KSE: Ukraine’s state debt review 2023

KSE: Ukraine’s state debt review 2023
In 2023, the combined state debt and state-guaranteed debt increased by 30.4% to $145.3bn, representing 85% of the estimated GDP. Debt is surging. / bne IntelliNews
By Kyiv School of Economics Center of Public Finance and Governance March 6, 2024

In 2023, the combined state debt and state-guaranteed debt increased by 30.4% to $145.3bn, representing 85% of the estimated GDP (up from 49% in 2021 and 77.8% in 2022). The surge was predominantly fuelled by a significant 49.1% rise in external debt, reaching $31.2bn, while domestic debt experienced a more modest 10.0% increase, amounting to $3.8bn. This disproportionate growth in external debt has altered Ukraine’s debt structure, with foreign exchange debt now constituting 73% of the total, up from 67% in 2022.

The notable increase in Ukraine's external debt was primarily attributed to $19.5bn ($20.5bn increase due to FX rate fluctuations and interests accrued) loan from the EU's Macro-Financial Assistance (MFA) package. The MFA is expected to be succeeded by the Ukraine Facility Program, a EUR 50bn fund, with EUR 38bn set to be dispersed to the state budget over 2024-2027. Additional substantial contributions came from the IMF ($3.6bn), IBRD ($4.8bn) driven by projects like PEACE and INSPIRE, both featuring concessional terms and a grant component, and the Canadian government ($1.9bn) under concessional terms, including a 4.5-year grace period and a 1.5% interest rate for tranches disbursed in 2023.

Ukrainian domestic government bonds (OVDP) brought a net inflow of $5.4bn into the state budget (in contrast to an outflow of $4.2bn in 2022), thanks to collaborative efforts by Ministry of Finance and National Bank of Ukraine aimed at revitalizing the local market, increasing primary market yields to 16.1-19.3% for 6m-3y UAH-denominated bonds (+430-640bp compared to 2022), and allowing banks to cover up to 50% of required reserves with benchmark OVDP. This resulted in a system-wide rollover rate of 150% in all currencies (67% in 2022). Strong demand from banks led to a cumulative increase of $4.7bn in their bond portfolios over the year, reaching $17.3bn (41% of total outstanding OVDP). The NBU attempted to encourage non-residents to reinvest OVDP funds in the primary market by allowing repatriation of OVDP interest after April 1, 2023 (previously banned). However, this only partially mitigated the outflow, resulting in a $0.4bn reduction in their bond portfolio (compared to a $1bn decrease in 2022) and accounting for 3% of total outstanding OVDP.

The budget ran a deficit of $48.1bn (not considering foreign grants as a part of the budget revenues), amid large defense expenses and a limited ability to increase tax collection on a similar scale. In 2023, 52% of state budget expenditures went to the Ministry of Defense and an additional estimated 13% went to war-related security issues. The deficit was much higher than planned in the initially enacted Law on State Budget for 2023 ($35.4bn), but foreign grants reduced it considerably – to $36.5bn (20.6% of GDP). On average, expenditures exceeded budget revenues by $4.0bn monthly – or $3.1bn if foreign grants are considered as a part of budget revenues.

In total, 37% of budget expenditures (which reached $109.8bn) in 2023 relied on external loans and grants. Another 5% were financed internally through the issuance of domestic government bonds. Only 56% were covered by budget revenues excluding foreign grants and 2% coming from changes in balances in the State Treasury accounts
 Please see more details on Ukraine's 2023 fiscal landscape and budget in KSE Institute Fiscal Digest for 2023

About 10.6% of GDP or $18.7bn was directed to the service (interest $6.8bn and principal $11.9bn payments) of the state debt in 2023. Most of it ($15.6bn) was paid for domestic debt, while $3.2bn went to foreign creditors. Projections for 2024 estimate a similar debt service cost of 11.1% of GDP, totaling $20.8bn.

International financial aid will continue to play a key role in financing budgetary needs in 2024. According to the budget for 2024, financing needs in the form of credit will amount to around $38.6bn, which is close to the amount in 2023 if grant support is considered. The Ukraine Facility Program (EUR 50bn) has been voted on by the European Council, with transitional financing (enabling Ukraine to receive support before the full launch), and final approval by the EU expected in April. However, risks of untimely funds inflows are still high in 1Q2024, along with the risk of declining financial aid starting in 2025. A tangible part in the form of grants for 2024 has not yet been approved by the partners. Thus, the anticipated commercial debt treatment in 2024 should not only prioritize the imperative of restoring debt sustainability, but also keep in mind the liquidity needs and securing of private financing for post-war development.

Read the full report here.


The Kyiv School of Economics (KSE) is a bne IntelliNews media partner and a leading source of economic analysis and information on Ukraine. This content originally appeared on the KSE website.