No holidays for Ukraine: financing needs increase

No holidays for Ukraine: financing needs increase

As the war in Ukraine drags on and the country’s economic prospects deteriorate, the financial needs of the state increase. Meanwhile, the European Union is delaying granting more macro-financial aid and organizing the financing of the country’s reconstruction.

Wars have a cost. The Ukrainian state is currently funding its defense against Russian military attacks as its tax revenues plummet due to the collapsing economy.

Estimates at the start of the year suggested Ukraine’s economy could shrink by 35-50% this year, with the International Monetary Fund (IMF) estimating that the Ukrainian government will need around $5 billion a month to continue. to operate.

And this sum increases as the war continues.

Consumers and businesses are more cautious

Tymofiy Mylovanov, adviser to Ukrainian President Volodymyr Zelensky’s office and former economy minister, told EURACTIV that he “the impression that the needs will increase”.

According to him, the population and businesses have begun to realize that the war could last for several more months. “Everyone is being much more careful with their funds, people are spending less, companies are laying off more and savings are starting to run out”he said.

Last week, Ukraine’s state-owned energy company Naftogaz became the first Ukrainian government entity to default since the Russian invasion began in late February.

In May, the European Commission offered macro-financial assistance to Ukraine in the amount of €9 billion and set up a platform for the reconstruction of the country.

However, at the end of July, EU member states could only agree on €1 billion in aid, enough to cover the needs of Ukrainians for a week. about.

The first billion can be disbursed because 70% of the subsidized loans granted to Ukraine are guaranteed by the EU budget. However, the Union budget has reached its limits and cannot be used to cover the remaining 8 billion.

“The exceptional nature of this macro-financial assistance stems from the specific circumstances of the war in Ukraine, which require a provisioning rate under the Union budget of 70%, as opposed to a rate traditionally set at 9%”a Commission spokesperson told EURACTIV earlier this month.

To release the rest of the sum, the Member States must therefore undertake to provide additional financial guarantees. The Commission has indicated that it is trying to find a solution to finance the remaining 8 billion euros ” as soon as possible “.

There seems to be disagreement between member states on whether this money should be paid out in the form of loans or grants.

Indeed, while most member states of the bloc want to provide the rest of the money in the form of loans, the German government would prefer the aid to take the form of grants, because it fears that the German Constitutional Court will rule against the disbursement of macro-financial assistance in the form of loans.

Will Ukraine have to monetize its deficit?

In the meantime, lack of funding is becoming a problem for Kyiv. At the top of the list of priority spending is the army, as well as the development of structures to accommodate displaced people so that they are safe and warm during the winter.

“If we don’t receive the funds, we will have to monetize the budget deficit through the Central Bank”said Mr. Mylovanov. “And we know the theoretical repercussions of this measure: inflation”, he continued. Already in July, the Ukrainian Central Bank had to devalue its currency by 25% against the US dollar.

In addition to macro-financial assistance, the European Union has also promised to co-lead the reconstruction effort in Ukraine. At a recent donors’ conference held in Lugano, the Ukrainian government announced that it would need around 750 billion euros for the reconstruction of the country.

The EU has not yet presented a detailed proposal on how it intends to finance this reconstruction. A Commission spokesperson said no further details were to be expected before another donors’ conference the EU executive plans to hold this autumn with the German government.

” They [l’UE et le reste de la communauté internationale] live in a normal world where it is normal to go on vacation and take two more months to discuss the best way to organize the reconstruction and to refine the priority objectives ”commented Mr. Mylovanov.

“We don’t live in this world. We live in a world where people are dying every day.he added.

Source

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