The Ukrainian government has published a draft budget for 2024, but raising enough money to fund the war effort and keep the economy working is going to be a struggle.

The budget draft for 2024 aligns with the principles established in 2023, with similar priorities focusing on defence, security and social protection. It anticipates support from international partners and is based on an optimistic assessment of the country's macroeconomic situation.

Ukraine’s economy just put in the first growth since the war started, expanding by 7.3% year on year in the first half of this year and by 19.5% quarter on quarter in the second quarter as the economy stabilises. For the full year the economy is expected to grow by about 2% but the Ministry of Economy's outlook forecast for next year is an optimistic 5%.

Expenditures in the defence and security sector remain an obvious priority throughout the entire year of 2024, Kyiv School of Economics (KSE) said in its latest analysis (see link at the end of this article). The budget is robust, but additional funding is likely to be necessary if the war effort continues at current levels and the budget is already heavily dependent on international aid from partners which account for almost half of all revenues.

“The planned expenditures for Ministry of Defence programmes, totalling UAH1,164bn, correspond to figures recorded during the period of January to August 2023. Therefore, if the trends from 2023 persist, active military operations continue until the end of 2024, and no additional funding is secured, the Ministry of Defence budget will again require a review in the [autumn] of 2024,” KSE says.

The main sources of revenue for the state budget in 2024 are projected to be external borrowing of nearly UAH1.8 trillion ($49bn), tax revenues of UAH1.5 trillion, and domestic borrowing of UAH421.6bn.

“Net external borrowing is expected to finance 47.4% of all expenditures in the state budget for 2024, while own sources will cover 52.6%, surpassing the planned figure for 2023. Net domestic borrowing is projected to be zero,” says the KSE.

As the economy stabilises, tax collection is starting to recover. The planned volume of tax revenues in 2024 is projected to be 28.6% higher than in the current 2023 plan – growth that is anticipated across all key taxes. But continued tax revenue growth remains dependent on the optimistic macroeconomic outlook in the 2024.

Ukraine remains heavily dependent on international help to make ends meet. In 2024 Kyiv is expecting UAH1,033bn from the US government and other official creditors, UAH370bn from the EU, UAH224bn from the IMF and UAH83bn from the World Bank.

Meanwhile, internal borrowing is planned solely for servicing domestic debt and not for raising fresh funds. Nevertheless, the Ministry of Finance (MinFin) is still experimenting with new ways of raising new capital and recently launched an initiative that makes Ukrainian domestically traded war bonds (OVDPs) available to international retail investors, hoping to tap some of the millions of individual supporters Ukraine has around the world. Prior to the start of the war the OVDPs were extremely attractive to international investors, who ploughed some $5bn into the securities, making them an important new source of funds for MinFin.

“Considering that in the first eight months of 2023, UAH100bn more was raised on the domestic market than was paid out, so there is room for manoeuvre in the budget for 2024,” says KSE.

There is a planned increase in the state and state-guaranteed debt to 110.7% of GDP by the end of 2024. Ukraine currently has some $133bn of state debt, just shy of 100% of GDP, and that debt has been rising steadily from modest levels prior to the war.

“[Next year’s anticipated debt of more than 110%] of debt is significantly higher than the Maastricht criteria (60% of GDP) and the "safe" level (which does not hinder economic growth) of 64% for developing countries. Clearly, after the conclusion of the war, there will be a need for fiscal consolidation, which will be challenging due to the necessity of financing economic recovery,” says KSE. “Therefore, the government should negotiate debt restructuring with the potential write-off of a portion of the external debt.”

1023 Ukraine budget 2023 2024  key parameters

Debt and domestic sources of money

Still living on handouts, the government continues to cast around for fresh sources of revenue.

The main income in 2024 will be the expected profit of the National Bank of Ukraine (NBU), which is to be directed to the state budget in 2024, and may be significantly higher than currently planned, says KSE. According to the plan, the National Bank is expected to transfer at least UAH17.7bn to the state budget as a portion of its profit for distribution. This amount is 75.1% less than what was planned for 2023. However, the final amount of the National Bank's transfer to the state budget will be known in the spring of 2024 after an audit.

Increased domestic market borrowing is another source of cash. The planned volume of domestic borrowing through the issuance of government bonds in 2024 corresponds to the planned repayments throughout the year, but the volume of new issues could be increased, says the KSE. The average borrowing rate is expected to be overly conservative at 19%. However, since the NBU is reducing the key interest rate, as inflation is falling faster than expected it is likely that government bonds rates will also decrease during 2024.

The NBU cut rates again this month to 20% after inflation fell again and following the last monetary policy meeting in September the board of governors said that the rates might be cut again to finished the year with 18%.

“In the formation of the Budget draft, the government used a baseline scenario for the macroeconomic forecast. This scenario includes cautious estimates of the current year's outcomes and a high degree of uncertainty and unpredictability in the security domain due to the changing situation on the frontlines, the intensity and geography of hostilities, and their consequences,” the KSE said. “In these conditions, the probability of deviations in actual indicators from planned ones remains high. However, there is also a high likelihood that the size of planned expenditures will be subject to revision. So if the war continues throughout 2024, there may not be sufficient funds for defence spending.”

In the optimistic scenario, nominal GDP for 2024 is set at UAH7.8 trillion ($212.2bn), or about double the size of the post-EuroMaidan size of the economy.

Real GDP growth in 2024 is predicted to be 5%. The average annual inflation is projected to be 13.8%, roughly in line with 2023 figures, but up from the 10% recorded in August.

The increase in the minimum wage will contribute to raising the average monthly salary to UAH21,900 ($596), which is 20.6% higher than in 2023 and incidentally catching and close to overtaking the average Russian salary.

According to the statements from the Minister of Finance, it is evident that the exchange rate of the hryvnia to the US dollar is assumed to be UAH41.4.

Risks to the plan

Nevertheless, the government has identified significant fiscal risks that may affect 2024, which KSE list as:

• Continuation of the war and uncertainty about its future development, which is a key risk to Ukraine's economic and financial capacity in 2024.

• Damage and destruction of infrastructure, including production and housing facilities.

• The risk of non-return of refugees from abroad (approximately 6.2mn people as of July 2023, according to UN data), creating a shortage of skilled labour, slowing economic development and reducing tax revenues.

• Insufficiently rapid implementation of reforms. In the coming year, budget support from international partners, critical for covering the deficit, will depend significantly on progress in reforms.

• Non-receipt of financial aid from international financial organisations and governments (a key risk for covering the budget deficit).

• The risk of non-compliance with obligations by representatives of small and SMEs, as well as sub-loans by municipal enterprises within joint projects with microfinance institutions.

• Reduction in external trade volumes (a trade balance deficit can disrupt exchange rate stability, lead to inflation and have an impact on tax revenues).

• Renewed increases in prices on global energy markets, which may lead to inflation growth, reduced purchasing power and, consequently, slower economic growth and reduced tax revenues.

Of the dangers to revenue, a reduction in the aid from the international donors is maybe the most significant. Ukrainian President Volodymyr Zelenskiy was in the US last week to attend the United Nations General Assembly (UNGA) but also went to Washington to meet Speaker of the House Kevin McCarthy, who was initially reluctant to continue funding Ukraine without more accountability on where the money will be spent.

However, in the end McCarthy signed off on a new $300mn package, but a larger $24bn package has yet to be approved. In light of the growing Ukraine fatigue, coupled with the upcoming November 2024 presidential elections in the US, which could see someone like former president Donald Trump returned to the White House, there could be some funding surprises in store over the coming year as the issue of funding Ukraine becomes increasingly politicised during the campaigns.

Tax revenues

Other than that, the recovering economy will produce taxes in the normal way, which the KSE details as:

• Value added tax (VAT, domestic and import) – UAH753.3bn (+21% compared to the current 2023 plan). The main reasons for the growth include inflation expectations in 2024, increased import volumes, rising consumer spending and national currency devaluation.

• Personal income tax (PIT) – UAH313.1bn (+73.6% compared to the current 2023 plan). The main driver of increased PIT revenues in 2024 is the inclusion of UAH135.4bn of military PIT, of which UAH96.3bn will be allocated to the special fund of the state budget for the first time. Additionally, the minimum wage will double twice in 2024, and there is an expected increase in the average wage from UAH18,000 in 2023 to UAH21,900 in 2024.

• Excise tax (domestic and import) – UAH195.3bn (+35.3% compared to the 2023 plan). Factors contributing to the growth include increased excise tax rates and minimum tax liability for tobacco products, the return to pre-war taxation on fuel by excise tax, potential fuel price rises and increased domestic production of excisable goods.

• Corporate income tax – UAH173.5bn (+56.7% compared to the 2023 plan). Despite the expected increase in business activity and the cancellation of the 2% tax in 2023, such a significant growth compared to the current year's plan appears optimistic.

0923 Ukraine macro budget tax revenues by source KSE

Deficit and debt

Fighting a war is hugely expensive and obvious Ukraine Inc. is running at a loss. For the third consecutive year, the budget deficit has exceeded one-digit numbers and is planned for 2024 at 20.4% of GDP.

“In 2023, the planned budget deficit was increased from 20.6% to 27% of GDP. Consequently, by the end of 2024 the expected level of the national debt will reach 110.7% of GDP, compared with 97% of GDP in 2023 and 78% of GDP in 2022,” the KSE said.

0923 Ukraine macro budget deficit KSE 

The ability to raise domestic debt has increased, while borrowing at market terms abroad remains impossible. Due to higher interest rates for government bonds on the domestic market and the NBU motivation for banks to acquire domestic government bonds for their required reserves, there has been higher domestic demand for government debt, the KSE says.

“Banks have increased their portfolio by UAH73bn since the beginning of the year, while individuals and legal entities have increased it by UAH33bn,” says KSE. “The NBU has not financed the state budget deficit and has no plans to do so in 2024. Access to international capital markets remains closed. In 2024, the two-year deferral period for payments on Eurobonds under the terms of the restructuring conducted in August 2022 will expire, as well as for government derivatives (GDP-linked warrants) for which investors agreed to no payments for 2023. Therefore there is a possibility of increasing government borrowing by the Ministry of Finance beyond the amounts set in the budget, potentially for further restructuring of GDP-linked warrants, including the possibility of exchanging or repurchasing them.”

As in the previous year, the majority of the debt (80% or UAH1,774bn, equivalent to $43bn) will be raised amongst the international financial institutions (IFIs) or bilateral partners. 3% (UAH62bn) of these funds will come from existing credit and investment development projects with the World Bank, EIB, EBRD and others. The remaining funds are expected to be obtained from the EU (UAH372bn or equivalent to $9bn), IMF (UAH224bn or equivalent to $5.4bn), World Bank (UAH82bn or equivalent to $2bn), and the largest portion from the US government and other official creditors (UAH1,033bn or $25bn).

External debt servicing costs will be minimal, so net external borrowing constitutes nearly 90% of the total borrowing, or UAH1,589bn (equivalent to $38bn).

0923 Ukraine macro budget Volume of domestic and external borrowings, UAH bn. KSE

In the fiscal year 2024, the maximum sum of state guarantees issued, based on government decisions, is capped at 3% of the projected revenues of the general fund of the state budget, amounting to UAH47bn. Additionally, there is provision for extending state guarantees amounting to up to UAH39bn, predicated on international agreements involving Ukraine.

Expenditure

The draft budget for 2024 outlines planned expenditures amounting to UAH3.4 trillion, marking an increase of UAH279bn (+9%) in comparison to the revised 2023 plan.

Unsurprisingly, defence and security, alongside the social sector, continue to dominate as priorities, constituting the focal points of budget allocation.

Approximately 60% of total expenditures are concentrated within three key ministries:

• Ministry of Defence – allocated UAH1,164bn, which represents a decrease of 5.6%, or minus UAH68bn relative to the amended 2023 plan.
• Ministry of Internal Affairs – designated UAH324bn, signifying a 5.1% increase or UAH 16bn in comparison to the 2023 amended plan.
• Ministry of Social Policy – earmarked UAH470bn, reflecting a 5.1% rise or UAH23bn when contrasted with the amended 2023 plan.

In the fiscal year 2024, financing defence and security expenditures remains the top priority, aggregating to UAH1,697.9bn. This sum equates to 21.7% of GDP and constitutes 51.3% of the total expenditure. Notably, UAH30bn within this allocation represents state guarantees, with the remainder being channelled into budget programmes of defence agencies.

Within the budget programmes of the Ministry of Defence totalling UAH1,164bn, a staggering 99% of all funds are traditionally allocated to two specific budget programmes.

• UAH882.8bn – salaries, healthcare, assistance to families of military personnel in the Armed Forces of Ukraine.
• UAH265.4bn – procurement and repair of weapons and military equipment.

The 2024 budget draft sets the stage for robust fiscal allocations, with an emphasis on Defence Forces personnel and social security.

Defence Forces Funding: A substantial allocation exceeding UAH1 trillion from the general fund is earmarked for monetary support and salaries for Defence Forces personnel, underlining the government's commitment to bolstering national security.

Social Security: The budget draft for 2024 designates UAH469.7bn, reflecting a noteworthy increase of UAH22.9bn (5.1%) compared to the amended 2023 plan. This augmentation is driven by multiple factors, including a UAH12bn rise in expenditures on benefits and housing subsidies, a UAH2.6bn increase in support for citizens facing challenging circumstances, and an equivalent hike in assistance for persons with disabilities. Additionally, the introduction of the new "Development of the Social Services System" programme contributes an extra UAH1.1bn to the allocation. Anticipating a surge in individuals requiring social assistance and the rollout of innovative forms of social protection, this budget underlines the government's commitment to ensuring the welfare of its citizens.

Pension Fund Transfers: The state budget for 2024 designates UAH271.9bn for transfers to the Pension Fund, accounting for a substantial portion (57.9%) of the Ministry of Social Policy's total funding. While this allocation is marginally lower by UAH1.8bn compared to 2023, it remains a key pillar of the government's commitment to pension payments and social security.

Veteran Policy: Notably, the 2024 budget demonstrates a significant uptick in funding for veteran policy, amounting to UAH13.6bn. This allocation, twice the amount allocated in the current year, encompasses various facets such as rehabilitation and adaptation support for veterans, housing provisions, financial backing for veteran-led projects, the establishment of a military memorial cemetery, and an array of additional measures aimed at honouring and assisting veterans.

0923 Ukraine macro budget expenditures