Ukraine, economics: external financing, Feb 2022

European Parliament approves emergency financial assistance

(for the EIU)

In mid-February, the European Parliament voted to extend to Ukraine an emergency EU loan worth Euro1.2bn. This clears the way for the swift disbursement of half the sum, following the earlier approval of the loan by the European Council, as long as the political and economic reform conditions attached to the funding are judged to have been met, which is likely.

The purpose of the loan in to help to cover Ukraine’s external financing gap, thereby supporting financial and economic stability in the country, undermined in recent months by the impact of geo-political tensions with Russia. Most recently, this showed itself as the withdrawal of coverage of Ukraine by some international commercial insurers, affecting airlines and shipping, and forcing the government to set up a new HRN16bn (US$592m) insurance fund of its own. 

Although the level of public debt in Ukraine has come down substantially since 2015—to 54% of GDP at the end of last year—the depreciation of the Ukrainian hryvnya to the US dollar since November last year is likely to exacerbate the public-debt burden. At the same time, the reserves of the National Bank of Ukraine (NBU, the central bank) fell sharply in January, while access to foreign capital markets remains restricted for the Ukrainian government and private firms.

This year, the Ukrainian authorities face a debt-servicing requirement of around US$2.5bn, according to the IMF [p. 54 of the SBA 1st review doc from Nov last year]. In addition, the government’s financing needs in 2022 will have to cover the budget deficit—expanded, not only by ad hoc economic measures, such as on commercial insurance, but also by unplanned additional spending in other areas, such as on military and civil defence.

In the current circumstances, funding from sources other than the EU are likely to be forthcoming. The first is the US$2.2bn remaining under Ukraine’s existing US$5bn IMF stand-by arrangement (SBA), set for completion in the middle of this year. This week, moreover, Antony Blinken, the US secretary of state, announced that the US would extend a loan guaranteed for Ukraine of up to US1bn, while the Canadian prime minister, Justin Trudeau, said that his government would provide a loan of US$500m. 

Current international developments will make it much harder for the government to stick to its’s recent reformulated plan for debt consolidation. This is just one of the signs of the toll that the geo-political confrontation with Russia is taking on the Ukrainian economy, even if the threat of another military attack does not materialise.

Following the vote in the European Parliament on financial assistance to Ukraine, the president of the European Council proposed the organisation of a donors’ conference to raise further emergency funds for Ukraine, while it is possible that an auxiliary IMF loan programme, running alongside the existing one, could also be developed. As much of the funding on offer will be in the form of loans, however, Ukraine’s public debt level could rise again.

 

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