Grants from the European Union and other partners now cover more than a fifth of Ukraine’s budget revenue, masking a wartime financing gap that widened to $20bn in the first half of 2026.

Kyiv’s headline deficit tells a reassuring story. After counting $13.1bn in grants, the central budget shortfall shrank to just $6.9bn in 1H26, down 47% year on year. Strip out the donor money, though, and the underlying gap grew by almost a tenth to $20bn, according to the latest Fiscal Digest from the KSE Institute, the analytical arm of the Kyiv School of Economics.

The improvement “increasingly reflected exceptional external support in the form of grants rather than stronger domestic revenue mobilisation,” the authors wrote. Fiscal stability, they added, “remained closely tied to external support, wartime economic resilience, and continued implementation of the IMF and other partners’ supported reform agenda.”

The reading is close to a mirror image of 2025, when Ukraine’s total spending hit a record $131bn and the full-year deficit reached $39.2bn. In the first six months of 2026 revenues climbed 28.8% year on year to $57.8bn while spending rose 17.1% to $68bn — a budget still built almost entirely around the war.

Revenues built on donor money

Total budget revenues reached $57.8bn in 1H26, up $12.9bn or 28.8% on the year, but the lift came mostly from abroad. Grants jumped 153.3% to $13.1bn, or 22.6% of all revenue, two and a half times the 1H25 level. Stripped of grants, revenue rose a far more modest 12.6% to $44.7bn. Non-tax receipts added $17.6bn, up 11.2%.

The inflows were bunched into a single month. Ukraine took in $7.1bn of grants in June alone, half of it from the EU, including the first €3.2bn ($3.6bn) tranche of macro-financial assistance under the new €90bn EU loan. A separate special fund received $11.8bn in military aid over the half.

Tax revenue told a quieter story. Receipts rose 13.8% to $26.5bn, or 45.8% of the total, drawn up by imports, wages and bank profits rather than any broad recovery in demand. Import VAT rose 23.5% to $7.3bn and personal income tax with the military levy 14.2% to $6.3bn, helped by an average monthly wage that climbed to $671 in June from $601 a year earlier. Corporate income tax grew 14.8% to $4.3bn on strong banking profits, and excise 9.3% to $3.5bn. Net domestic VAT, by contrast, slipped 2.5% to $3.7bn, dragged down by weak demand, higher refunds and the lagged hit from winter strikes on the power grid.

Structure of Ukraine’s budget revenues, 1H24-1H26 ($bn). Grants more than doubled to $13.1bn. Source: KSE Institute; Ministry of Finance of Ukraine; Openbudget.

Defence takes seven dollars in every 10

Spending stayed overwhelmingly military. Defence and security absorbed 70.3% of the budget, or $47.8bn, of which the defence ministry alone accounted for $34.7bn — fully 51% of all outlays and up 10.4% on the year. Security-sector spending rose 23.2% to about $10.4bn. To meet front-line needs, the finance ministry pulled more than $7.7bn of appropriations forward from the final months of the year, a step that KSE warned raises the risk of underfinancing in the fourth quarter.

Non-military spending rose too, reaching $20.2bn, or 29.7% of the total, from $17.4bn a year earlier. Outlays on economic affairs jumped 44.5%, driven by support for the energy sector and the railways, including some $0.4bn to compensate domestic passenger services. Transfers to regions rose 39.3% on higher teacher salaries. Social benefits grew 8.5% to $5bn, with support for families with children up 67.9% to $0.44bn as the government leaned against a deepening demographic decline. Housing and utility subsidies fell 10% to $0.53bn after the number of recipients dropped by 328,000.

Structure of budget expenditures, 1H24-1H26 ($bn). Defence dominates the $68bn total. Source: KSE Institute; Ministry of Finance of Ukraine; Openbudget.

Actual spending on social payments, 1H24-1H26 ($bn). Support for families with children rose 67.9% year on year. Source: KSE Institute; Ministry of Finance of Ukraine.

The June rescue

For most of the half, external money barely trickled in; in June it flooded. The EU released the €2.8bn seventh tranche of the Ukraine Facility early in the month, followed by the first €3.2bn of macro-financial assistance under the €90bn Ukraine Support Loan and a further €3.9bn for defence on June 30. Though the loan carries conditions, Ukraine books the inflows as grant revenue.

The deficit excluding grants widened 9.5% year on year to $20bn, even as grants cut the reported shortfall to $6.9bn. Net external financing of $4.7bn covered 68.1% of the actual deficit. Gross external loans, however, collapsed to $6.1bn from $15.6bn a year earlier — down 60.6% — as the funding model shifted from loans to grants. The EU provided $2.8bn under the Ukraine Facility, the IMF $1.5bn in the first tranche of a new 48-month Extended Fund Facility, and the World Bank’s IBRD $1.4bn.

Domestic borrowing did little more than roll over old debt. “Domestic borrowing remained primarily a debt-management tool rather than a major source of deficit financing,” the report said. Gross bond issuance fell 5.7% to $5.3bn and net domestic financing came to just $77.8mn, while six bond-exchange auctions worth $1.5bn stretched out maturities. Households became a bigger buyer, lifting their holdings to a record $3.4bn in June, or 7.6% of outstanding bonds. The reliance on the Fund is not one-way: over 2026-29 Kyiv is set to pay the IMF back more than it draws, as repayments on older programmes come due.

Budget funding sources, 1H24-1H26 ($bn). External loans fell 60.6% while grants tripled. Source: KSE Institute; Ministry of Finance of Ukraine.

Debt holds steady

The shift to grants slowed debt accumulation. State and state-guaranteed debt edged up to $211.6bn and, though 23.3% higher year on year, was broadly flat in 2026, slipping 0.8% in dollar terms even as it rose 5% in hryvnia. External state debt climbed 21% to $161.3bn, most of it on long-term concessional terms, while domestic debt held near $44.1bn.

“The receipt of USL financing in grant form, rather than the originally anticipated loan structure, has been critical to debt sustainability, as the programme’s €30bn in macro-financial assistance will not generate any debt service burden,” the authors wrote. They cautioned that the support “remains quasi-grant in nature”: Kyiv must repay it should Russia ever pay reparations, meaning the money “could ultimately materialise as sovereign debt obligations.”

State-guaranteed debt fell 17.1% to $5.8bn from $7bn as the government issued fewer new guarantees. In June the Naftogaz group agreed to restructure two Eurobond series with a combined face value of €1.2bn, extending maturities to 2032 and 2033.

Where it could go wrong

KSE set out the main threats to the numbers. Renewed Russian strikes on energy and gas infrastructure could hit revenue and lift spending at the same time, narrowing the tax base for corporate, income and domestic VAT receipts while forcing emergency repair bills in the autumn and winter. Attacks on export logistics — Odesa’s ports, the Danube route and the Polish border — pose a similar double threat to trade and customs revenue.

The bigger risk is self-inflicted. IMF staff already flagged a slowdown in reforms during the first review of 2026, and continued EU money hinges on clearing a backlog of unmet commitments; the EU Council on July 30 approved changes to the Ukraine Plan that open the way to more than €8bn of extra financing this year. Ukraine missed 14 reform targets in 2025, worth close to €3.9bn in tied funds, a warning of how quickly disbursements can stall. New spending pledges, from cashback schemes to winter cash handouts, could stretch the budget further if they arrive without offsetting cuts.

The year ahead

For the full year KSE expects spending to reach a record $143.5bn, up 9.3%, with $101.5bn going to defence and security. Revenue growth is set to stay constrained while the war holds down GDP, leaving the budget dependent on nominal wage gains, imports and, above all, the timing of external money. Planned tax changes — taxing income earned on digital platforms, extending the 5% military levy for three years beyond martial law and taxing parcels worth up to €150 — should slowly widen the base but will not offset wartime losses.

The Ukraine Facility could become the largest single source of inflows in the second half, subject to reform progress, while the IMF is due to hand over a further $1.37bn this year, $685.5mn of it already released in July. On the evidence of the first half, the arithmetic still holds only for as long as the grants keep coming.