Allies alarmed about Ukraine’s public finances

Ukraine’s international partners are sounding the alarm about growing pressure on Kyiv’s public finances as Russia’s invasion reduces tax revenue and its allies struggle to supply provide quick financial assistance.

The US Treasury warns that urgent measures such as money printing being used by Kyiv to support its public finances risk compromising its ability to deliver vital public services over time, emphasizing the need allies to meet commitments to provide tens of billions of dollars in funding and cheap prices. Loans as quickly as possible.

EU finance ministers meeting in Brussels on Tuesday agreed on a new 1 billion euro emergency loan for Ukrainebut they are struggling to reach an agreement on a broader package for the country.

Valdis Dombrovskis, Executive Vice President of the European Commission, said Ukraine was facing “major short-term financial needs” and needed to work harder to meet it. He called on EU member states to provide sufficient financial guarantees for the commission to deliver the planned €9 billion package to Kyiv.

Ukraine’s budget crisis has been exacerbated by declining tax and customs revenues since the invasion began nearly five months ago, coupled with higher war spending.

The cessation of grain and steel exports has stripped Kyiv of foreign currency earnings. Ukraine is being forced to burn through its foreign exchange reserves at an increasingly rapid rate, as the central bank buys government bonds to cover a financial shortfall.

The G7 and the EU announced official funding commitments to 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.

EU leaders in May pledged additional support of up to 9 billion euros, in addition to the previous emergency loan of 1.2 billion euros; they are still negotiating how to structure that financial aid. Officials warn the EU’s full support package is unlikely to be resolved before the August holiday.

Diplomats say Germany has specifically questioned the idea of ​​providing all the support in the form of loans. Berlin has contributed bilateral assistance of 1 billion euros to Ukraine, and on Tuesday it supported an additional 1 billion euro EU loan.

The German finance ministry said the commission would make another proposal to reach 9 billion euros and as soon as this became available it would be evaluated by member states. It added: “Along with our international partners, we stand by Ukraine at all times.”

Oleg UstenkoAn economic adviser to Ukrainian President Volodymyr Zelenskyy, said the country now needs $9 billion a month from Western supporters to cover the budget shortfall, almost double the previous request.

The finance ministry says its assessment of the spread is still $5 billion a month but even that is more than in Western capitals to date.

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

“We will try to survive under any circumstances, but without the financial support of our allies, it would not only be difficult to do so, but impossible.” .

Financial strains are manifesting more widely. Naftogaz, the state-owned energy company, on Tuesday asked holders of $1.5 billion of its bonds to accept payment deferrals as they seek to preserve cash to buy gas. It would be the first debt owed by a Ukrainian state entity since the war began.

Naftogaz’s move could signal a change in the Ukrainian government’s approach to foreign bondholders. Until now, Kyiv has refused to extend debt, saying it is important to maintain the confidence of international investors.

Last week, Ukraine’s central bank said it had used up $2.3 billion or 9.3% of international reserves in June alone, in part because it was monetizing the deficit at an ever-increasing rate. .

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

On Tuesday, the United States announced an additional $1.7 billion in direct economic assistance to the Ukrainian government. “This aid will help the democratic government of Ukraine provide essential services to the Ukrainian people,” Finance Minister Janet Yellen said in announcing the aid.

The United States Agency for International Development USAID and the Treasury Department have provided $4 billion in direct budget support to the Ukrainian government, meaning they have already reached half of the total commitments made under the bipartisan law.

Additional reporting by Guy Chazan in Berlin

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