Ukraine's struggling economy may be able to survive the next few months until foreign aid arrives, but 2024 will certainly be more difficult than this, and Kyiv will have to rely more on its own resources.
Next year will be more difficult for the economy of Ukraine
Next year, Ukraine hopes to cover a budget deficit of $43 billion mainly with foreign financial assistance, including €18.5 billion from the European Union and more than $8 billion from a US package. However, both aid packages are currently blocked - by Republicans in the US Congress and Hungary in the European Union — but should eventually be approved. At the same time, economists and foreign diplomats point out that the issue of US financial assistance remains a question mark.
Since the Russian invasion in February 2022, Kyiv has devoted all of its revenues to defence and the army, while spending on everything from pensions to social benefits has been covered by tens of billions of dollars in foreign aid. In 2024, Kyiv may be a few billion dollars short, but a $10 billion deficit would pose problems for macroeconomic stability and the International Monetary Fund programme, says Elena Bilan, chief economist at Dragon Capital.
The IMF, which this month approved a new $900m tranche, requires Ukraine to provide firm funding guarantees for the next 12 months, so a significant reduction in external financing could put its programme in jeopardy.
Yuriy Gaidai, senior economist at the Analytical Centre for Economic Strategy in Kyiv, notes that the Ukrainian government has liquidity reserves for January and February.
At the same time, in order to close the budget gap, the Cabinet of Ministers could raise taxes, which would be counterproductive for the economy, or even print money, which would also carry serious risks.
In parallel, Ukraine must also find a way to restructure about $20bn of external debt next year after sovereign bondholders agreed to a two-year repayment freeze in August 2022.
Finance Minister Sergiy Marchenko said that the government hopes to fully secure external financing in 2024, but added that if the war lasts longer, "the scenario will require adaptation to new conditions".
The economy is expected to grow by around 5% this year, after falling by almost a third in 2022. Inflation has fallen to single digits, foreign exchange reserves are close to historic highs, and foreign aid has been flowing regularly this year.
Ukrainian and foreign businesses have adapted to the new wartime realities, and some have even announced the opening of new production facilities in the central and western regions, away from the fighting in the more industrialised east and south. But despite modest signs of recovery this year, the commodity economy is still smaller than it was before the war, and risks and other constraints remain high.
Meanwhile, millions of Ukrainians have remained abroad since the invasion, leaving many companies complaining about a shortage of workers, especially for highly skilled jobs.
The economy is also being hampered by Russia's attempts to blockade the Black Sea, although a Ukrainian shipping route created in defiance of Moscow this summer has helped exports of goods and could significantly boost growth next year, economists say.
The outlook for the war is still uncertain and logistics remain disrupted, affecting the expert, 60% of which is food.
Kyiv-based investment house ICU forecasts growth will slow to 5.0% in 2024, after 5.8% this year, with inflation expected to accelerate next year. Dragon Capital expects GDP to grow by about 4% in 2024, after 5.2% this year. At the same time, Kyiv will remain dependent on foreign financing.
We see the deficit (excluding foreign aid and loans) exceeding 10% of GDP at least until 2027 and falling below 5% only after 2030, the ICU analysis says.
In the first 10 months of 2023, Ukraine's trade deficit widened to USD 22.3 billion, a record high, reflecting rapidly rising imports while exports remained weak. This has even led Economy Minister Sergiy Marchenko to call on the population to reduce consumption of imported goods. According to him, the economy's transition to a state of war means not only the development of the military industry, but also the public's understanding of the situation.
