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    Home»Finance»Kyiv blames US aid delays for widening $43bn deficit
    Finance

    Kyiv blames US aid delays for widening $43bn deficit

    August 11, 20245 Mins Read


    Ukraine’s finance minister has called on its western allies to speed up disbursement of a $50bn loan, claiming delays in weapons deliveries had contributed to a yawning budget deficit that has left Kyiv scrambling to find money to pay its army.

    Serhiy Marchenko told the Financial Times that the slow dispersal of weapons, especially from the US, had contributed to a $12bn rise in military spending.

    The $12bn rise meant the country was set to record a deficit that other government officials have estimated at just under a quarter of GDP, or $43.5bn, this year.

    $27bn-worth of direct US military aid was approved by Congress in April this year, but its disbursement continues to be “slow”, Marchenko said. “We still have a lack of necessary weapons, ammunition and shells.”

    The situation meant the country “will have a lack of money to cover salaries for our troops,” the finance minister said, adding that the delays in aid meant that pay packets set aside for the end of 2024 were used to “purchase necessary weapons and ammunition” at the start of this year.

    Western allies do not directly fund the salaries of Ukraine’s army, but the lack of US weapons and concurrent rise in military spending has meant that Kyiv will have to fund the war by cutting spending, selling state assets and raising taxes.

    Ukraine’s Finance Minister Serhiy Marchenko
    Serhiy Marchenko: ‘We can’t press pause on this war. You can’t stop fighting. You need this money.’ © Odd Anderson/AFP/Getty Images

    The finance minister said the country’s perilous financial situation highlighted the need for the US and others to pledge more aid and accelerate progress on a $50bn loan promised by G7 leaders.

    The G7 aims to finalise the loan this year and repay it with the profits generated by €260bn-worth of frozen Russian central bank assets, most of which are held at Belgium’s Euroclear. The allies will decide how the $50bn can be spent, but Ukrainian officials hope that at least part will be allocated for weapons.

    “Ukraine is in a very vulnerable position,” he said, adding that the $50bn loan was “a magic solution” that would enable the country to buy military supplies and stop it from falling into a financial state that would alarm its creditors, such as the IMF.

    Finalising the $50bn loan has been mired by complex negotiations between the US and EU countries, however.

    The US wants guarantees that the €260bn will stay frozen for the foreseeable future, and is concerned that Hungary could block efforts to make that a reality. Hungary, governed by pro-Russian premier Viktor Orbán, has repeatedly held up EU aid to Ukraine.

    With the US presidential election looming, and Republican candidate Donald Trump threatening to cut off US aid to Ukraine, Marchenko expressed concerns about delays beyond the summer break.

    “They are not ready to accept this as a matter of urgency for Ukraine,” he said of the EU and the $50bn.

    Prime Minister Denys Shmyhal has called on the EU to consider revising its sanctions policy to push through the loan.

    Shmyhal said this month in a letter to the European Commission, seen by the Financial Times, that the bloc should agree to freeze the assets “until the end of the armed aggression of the Russian Federation against Ukraine and the compensation of all damages incurred”. But such a move requires unanimity among EU’s 27 members, with officials concerned that Hungary could block it.

    The commission said it would not comment on “correspondence from partners”.

    Brussels this week disbursed a €4.2bn tranche from a separate €50bn facility for Ukraine agreed in February and funded through the EU’s own budget. The payment was contingent on Ukraine fulfilling certain reforms as part of its bid to join the EU.

    Kyiv urgently needs a signal from its western allies that the frozen assets plan will go ahead, in part to show to the IMF that it is on solid budgetary ground when the lender starts reviewing Ukraine’s public finances in September.

    The Ukrainian finance ministry also has a mid-September deadline to put forward its 2025 budget.

    “We can’t press pause on this war,” Marchenko said. “You can’t stop fighting. You need this money. So if you haven’t enough support from your partners, you will try to figure out how to find this money in your own resources.”

    However — while the government is carrying out a mixture of debt restructuring, privatisations and tax hikes to plug its deficit — investors believe Kyiv ought to do more to address the country’s large shadow economy.

    “Ukraine’s government needs to acknowledge the scale of the shadow economy and start fighting it immediately,” said Andy Hunder, head of the American Chamber of Commerce in Ukraine.

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    Montage of map of Ukraine and tanks

    The head of Ukraine’s parliamentary committee on taxation, Danylo Hetmanstsev, estimates Ukraine’s shadow economy could generate as much as $12 billion. “Businesses that are paying taxes are being squeezed to pay more, while those evading tax are getting away with it,” said Hunder. 

    Instead, Ukraine’s government has proposed a rise in its war tax, charged on people’s salaries, from 1.5 per cent to 5 per cent. It could be extended to the self employed too. They also hope to broaden the number of businesses eligible to pay the war tax, and impose steeper levies on luxury goods. The number of goods subject to excise tax will increase, and as will the rate charged in some cases.

    Some economists believe more tax rises are inevitable.  

    “War is extremely expensive . . . If foreign aid is not forthcoming, it means you have to look internally for these resources,” said Yuriy Gorodnichenko, a specialist on Ukraine’s macroeconomic policy based at the University of California, Berkeley. “It’s a bit of a miracle that we’re in the third year of the war and the taxes have not been raised [more] aggressively.”



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