How to help Ukraine's war-ravaged economy

Top finance chiefs from the World Bank and International Monetary Fund (IMF) begin their spring summit in Washington, DC, on Wednesday, with a slowing global economy in the post-pandemic era and Russia's invasion of Ukraine likely to top the agenda.

Ukrainian Prime Minister Denys Shmyhal and Finance Minister Serhiy Marchenko have flown to the United States and are set to meet with top World Bank-IMF chiefs on Thursday to discuss additional financial assistance for the country.

Ukraine's economy is expected to be decimated by the conflict, contracting by up to 45% this year. Inflation has already hit 13.7%, with prices growing 4.5% in a month, according to the country's central bank.

The IMF and World Bank have already approved more than $2 billion (€1.84 billion) in loans to Kyiv since Russia's invasion began on February 24, while the World Bank said last week that it's preparing nearly $1.5 billion in extra funds to allow essential Ukrainian government services to continue.

Over the weekend, IMF Managing Director Kristalina Georgieva said "more [funds] would be necessary ... to keep the economy functioning and prevent inflation shooting up."

Loans 'not enough'

Economist Oleksandr Kravchuk told DW that, though this type of funding is critical to shoring up Ukraine's finances, "these sums are clearly not enough for financial stability."

"Almost all of the money granted by international partners were loans — even if at a small interest rate. This means that the country's debt dependence and debt burden will only grow, and it will be very difficult to repay these loans," he said.

Kravchuk called for a "substantial amount" of previous debts to Ukraine to be written off.

Even before the war, Ukraine's external debt had hit $129 billion, according to the World Bank — the equivalent of 78.8% of the country's gross domestic product (GDP). The Ukrainian central bank says it's expected to repay $16 billion of it in 2022.

Worse still, the country's debt has been restructured once before — a year after the 2014 war in eastern Ukraine broke out. The IMF agreed with Kyiv to postpone some payments for three years and wrote off a fifth of the debt.

The restructuring came with strict conditions that forced Kyiv to speed up payments if GDP grew by more than 3% per year, which Kravchuk said has grown to be "a noose around the neck of the economy."

Jerome Phelps from the Debt Jubilee UK campaign told DW that it is very likely that some kind of debt restructuring would be necessary.

"It's really difficult to see how Ukraine can rebuild after this catastrophe and pay off all its debts, and pay off the multibillion dollar loans it's been given since the invasion [without some form of restructuring]," Phelps said.

"The question is whether it happens in a planned, structured way that's fair to all the creditors or whether it happens in a messy way that harms the Ukrainian people."

Basic income needed to prevent poverty

Other international bodies are also focusing on how to shore up the Ukrainian economy. The United Nations warned last month that a more severe and protracted war could see Ukraine's poverty rate rise to nearly 30% of the population, undoing 18 years of economic progress.

The UN Development Programme (UNDP) called for other countries to help fund "temporary basic income" for Ukrainians.

"People have lost their earning opportunities," Kravchuk said. He added that, though the government still currently supports social welfare at the prewar level, there is a monthly deficit of $5-7 billion per month because of plummeting tax and customs revenues.

In the meantime, Kyiv has temporarily fixed the exchange rate of the country's currency — the hryvnia — which should help to curb inflation.

The government has also cut taxes and regulated the price of some foods, fuel and public utilities for the duration of the conflict.

0% farm loans 

Ukraine's role as one of the world's largest wheat and barley exporters has dominated headlines in the first weeks of the war, due to plummeting exports that are already impacting global food security.

The World Bank wrote in its "War in the Region" report last month that the trade of grains through the Black Sea has been severely disrupted, noting that dry bulk vessels at Ukrainian ports were down 82% in early March compared with the previous month.

Dmytro Los, chairman of the Ukrainian Business and Trade Association, told DW that the country had initially lost up to one-fifth of agricultural territories to Russian forces.

He said Ukraine's first priority was now to feed its own population and that exports of grain could drop by 30-50% this year as a result of large amounts of the crop being left unharvested. Further exacerbating the export crisis were severe supply chain disruptions, he added.

"We still have huge issues with logistics of exports out of Ukraine because ports are blocked, so we have only a narrow bottleneck to connect Ukraine to the European Union and other countries," Los said last week.

The central bank has offered 0%-interest loans to support agricultural producers and wrote on its website this week that some 3,000 firms have taken up the offer, in an effort to keep the spring sowing season on track.

Inward investment nosedives

Investment activity in Ukraine has declined markedly this year because of the high risks and considerable uncertainty about the length of the conflict. 

Another snapshot of the impact the war is having on business activity came from the American Chamber of Commerce (AmCham) in its recent survey of CEOs and top executives of its members in Ukraine.

Just 41% those companies are still fully operational in Ukraine, 29% have been forced to relocate within the country, and 19% have been forced to temporarily move their firms outside Ukraine.

The survey showed that 40% of AmCham members have had to implement cost-cutting measures as a result of the war and more than half said they had to adapt their business models.

There are, however, signs that economic activity in the capital, Kyiv, is recovering after Russia changed its military strategy to focus on capturing eastern Ukraine.

Ukraine's central bank noted this week that life was returning to normal in the greater Kyiv region, as electricity consumption remains stable and demand for train tickets on the state railway system has returned.

Edited by: Uwe Hessler