Brussels is drawing up plans for a new round of emergency lending to Ukraine as it seeks to contribute to efforts by allies to plug a yawning government financing gap running to billions of euros a month.
Valdis Dombrovskis, European Commission executive vice-president in charge of economic policy, said EU officials were looking both to accelerate a payment of €600mn under the bloc’s existing emergency support plan and to bring forward a new round of lending.
This could be achieved either by topping up the funding or extending a fresh emergency loan, he said. “We are currently assessing both options,” Dombrovskis told the Financial Times in an interview. “The aim is of course to really bridge this financing gap.”
Ukraine’s finance minister last month appealed for immediate financial support of tens of billions of dollars to plug a fiscal deficit caused by Russia’s invasion of the country. Sergii Marchenko said government spending would exceed revenues by between $5bn and $7bn a month as the war continues.
Kristalina Georgieva, the IMF’s managing director, subsequently estimated that Ukraine will need $15bn over three months to prop up its finances.
Marchenko said the response from foreign governments and multilateral institutions to its appeals for assistance had been positive but the commitments made were far smaller than Ukraine’s needs.
The IMF, World Bank, US, UK and other donors “agreed on our estimation of our needs,” he said. “Now it is time to fill the glass.”
Dombrovskis revealed the EU’s latest plan on Wednesday, a day ahead of an announcement by US president Joe Biden of a request to Congress for a Ukraine-related package that included $8.5bn in economic aid for Kyiv. Other western partners have also come forward with support for the country, including Canada and a number of EU member states via bilateral facilities.
The EU earlier this year agreed on a €1.2bn emergency package of so-called macro-financial assistance to Ukraine, on top of its regular support for the country.
So far, however, Ukraine has received only about $4.6bn in budgetary support from foreign donors and lenders. It has also raised about $3.7bn by selling war bonds on local markets, including $800mn last week, according to the finance ministry. At least $1.4bn of the bonds were bought by the central bank, a form of money printing Marchenko said that Ukraine was reluctant to repeat.
From April to December, Ukraine faces local and external debt repayments of about $15bn, bringing its estimated gross financing needs to the end of the year to between $40bn and $50bn, according to Timothy Ash, senior emerging market debt strategist at BlueBay Asset Management.
With $27.6bn in foreign exchange reserves at the beginning of March, and with some foreign and local funding coming in, the government would be able to keep servicing its debts for at least the next several months, Ash added.
Marchenko said keeping up debt repayments was a priority because the government wanted to retain its access to local and international capital markets.
But at some point, analysts think Kyiv’s debt will be restructured. “When hostilities end I can’t imagine [restructuring the debt] won’t come under discussion, and private-sector involvement will surely be part of that,” Ash said. “I can’t see why tens of billions of dollars of western taxpayers’ money [should be spent on supporting the Ukrainian government] without bondholders being asked to contribute.”
Dombrovskis said the topic of supporting Ukraine’s immediate needs had been discussed during the April meetings of the IMF and World Bank in Washington, describing it as a “work in progress”.
“It is challenging but it is important to do,” he said. “There was willingness from all sides to [make] this effort and make sure this support for Ukraine is there to maintain the normal functioning of the state.”