The State Debt of Ukraine set a new historical record

The state debt of Ukraine increased by USD 34 billion over the year. and set a new historical record. Currently, it is twice as large as before Russia's full-scale invasion of Ukraine. How does this threaten the state and the population, and is Ukraine able to pay its debts?

According to the results of last year, the state debt of Ukraine exceeded UAH 5.5 trillion. This is twice as much as at the beginning of a full-scale war. Currently, the national debt has set a new historical record.

According to the Ministry of Finance of Ukraine, the state and state-guaranteed debt reached UAH 5,519.5 billion (or USD 145.3 billion in currency equivalent). Over the year, it increased in hryvnias by 35.4%, in currency equivalents – by 30.4%.

The press service of the Ministry of Finance clarified that among the donors of Ukraine were: Japan, the EU, the IMF, Norway, Germany, the USA, Switzerland, and the World Bank.

By the end of 2023, the share of liabilities in euros increased to 32.32%, while in US dollars it decreased to 26.21%, in hryvnia – to 27.21%, in special borrowing rights – to 11.34%, in Canadian dollars – up to 2.26%, in yen – up to 0.65%, in British pounds remained at the level of 0.02%.

Since the beginning of the full-scale war, the main increase in the national debt has been caused by external loans from official creditors.

According to Danylo Hetmantsev, chairman of the Verkhovna Rada Committee on Finance, Tax and Customs Policy, the biggest impact on debt growth in 2023 was the receipt of 18 billion euros of macro-financial assistance (soft loans) from the EU. This led to a 55% increase in the state debt in hryvnias and up to 61% in foreign currency.

The growth of Ukraine's national debt was also influenced by the receipt of loans under the programs of the IMF, the World Bank, the EBRD, and the government of Canada.

The lion's share (about 6/7) of the growth of the entire national debt in 2023 was caused by an increase in foreign debt. The rest (1/7) is at the expense of OVDP.

So, since the beginning of the full-scale war, the main increase in the national debt has been caused by external loans from official creditors.

In total, last year, Ukraine attracted 42 billion dollars. external financing only to cover budget needs and made a record amount of borrowing on the domestic market. This was announced by the Minister of Finance Serhiy Marchenko. He expressed hope that the plans for receiving revenues from internal sources will also be fulfilled, although he noted that in the case of customs, this is "less likely."

Unfortunately, forecasts for future debt growth are disappointing. Thus, the IMF predicts that the total public debt of Ukraine will grow to 98.6% this year and reach a peak value of 100.7% in 2025, after which it is expected to gradually decrease. It is believed that debt over 100% poses threats to the economy.

The rising indicator of the ratio of public debt to GDP leads to the country's insolvency, threatens to reduce trust in it on international financial markets, and increases debt service costs. The consequence of the increase in indebtedness may be a slowdown in economic development and an increase in inflation. The main factor in the growth of the state debt is the increase in budget expenditures and, as a result, the budget deficit.

The presence of a high debt leads to the impoverishment of the country. After all, the more money the state spends on paying interest on the debt, the less is left for the social needs of the population: education, infrastructure, health care, etc. This significantly worsens the quality of life. In addition, a possible default in this situation leads to a recession in the country and increases the level of unemployment.

 “Це дуже небезпечна ситуація для української економіки. Це стан, який передує банкрутству держави. При такому стані речей вона не зможе виконувати обов'язків перед кредиторами, обслуговувати борги їй буде не під силу”, - каже Олексій Кущ, експерт аналітичної компанії “Об'єднана Україна”.

At the same time, it should be borne in mind that 55% of foreign aid for financing the budget comes in the form of long-term soft loans, which makes the situation not as critical as it seems at first glance.

In addition, according to Ivan Nikitchenko, director of the Crane IP Law Firm, the threat of default may arise even with a lower debt-to-GDP ratio if there is no way to refinance it. Therefore, the level of debt is not as important as the ability to pay it.

Some experts believe that Ukraine should immediately pursue debt restructuring.

 “Треба, спираючись на форс-мажор у вигляді війни з РФ, вести переговори з кредиторами та добиватися списання боргу на кращих умовах і на довший термін. Потрібно досягти трьох позицій: списання 50% боргу, реструктуризації суми, що залишилася на 15-20 років і зниження державного обслуговування боргу до 2-3%.”, - вважає Кущ.

The problem is also that after the end of the war creditors will be able to insist on the payment of all their debts. It is now possible to agree on restructuring while it continues, after the end of the war it will be more difficult to do so.

In turn, Hetmantsev says that part of the foreign debt has already been restructured. For official creditors from the G7 and the Paris Club – until the end of March 2027. And for commercial creditors (Eurobonds, GDP-warrants) – currently until August 2024 (but the IMF program also plans to extend it until 2027).

 “Це суттєво зменшує навантаження на бюджет: завдяки реструктуризації очікується економія на погашенні та обслуговуванні держборгу у 2024 р. у сумі 4,6 млрд дол., сумарно до 2027 р. - 14,8 млрд доларів”, - каже Гетманцев.

There is also hope that Ukraine will be able to return to the external borrowing market.

 “Завдання у нас ключове: не отримати дефолт; мати можливість запозичувати на ринку капіталу, нам така необхідність буде потрібна, я думаю, починаючи з 25-26 року; виконати зобов'язання в межах програми з МВФ, слідуючи нашим показникам щодо боргу ВВП, іншим показникам, які передбачаються на середньострокову перспективу”, – сказав міністр фінансів Сергій Марченко.

He reminded that the deferral of payments on Eurobonds of Ukraine expires on September 1, 2024.

 “У нас є час, ми готуємо відповідні рішення”, – зазначив міністр, додавши, що поки що ще немає повної картини, але є кілька планів дій.

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