As of early 2024, Ukraine faces a significant increase in public debt, which has now reached $145.3 billion. These figures, released by the Ministry of Finance, reflect the country's difficult path due to financial challenges exacerbated by war and the need to rebuild infrastructure.
How the debt of the Ukrainian state has changed over more than 30 years of independence, and what influenced this indicator most, we will consider in more detail in our material.
From the “zero option” to debt burdens: Ukraine in the first years of independence
At the time of independence, Ukraine stood on the threshold of a new era without external debt, according to the so-called “zero option” of the distribution of liabilities and assets of the USSR. However, the beginning of the 90s was marked for the young state by a series of financial challenges: from chronic budget deficits to hyperinflation and lack of experience in the sector of international credit relations.
Market reforms, the severance of economic ties with the former Soviet republics, as well as a drop in production - this led to a catastrophic decline in tax revenues. This, in turn, reduced the budget for social services and the salaries of public sector workers. In response to these challenges, the government turned to external creditors for financial assistance, which led to the rapid accumulation of public debt.
External public debt grew due to loans from individual countries, including Russia, and through loans from the National Bank. But the lack of a transparent mechanism for evaluating loan projects and corruption schemes aggravated the situation. To cover energy debt, the government transferred debt from the private sector onto its own shoulders, exacerbating the financial crisis.
The resolution of the Cabinet of Ministers of Ukraine since 1995 has been an attempt to streamline the chaos in the field of external lending by limiting government guarantees and developing debt policy instruments. However, the domestic market for government loans did not develop, and the share of external debt reached 80% by 1996.
The role of IFIs, such as the World Bank and the IMF, began to grow, and in 1995 alone, external debt increased by $3.2 billion. Such actions were a forced step for Ukraine to enter new loan capital markets, but they entailed an increase in the debt burden, which country had to fight over the next decades
A new stage in the Ukrainian financial system began with the introduction of the national currency, the hryvnia, in 1996. Its own currency allowed Ukraine to expand sources of lending from international financial institutions to issuing Eurobonds and attracting loans from foreign banks.
However, the growth of financing directions could not change the fundamental problem - new loans were used to pay off old debts, creating a vicious circle of debt obligations. In 1997, International Financial Institutions became the main source of loan resources, and loans from foreign governments continued to be a significant debt burden.
Thus, Ukraine's public debt reached $15.2 billion in 2000, or 48.8% of the country's GDP.
Economic turns of Ukraine: from debt restructuring to resource dependence
At the turn of the millennium, Ukraine found it difficult to manage its guaranteed public debt, and payments on loans under state guarantees were a significant burden on the budget. Overdue debts of borrowing enterprises that did not fulfill their obligations increased the financial risks of the state and its budget, leading to the need to find new ways out of the debt crisis.
After a period of accumulating debt and financial difficulties in the 90s, in the 200s Ukraine was able to reduce its public debt to GDP to 12% in 2007. This was a significant improvement from 61% in 1999. How was it possible to achieve such a result?
Changes in financial policy and debt restructuring undoubtedly played a role. But the main answer should be sought in the global economic trends of that time. The high level of world prices for raw materials has become a decisive factor contributing to the economic growth of Ukraine. Growth in exports, especially in metallurgy and engineering, helped increase government revenues and reduce the need for external credit.
However, this economic growth was mainly extensive and based on the old industrial potential, which came under the control of oligarchic structures after privatization. Lack of investment in new technologies and retooling of production has made this growth unsustainable.
The global financial crisis of 2008 revealed the fragility of this development model, and Ukraine had to again turn to international financial institutions for support. The country faced new challenges related to finding ways out of the financial crisis and reducing dependence on external financing. History repeated itself: short-sighted debt policy and the lack of structural reforms again confronted Ukraine with the need to restructure debts and search for ways of economic independence
The road to debt: how Ukraine ended up in the arms of international loans
The Ukrainian economy has always been like a minefield: one wrong step, and you can blow up not only the present, but also the future of the country. This became especially noticeable during the reign of Yulia Tymoshenko, when in less than two years Ukraine raised an impressive $26 billion from the IMF, World Bank and other lenders.
In 2008-2009, the Stand-by program opened financial flows for the country in the amount of $10.6 billion, of which the first tranche of $4.5 billion went to support the gold and foreign exchange reserves of the National Bank. What happened to the rest of the funds?
However, the money was used with shortsightedness, because much of it went to save individual banks that were already teetering on the brink of bankruptcy due to their dubious policies. This move did not help reduce the debt burden, and the reduction in export revenues and the slowdown in domestic economic processes only aggravated the problem.
2010 brought an additional $14 billion in debt, due to loans raised by both the Tymoshenko government and the next cabinet of Mykola Azarov, which came to power after the presidential elections. Although there was some improvement in 2011, by 2013 the situation had again become critical. Despite 2 tranches from the IMF totaling $3.4 billion, the government continued to accumulate external and internal borrowings, despite growing financial risks.
But the biggest mistake, perhaps, was “Russian billions for Yanukovych,” which failed to become an effective tool for solving economic problems. Instead of becoming a source of stabilization, they only increased the vulnerability of the economy.
Empty state treasury and attempts to overcome the financial stranglehold
At the beginning of 2014, the new authorities of Ukraine were faced with a gigantic debt of $73.23 billion, inherited from the “wallets”. Of this amount, $27.83 billion accounted for external borrowing, which the International Monetary Fund predicted could exceed 100% of GDP by 2025. Just a few years ago this figure did not exceed 50%. This situation was the result of significant financial burden due to the war, which negatively affected the country's economy.
On the one hand, the growth of public debt in absolute numbers is the result of a fall in economic production, and not only due to an increase in debt obligations. On the other hand, Ukraine managed to attract significant funds in the form of grants, which allowed it to avoid a critical increase in debt in the short term. However, despite the stable demand for domestic government bonds, most of which are owned by the NBU, and low interest rates on international loans, external debt remains a large burden.
Eurobond payments are approaching, and without a restructuring of this debt, Ukraine will have to pay significant amounts to commercial creditors in 2024, which may be unaffordable for a country already in armed conflict.
Debt restructuring is an important part of the IMF program and the government appears to have begun negotiations with creditors ahead of schedule to ensure a stable financial future for Ukraine.
For now, the issue of public debt remains one of the main economic problems of our state, on which the economic future of Ukraine will depend.
