Allies are alarmed by the poor state of Ukraine’s public finances

Ukraine’s international partners are sounding the alarm over increasing pressure on Kiev’s public finances as Russia’s invasion cuts tax revenues and its allies scramble to provide quick financial support.

The U.S. Treasury Department has warned that emergency measures such as money printing used by Kiev to shore up its public finances risk harming its ability to provide critical public services over time, underscoring the need for allies to meet commitments to provide tens of billions of dollars in grants and cheap loans as quickly as possible. possible.

EU finance ministers meeting in Brussels on Tuesday agreed a new emergency loan of 1 billion euros for Ukraine, but are struggling to agree on a wider package for the country.

Valdis Dombrovskis, executive vice president of the European Commission, said Ukraine faces “huge short-term financial needs” and more work is needed to meet them. He called on EU member states to provide financial guarantees sufficient for the Commission to advance the planned package of 9 billion euros to Kyiv.

Ukraine’s budget crisis has become acute due to falling tax revenues and tariffs since the invasion began nearly five months ago, along with higher war spending.

The suspension of grain and steel exports deprived Kyiv of foreign currency earnings. Ukraine is forced to spend its foreign exchange reserves at an accelerated pace, while the central bank buys government bonds to fill its financing gap.

The G7 and the EU announced official financial commitments for Ukraine worth $29.6 billion. According to Dragon Capital, an investment bank based in Kyiv, Ukraine’s allies and international financial institutions have so far disbursed $12.7 billion to the country.

In May, EU leaders pledged additional support of up to €9 billion, on top of a previous emergency loan of €1.2 billion; they are still negotiating how to structure that financial support. Officials warn that the full EU aid package is unlikely to be resolved before the August recess.

Germany in particular is questioning the idea of ​​providing all aid in the form of loans, diplomats say. Berlin has already given bilateral support to Ukraine of one billion euros, and on Tuesday it supported an additional EU loan of one billion euros.

The German Ministry of Finance announced that the commission will present an additional proposal to reach 9 billion euros and that the member states will evaluate it as soon as it is available. “Together with our international partners, we stand by Ukraine,” it added.

Oleg Ustenko, an economic adviser to Ukrainian President Volodymyr Zelensky, said the country now needs $9 billion a month from its Western sponsors to plug the budget shortfall, nearly double the previous request.

The Treasury Department said its estimate of the gap is still $5 billion a month, but even that is far more than Western capitals have so far provided.

But Ustenko said Ukraine needed an additional $4 billion a month over the next three months to cover the cost of emergency housing and housing repairs for millions of people and to fund a basic minimum income for people who lost their jobs.

“We will try to survive in any case, but without the financial support of our allies it will not only be difficult, but almost impossible.

Fiscal burdens appear wider. Naftogaz, the state energy company, on Tuesday asked holders of its $1.5 billion bonds to accept a payment delay as it seeks to conserve cash for gas purchases. This would represent the first default by a Ukrainian state entity since the beginning of the war.

Naftogas’ move could signal a change in the Ukrainian government’s approach to its foreign bondholders. Kiev has so far refused to reschedule debt repayments, saying it is important to maintain the confidence of international investors.

Ukraine’s central bank said last week that it spent $2.3 billion, or 9.3 percent of its international reserves, in June alone, in part because it is monetizing the deficit at an accelerating pace.

The National Bank of Ukraine bought $3.6 billion worth of government bonds last month, more than double the rate of $1.7 billion for April and May. The central bank still has enough reserves to cover three months of imports.

On Tuesday, the US announced an additional $1.7 billion in direct economic aid to the government of Ukraine. “This assistance will help Ukraine’s democratic government provide essential services to the people of Ukraine,” Treasury Secretary Janet Yellen said in announcing the support.

USAID and the Treasury Department have provided $4 billion in direct budget support to the Ukrainian government, which means they are halfway to their total commitments under the bipartisan legislation.

Additional reporting by Guy Chazan in Berlin

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