Ukraine, which was in a rather stable debt situation before the start of the war, underwent significant changes after the beginning of the conflict. According to data at the end of 2021, the country's public debt was 48.9% of GDP, with an average service rate of about 9% per year on domestic debt and 4% on external debt. The cost of servicing the debt was 2.9% of GDP.
But the decline of the Ukrainian economy due to the military conflict, as well as a significant increase in public spending, which increased from 40% to 75% of GDP from 2021 to 2023, significantly increased both domestic and foreign debt. As a result, according to the results of 2023, the national debt amounted to 84.4% of GDP. This number would have been even worse if the United States had not filled Ukraine's budget with $22.85 billion in grants, not loans, in 2022-2023. In 2022, Ukraine agreed with its creditors to postpone the payment of principal and interest on Eurobonds for 2022-2023. However, the situation will be different in 2024. There is no Western grant support in Ukraine this year, and it is time to pay interest on Eurobonds immediately in three years (2022-2024).
This situation has led to an unprecedented increase in the cost of servicing the national debt to 6.3% of GDP, or almost $12 billion in 2024. And by the end of the year, the state debt will reach almost 100% of GDP (97.6%, according to my current forecasts). At the same time, the policy of high interest rates of the National Bank of Ukraine led to an increase in the average domestic debt service rate from 9% to 13% in two years.
Debt service to the IMF and other creditors Ukraine, having signed a four-year program with the IMF, is now replacing $10 billion of debt to the Fund (debt that was obtained before the war at rates of 2 or 3 percent per year) with another IMF loan of $15.6 billion ( which yields an interest rate of about 8.5% per annum). As a result, already in 2024, in addition to repaying the principal amount of the loan under the old IMF programs, Ukraine will have to pay approximately $900 million in interest to service IMF debts. According to calculations, after receiving $5.4 billion in IMF loans in 2024, Ukraine will need to increase debt service payments in 2025 to $1.1-1.2 billion.
In addition, there are securities of Ukraine tied to the GDP of 2015, which are valid until 2041. In 2015, Prime Minister Yatsenyuk and Finance Minister Yaresko signed an agreement with creditors that slightly reduced the amount of debt in exchange for securities, payments on which are mandatory if Ukraine's economic growth exceeds 3 percent of GDP starting in 2019. The bigger the growth, the bigger the payouts. In the conditions of post-war recovery, payments on these obligations can reach 1-2 billion dollars per year and more for the nominal volume of securities of 3.2 billion dollars.
In 2023, the Ukrainian economy grew by 5.3 percent, which means that already in 2025, Ukraine will have to pay, according to my estimates, $700-$800 million "tax on the growth of the Ukrainian economy" in favor of creditors, which the Ministry of Finance has been trying to hide for years .
Therefore, approximately half of the US and EU aid to Ukraine in 2024 will go to service the debt of creditors inside and outside of Ukraine.
In order to reduce the burden on the state budget, in May-June 2024, the Ministry of Finance and creditors of Ukraine held negotiations on the restructuring of the $20 billion debt (Eurobond) and the modification of securities tied to GDP. So far, the negotiations have not led to any joint decision. If debt restructuring fails by August 1, 2024, Ukraine will have to pay about $3.75 billion in interest on Eurobonds by the end of 2024.
