war. And with cruise missile salvos hitting cities across Ukraine, tremendous uncertainty looms over all the country’s businesses.

The economy is forecast to contract by about 40 percent this year, dwindling tax revenues and indefinitely postponing previously planned spending that would have boosted growth.

The central bank statement released on Monday pointed to a less visible side of Ukraine’s war-induced funding gaps: an inability to raise money in the market. Since Russia invaded on February 24, Ukraine has been unable to roll over its accumulated pre-war debt. The country paid investors about $2.2 billion more than it raised through bond sales during that period, the central bank said.

All of this has left Ukraine’s public finances, which have been shaky in the post-independence boom, deeply dependent on support from the United States, the European Union, European countries that donate individually, and other donors.

The Treasury sold $6.7 billion worth of bonds during this period, despite fighting in south-east Ukraine, rocket attacks in the capital and the advance of the Russian military within about a dozen miles of central Kyiv in the first month of the war.

Much of these sales were seen as politically driven – with investors wanting to help the government or unable to invest elsewhere due to capital controls. The interest rate that the Treasury pays on government debt is below market value given the risks and other more market-driven indicators of the likely cost of borrowing.

In a feature of Ukraine’s wartime monetary policy, the central bank has maintained lending rates averaging about 25 percent, well above Ukraine’s bond yields, which have averaged about 15 percent.

Ukraine’s actions to cover summer deficits by printing money to pay soldiers’ salaries and other war costs pushed up inflation. Now the central bank is keen to curb inflation while the government seeks lower interest rates to lower the cost of borrowing.

The budget for next year passed by the Ukrainian parliament shows a deficit of about $36 billion. About half of the planned expenditures will go to the army, police and other military expenditures. The deficit is even larger this year, at about $5 billion a month.

The International Monetary Fund, which bailed out Ukraine through a long string of post-independence financial crises, did not continue large-scale lending during the war.

“They are concerned about debt sustainability,” said Tymofiy Mylovanov, a former economy minister who is a professor at the Kyiv School of Economics. “If the IMF is worried about debt sustainability and funding ability, imagine what private investors think.”

Waves of Russian rocket attacks on Ukraine’s power grid left around nine million people without electricity, President Volodymyr Zelenskyy said in his late night address on Monday. Power outages have brought economic activity to a virtual standstill in some cities.

Donors weighing the cost of defending Ukraine must also consider the potential cost of continued instability in Eastern Europe if Ukraine remains unstable, Mr Mylovanov said.

“Ukraine will be a net recipient of foreign aid for a long, long time, and in very significant amounts, precisely because it will be vital to European security,” he said. But continued instability in Europe would be more expensive than propping up Ukraine’s government, he said.