In its latest Macroeconomic Handbook, the Kyiv School of Economic’s key assumption is the war will come to end this year and the recovery growth of 6% per annum will begin. / Ben Aris
Ukraine’s economic resilience continues to be tested as the nation navigates the multifaceted challenges posed by ongoing conflict but Kyiv School of Economics (KSE) assumes that the war will come to an end this year and economic growth of 4% expected in 2025 will increase to around 6% a year thereafter, according to its latest macroeconomic handbook release in January.
The good news for now is that the government has plenty of money thanks to the surge in Western military and financial support by the Biden administration in the months before US President Donald Trump took over.
“$75bn in loans and $18bn in grants are expected for budget financing from partners through 2025-27, with more than half of it accounted for by the G7’s Extraordinary Revenue Acceleration Loans for Ukraine (ERA) mechanism,” KSE said.
“This will also provide critical support for Ukraine’s external balance and offset a larger trade deficit, still suppressed foreign direct and portfolio investment, as well as outflows of resident capital, and allow Ukraine to accumulate $12bn in reserves, thereby boosting macroeconomic stability. Actions by Ukraine’s partners have, thus, led to a dramatic improvement in our outlook.”
In the first half of the year, budgetary spending will mostly go to the defence which accounts for 46% of total expenditures. The budget deficit, exceeding $30bn, has been financed through a combination of grants, domestic loans and external borrowing and the deficit of UAH1.6 trillion was 80% covered through help from Ukraine’s partners.
Notably, the EU and G7 countries have pledged approximately €55bn, with the EU committing €50bn to address 45% of Ukraine’s financial gap until 2027. Additionally, memoranda of support have been signed with organisations such as the European Bank for Reconstruction and Development (EBRD), International Finance Corporation (IFC), US International Development Finance Corporation (DFC), Multilateral Investment Guarantee Agency (MIGA) and British International Investment, aiming to expand trade financing for Ukrainian projects.
However, the fiscal outlook remains precarious, with potential risks that could have an impact on future budgetary execution, as funding is expected to fall off dramatically from 2026 onwards.
“The largest disbursement of $41bn is planned for 2025 and $34bn will be provided over 2026-27, supported by the G7’s ERA package and the EU’s Ukraine Facility,” says KSE. “Domestic debt issuance and a gradual return of foreign investors are expected to complement this financing. Assistance from abroad is also important for Ukraine’s external accounts and will allow the accumulation of an additional $12bn in reserves over 2025-27, leading to comfortable reserve coverage. This increases policy space for Ukrainian authorities.”
Growth remains robust given the circumstances and was around 4% in 2024, and similar is expected this year, on the back of heavy investment into defence by the state. If mooted ceasefire talks happen and the fighting stops, then a bounce-back boom is anticipated that could lift growth to 6% going forward, says KSE.
“Most importantly, we assume that the full-scale war will end by late 2025, followed by a low-intensity conflict or a full cessation of hostilities, driven by Ukraine’s diplomatic efforts and supported by international partners,” says KSE. “The analysis underscores the critical role of foreign financial assistance, with ERA funds expected to finance the budget while reconstruction funding will require separate and substantial commitments.”
Growth in 2025 will be driven by private and government consumption, with investment becoming the key driver of post-war recovery thereafter. By 2026, net exports are expected to contribute positively to growth, while government spending will decline. However, the economy will remain about 10% smaller than pre-war levels by 2027, KSE said.
Once peace returns, the main challenge will be funding the recovery. Kyiv can count on around $100bn in assistance in 2026 but this is far short of the World Bank’s estimate of $500bn that is needed for reconstruction.
“Total investments over 2025-27 will be ~$100bn, which is insufficient to fully fund reconstruction and recovery needs, which are estimated at over $500bn based on the World Bank’s RDNA3 and KSE Institute’s expert assessment. Securing additional funding, including through the confiscation of frozen Russian assets abroad, is a key objective in 2025,” KSE said.
While there has been talk of attracting investment from the private sector, currently the only realistic source of funds is from the confiscation of Russia’s frozen $300bn in CBR reserves. Ukrainian President Volodymyr Zelenskiy was in Washington to meet with President Trump at the start of February and is hoping to put pressure on the US president to persuade his EU partners to drop their objections to seizing this money.
Ukraine’s heavy reliance on external financing is expected to persist, raising concerns about its growing debt burden, which may exceed the forecast range. The report covers economic developments in key areas such as the budget, external accounts and economic activity, and highlights challenges related to electricity supply and the labour market.
Agricultural sector: The destruction of the Kakhovka dam has exacerbated challenges in Ukraine’s agricultural sector. The anticipated harvest of grains and oilseeds is projected to decline by nearly 6mn tonnes compared to the previous year. This reduction is attributed to both infrastructural damages and external factors, including Russia’s withdrawal from the grain agreement and trade restrictions imposed by certain European Union countries.
Infrastructure damages: The “Russia Will Pay” project team has updated their assessment of Ukraine’s material losses due to Russian aggression. The direct damage to public and private infrastructure sectors is now estimated at $150.5bn. This figure encompasses a wide array of assets, from transportation networks to energy facilities, highlighting the extensive impact on the nation’s foundational structures.
Recovery initiatives: In response to these challenges, Ukraine has articulated a comprehensive vision for its post-war recovery. A central component of this strategy is the preparation of the Ukraine Plan, which is part of a broader support package from the EU, envisaging €50bn in assistance until 2027. This plan emphasises macroeconomic stability, structural reforms and the attraction of private investments to facilitate sustainable growth.
Power imports to reverse: Ukraine’s electricity imports hit a record 4.1 TWh in 2024 due to severe damage to energy infrastructure from renewed Russian attacks. At the end of January, Ukraine’s stored gas fell to critically low levels, necessitating imports urgently. Ukraine’s gas storage tanks are approaching the 10% full mark with two months of winter left to go. Rising energy costs pushed inflation from 4.8% year on year in June to 11.2% in November, while higher external payments put pressure on the currency. Power shortages hindered economic recovery, with GDP growth slowing from 4.0% in September to 0.7% in November. However, imports are projected to decrease to 2.7 TWh in 2025 and 1.9 TWh in 2026 as restoration progresses. By early November 2024, 3 GW of the 9 GW of damaged generation capacity had been restored, with an additional 1 GW of new capacity connected to the grid. Another 1 GW of new capacity is planned to be operational by spring 2025.
Funding the budget: The budget is largely financed over 2025-27 due to additional financial assistance from partners. Revenues will rise at a moderate pace in the coming years on the back of stronger tax receipts. Total revenues are estimated to have reached UAH3.1 trillion in 2024 with UAH1.6 trillion in taxes and more than UAH500bn in grants from partners. As far as taxes are concerned, this represents a 33% increase vs. 2024, driven by the economy’s recovery, higher imports, changes to the tax code and a growing tax base due to inflation. KSE projects tax revenues will continue to grow at a robust pace in 2025-27 and reach UAH2.4 trillion in 2027 (+49% vs. 2024). Grants from foreign partners are set to decrease after reaching a $13.1bn (or roughly UAH530bn) in 2024 but will remain an important source of revenues. After rising an estimated 18% in 2024, total revenues (including grants) will increase by another 13% by 2027.
Expenditures will rise significantly in 2025 before declining in the post-full scale war period. Spending on defence and security is the key driver of this dynamic and expenditures are projected to rise by 8% and 14% respectively as uncertainty regarding future military assistance from Ukraine’s allies requires the allocation of additional domestic resources to these areas. Altogether, KSE project roughly $72bn in spending on defence and security in 2025.
The budget deficit will reach 17.9% of GDP in 2025 before narrowing markedly thereafter. As a result of the aforementioned revenue and expenditure dynamics, the state budget deficit is expected to rise from UAH1.3 trillion ($31.9bn, 16.8% of GDP) in 2024 to UAH1.6 trillion ($37.5bn, 17.9% of GDP) in 2025 before declining to UAH775bn ($16.9bn, 7.5% of GDP) and UAH 532bn ($11.5bn, 4.6% of GDP) in 2026-27 respectively. This represents a substantial adjustment compared with the 21.2% of GDP ($37.9bn) deficit that Ukraine registered in 2023, although it was smaller in absolute hryvnia terms (UAH1.4 trillion). Financing needs will remain sizeable over the forecast period, however, with a cumulative budget deficit of UAH2.9 trillion in 2025-27, which is equivalent to $66bn.
FX: The NBU managed to contain hryvnia depreciation in the second half of 2024 through extensive interventions. In the second half of last year, Ukraine’s currency lost 4% of its value against the US dollar and 1% against the Euro – compared with 6% and 3% respectively in the first half of the year. This was driven by higher inflows of foreign assistance and also supported by the NBU’s interventions in the foreign exchange market totalling $20.7bn in the second half of the year (vs. $14.2bn in the first half). Such interventions will most likely continue in 2025 to prevent additional inflationary pressures from Hryvnia depreciation and are enabled by the significant support Ukraine is expected to receive from foreign partners, including through the ERA mechanism.
External sector: The outlook for Ukraine’s external accounts is quite positive, largely as a result of the $50bn ERA-based macro-financial assistance package from G7 partners and despite ongoing balance of payments challenges due to Russia’s ongoing full-scale war. Foreign assistance of more than $90bn in grants and loans over 2025-27 will offset wider goods and services deficits as well as the decline in foreign investment and persistent outflows of resident capital, altogether allowing for reserve accumulation of close to $12bn between 2024 and 2027. KSE says Ukraine will possess foreign reserves of more than $50bn by the end of the forecast period, which corresponds to more than six months of imports of goods and services and represents a comfortable level.
Ukraine’s current account deficit is projected to widen considerably over the coming years – from $9.6bn in 2023 to $13.2bn in 2024 and $25.9bn in 2025 before narrowing in 2026-27. Developments towards the end of the forecast horizon are driven by two key factors: external conditions will become more favourable following the end of the full-scale war, leading to increased trade in goods, an improved services balance and higher remittances. At the same time, the level of financial assistance from international partners in the form of grants is expected to decline significantly.
Non-resident capital flows are projected to perform very well over the forecast period, largely due to the ERA-based loans from foreign partners but also supported by stronger foreign direct investment after the end of the full-scale war and the return of foreign portfolio investors towards the end of the forecast period. Foreign direct investment (FDI) will remain broadly stable at $5.0bn per year in 2024- 25 as the full-scale war continues, but improve meaningfully in 2026-27 to $7.5bn and $10.0bn respectively.
Foreign investors are likely to re-enter the Ukrainian domestic sovereign debt market by 2026-2027 and a return to the Eurobond market is anticipated for 2027 (or even earlier). As a result, portfolio inflows will return in 2026-27 at $0.9bn and $4.2bn respectively after four years of continued outflows. The most important driver of capital flows are foreign loans, which have financed a significant share of external and budget needs since the start of the full-scale invasion. They are projected to remain strong due to the ERA mechanism, especially in 2024-25, reaching $28.3bn and $40.7bn respectively, before declining to $19.3bn in 2026 and $14.6bn in 2027. Resident capital outflows will moderate as the intensity of the war subsides – from $21.6bn in 2022 to $7.3bn in 2027.
