Ukraine’s finance minister has made an appeal for immediate financial support of tens of billions of dollars to plug a gaping fiscal deficit caused by the Russian invasion.
Government spending exceeded revenues by about $2.7bn in March and Ukraine expects the gap to expand to $5bn-$7bn a month in April and May because of the war. Ukraine’s gross domestic product was worth $164bn in 2021.
“We are under great stress, in the very worst [financial] condition,” Sergii Marchenko said in an interview with the Financial Times. “Now it is a question of the survival of our country.”
“If you want us to continue fighting this war, to win this war . . . then help us.”
Marchenko painted a grim picture of the damage to Ukraine’s economy inflicted by Russia’s full-scale invasion in late February. Damage to civilian and military infrastructure was estimated at $270bn so far, he said, with nearly 7,000 residential buildings damaged or destroyed.
Though Ukraine has received significant military aid to help defend itself against Russia, the government wants its western partners to grant financial aid and to approve emergency lending from the IMF and World Bank.
About 30 per cent of Ukrainian businesses had ceased all activities and 45 per cent were working at reduced capacity, he said. Electricity consumption was down 35 per cent. Trade had collapsed, with exports halving between February and March and imports falling by more than two-thirds. The Kyiv School of Economics on Monday estimated total economic losses from the war at up to $600bn.
Marchenko demanded that Russia pay reparations for “the destruction of private and public property” during the war and said Kyiv had assembled an international legal team to lodge claims against Moscow.
But the priority was short-term finance. As Ukraine tries to limit its budget shortfall, the government had already made spending cuts of more than $6bn, but it was not enough, the minister said.
“We can cut some spending, but it can’t cover the gap,” he said.
Revenues were running at just over half of the prewar level, he added. The budget deficit in 2022, forecast at 3.5 per cent of GDP before Russia’s invasion, would run to “many multiples” of that depending on the duration of the war, he said.
The government continued to meet its core obligations of paying public-sector salaries and pensions and servicing its debts, he said. The country made a $292mn payment last month on a dollar-denominated eurobond maturing in September and would continue to meet its obligations to avoid default or restructuring, he added.
“A lot of politicians advise us to talk about restructuring but that is not our policy,” he said. Ukraine wanted to be able to access both concessional and commercial financing, and to be able to continue to issue external debt.
The government was in discussions with the US to secure guarantees to enable it to issue sovereign bonds at rates of interest below those currently demanded by the market, which were “far higher than optimal for us to borrow now”, he said.
The IMF said on Friday that it had opened an account to channel grants and loans to Ukraine to help it “meet its balance of payments and budgetary needs and help stabilise its economy”.
Marchenko called on rich countries to use the account to channel funds they received from the IMF last August, when it made a $650bn allocation of its special drawing rights or SDRs, a form of reserve asset that is the equivalent of newly minted money. The allocation was intended to help countries cope with the economic impact of coronavirus.
Members of the G7 group of the world’s largest economies received about $290bn in the allocation shared among the IMF’s 190 member countries, roughly in line with their share of global output. Marchenko urged rich countries to donate or lend between 5 and 10 per cent of their allocations to Ukraine’s war effort through the new IMF account.
“That allocation was not used, a lot of countries just parked it,” he said. “It is probably the easiest [form of support].”
Last month, the US Congress approved $13.6bn in military and humanitarian aid to Ukraine and other countries affected by the war. While Marchenko welcomed this, he said Ukraine would “not receive a cent” as it would be provided in the form of direct aid rather than in cash. “This is not direct budgetary support. We cannot use it to fill the deficit,” he said.
