Ukraine's public finances are in extreme mode. The intensive care unit is connected to external sources. Without ~$40 billion of foreign resources in 2024 coping with fiscal challenges will be very problematic. The Ministry of Finance, the National Bank, the Cabinet of Ministers around the world are looking for loans, grants, and various types of assistance.
Negotiations are underway with international organizations, governments and creditor clubs. Ukraine urgently needs money for weapons, energy, logistics, supplying the Armed Forces of Ukraine and the production of basic goods/services for people. The key word is “basic”, those that are necessary for survival on the one hand and for victory over the enemy on the other.
They help Ukraine with money (the lion's share is expensive loans), expecting a responsible attitude towards government spending. When a form major event occurs in a family (fire, flood), it cannot afford to maintain the structure and volume of expenses before the accident. Family sources of income are shrinking. It is reasonable, logical, and responsible to reduce costs. Yes, relatives, friends, just kind, warm-hearted people help a family in trouble. Some give clothes and food, others furniture, others give us the use of a car. Good people stepped up to the plate and provided a loan in the hope that the family would restore fiscal health.
Imagine if, in such a situation, a family that is helped by almost the entire virtuous world continues to live as if the tragedy did not happen to them. New gadgets, fashionable branded clothing from the latest collections, vacations twice a year, Italian furniture for the dacha and, of course, beauty salons/fitness twice a week - all this is included in the family’s expenses. How much do you think the generosity and warmth of neighbors/friends of such a family will be enough to help it with money and resources?
The Ukrainian authorities pursue budget policy with only one calculation. This is a calculation for writing off government debts by external creditors. The more they give, the better. We are not going to repay anyway, because with such an economy it is impossible to repay such debts. For a developing country, painlessly servicing a government debt of more than 60% of GDP requires a growth rate of more than 7% of GDP.
In Ukraine, the Government is afraid to even theoretically discuss the idea that domestic buyers of government securities in the current regime and in the future will not be paid or paid at a discount. Therefore, the topic of writing off public debt applies exclusively to external creditors. And here we have a demoralizing case of discrimination against economic entities based on their country of origin.
By the end of 2023 Ukraine's public debt amounted to 84.4% of GDP. As of 04/01/2024 it grew sharply by 434 billion hryvnia, breaking the 90% of GDP mark. Since the lion's share of the country's external debts (~75%) is denominated in dollars and euros, to assess the volume of resources for their financing, certainty in exchange rate policy is needed. It’s one thing to service the national debt at an exchange rate of ₴38 – 39 per $1, another thing – ₴43 – 45 per $1. With a gigantic trade deficit, an investment drought within the country, strict restrictions on the balance of payments and a strong dependence on external financing, administrative conservation of the hryvnia exchange rate at around ₴40 per $1 for a long time is impossible, especially given the cooling of creditors’ attitude towards Ukraine and their disappointment with our economic policy. To tell the truth, there are plenty of sources for such disappointment, and they are not at all related to the course of military operations.
In 2024 Ukraine must spend $25.2 billion (~₴1.1 trillion) to service its public debt. ₴589.24 billion – for payments on domestic government securities. Almost 35% of this amount is interest payments. The war made buyers of government bonds rich. The amount of payments on external obligations of the State is ₴427.42 billion. 58% of this amount is interest.
In 2023 servicing public debt cost Ukraine $18.7 billion or ~10.6% of GDP. Of this amount, $15.6 billion (more than 83%) was paid on internal loans, $3.2 billion on external loans. If we estimate Ukraine's GDP in 2024. at $185 billion, public debt will take away 13.6% of our GDP. That's about half of what we spend on defense. How do you like this debt and fiscal policy of the Government?
The first three years of the war were a real goldmine for participants in the Ukrainian debt market. That’s for sure who gets war and who gets a source of incredible enrichment. Ukrainian banks, especially the five largest in chocolate. Profitability is skyrocketing. Here we are in the first quarter of 2024. Ukrainian banks increased their net profit by 18% compared to the first quarter of 2023. In the first three months of 2024. they earned ₴40.5 billion ($1.05 billion). The main source of profit is government securities (government bonds and NBU certificates of deposit). They were and remain active participants in the construction of the debt pyramid. Its construction has not been canceled. So only on May 14, the Ministry of Finance sold annual government bonds worth ₴11.5 billion at 15.25% per annum. With annual inflation at 4 - 5%, manual fixation of the hryvnia exchange rate, this is a financial transaction even worse than the foreign exchange transactions of the second half of the 1990s.
It is not surprising that the Cabinet of Ministers, the Ministry of Finance, the National Bank, as well as their institutional and commercial partners, including banks and investment companies, came together and merged into a single syndicate for earning high profits at the expense of the State. These financial barons have just forgotten that Ukraine is at war, that this kind of financial, monetary, debt sabbath sharply reduces trust in Ukraine, cools the cordiality and generosity of our partners, again raises the question on the agenda: “If they themselves treat their country, their economy this way,” , they treat their people, then why should we worry? Why should we pay for their schematosis, for enriching 1% of the population at the expense of 99% of the rest?”
No matter how much the budget and debt rope twists, the end will still come, and it will be very painful, tense and crisis-ridden. The architects of the Ukrainian fiscal and debt pyramid are counting on writing off the national debt. And if not? The beneficiaries of the state debt pyramid are confident that they will have time to reach the cash in time and hide the net profit in hard currency. They are definitely not worried about what the hryvnia exchange rate will be after this, ₴50 or ₴70. However, the practice of scammers in the financial sector of Ukraine has clearly taken root.
If it is not possible to persuade external creditors to write off the debt, if it is not possible to persuade internal creditors to do the same, then the Argentine (before Miley) option remains - default. After that there will be other negotiations, but without a debt noose around the neck. Also a very unpleasant procedure. Also with high reputational risks. Those subjects who are pushing us into it count on the fact that they personally will not suffer from this. Yes, they will be forced to leave power, but in the modern history of Ukraine there have been so many fentifluchters and schwendipoppers who stole, cheated, sawed, ruined the “people's property” - and there was no prison, or even a loss of reputation.
There is only one way to stop the debt and budget bacchanalia - to radically reconsider the parameters of budget income and expenditure. A full-fledged tax reform with a deep audit of budget expenditures is a necessary, but not sufficient part of the program of measures to save the Ukrainian economy, to save the country from its two biggest enemies: Nazi Russia and the home-grown bureaucracy, as the foundation of corruption and Oligarchy.
