Ukraine’s 2023 budget has a $38 billion gap. Who will help cover it?

Russia’s war has ravaged Ukraine’s public coffers, leaving the country with an ever-widening deficit that requires urgent foreign assistance to keep the economy afloat.

The widespread havoc wreaked by Russian forces has triggered insolvency, brain drain, rising unemployment, soaring inflation and a drastic fall in exports, wiping away billions in revenue and tax income.

An initial forecast by the World Bank that predicted a 35% contraction of Ukraine’s GDP has worsened as a result of the Kremlin’s continued attacks against key infrastructure.

The country is now scrambling to find sources of revenues to sustain its 2023 budget, which includes a record-breaking deficit of $38 billion (€36.9 billion).

The funding is supposed to ensure the most basic services, such as healthcare and education, remain available to citizens as the war rages on. The purchase of energy supplies and the repair of damaged power systems are set to inflate the expenses.

“For Ukraine, this is an unsustainable amount: $38 billion dollars of deficit. The salaries of teachers, doctors, social benefits, pensions, are essential funds,” Ukrainian President Volodymyr Zelenskyy said last month, in a virtual address to an international conference hosted in Berlin.

But in the midst of a global recession, what country is willing to foot such hefty bill?

Inevitably, all eyes have turned to Western allies, those who have repeatedly pledged to support Ukraine for “as long as it takes.” In other words, the European Union and the United States.

Brussels has already presented a draft plan to disburse up to €18 billion in financial aid over the course of 2023, which will amount to €1.5 billion per month.

The package, which is still pending approval, will be released as long-term loans with favourable conditions: Ukraine will not be asked to re-paid the money until 2033 and interest rates will covered by member states.

Washington is reportedly planning to provide a similar monthly amount, but in the form of grants, which do not need to be repaid and help alleviate Kyiv’s financial burden.

Together, the EU and the US could fill a significant portion of Ukraine’s enormous budgetary hole, but it will not be enough to close it entirely.

Other Western countries, together with financial institutions like the International Monetary Fund (IMF) and the World Bank, are expected to contribute to the effort. The IMF had previously estimated Ukraine’s financial needs to be worth between $3 and $4 billion per month.

“We all have to be alive to the possibility that social and infrastructure requirements could push financing needs beyond this range, depending on the evolution of the war,” IMF’s Managing Director Kristalina Georgieva has warned.

Western aid, however, relies on political consensus, which the upcoming recession is poised to strain.

Disagreements between member states partially derailed the €9 billion the EU promised to deliver to Kyiv across 2022, while Hungary has expressed its opposition to next year’s €18-billion package.