EFE
The war in the Middle East is taking a toll on Ukraine's economy by accelerating inflation, and Kyiv is exploring options to finance essential defense and social spending should the European Union's (EU) €90 billion loan be blocked. Rostyslav Averchuk / EFE Fuel prices in Ukraine have risen by 10% to 20% since the US and Israel launched their offensive against Iran on February 28 and Tehran's regional retaliations began. This comes amidst a devaluation of the hryvnia, Ukraine's currency, and growing uncertainty. To cushion the impact on households, the government is preparing partial compensation for drivers through fuel purchase reimbursement programs, along with UAH 1,500 (approximately €30) aid for nearly 13 million vulnerable citizens. However, critics warn that these measures will do little to curb price increases and will burden the already strained state budget. According to the KSE Institute of the Kyiv School of Economics, Ukraine experienced a "critical deficit" in international aid in February, receiving only about €1.25 billion instead of the expected €2.95 billion. This resulted in a monthly deficit twice as large as anticipated, around €1.54 billion, as Ukraine's tax revenues cover only approximately 57% of its expenses. The hryvnia has continued to weaken amid stagnant industrial production and a widening trade deficit. Experts indicate that the National Bank's international reserves, exceeding €47 billion, will likely absorb much of the pressure and prevent a disorderly depreciation. However, relative economic stability largely depends on sustained external financing and the war's evolution. Among the primary risks are Hungary's blocking of EU aid, the escalation of hostilities, and further damage to energy infrastructure. The EU's promised €90 billion loan remains the cornerstone of Ukraine's ability to meet its social obligations and defend itself, with defense accounting for 60% of public spending. Kyiv expects to receive the first tranches in the first week of April, but the disbursement mechanism is uncertain due to Hungary's vetoes, linked to the disruption of Russian oil transit through Ukraine following a Russian attack on the Druzhba pipeline, despite Budapest's approval of the credit in December. The loan's future will be debated at the EU Foreign Affairs Council in Brussels on Monday. European Commission President Ursula von der Leyen has stated that the funds will be delivered "one way or another." Nevertheless, Ukraine is already preparing a "Plan B," according to National Bank Governor Andriy Pyshnyi. Pyshnyi outlined two main options: increasing debt in the domestic market or directly financing budgetary needs through money issuance. Experts doubt that domestic borrowing can cover the deficit on the necessary scale, while large-scale issuance would drastically accelerate inflation. Any delay in the EU loan would have an even greater impact, as rising oil prices due to the Middle East war will increase Russia's revenues, crucial for its ability to sustain the war against Ukraine. The funding shortage will directly impact the Ukrainian Army, stated Lyubov Shipovich, director of the Dignitas Foundation, which supports Ukrainian defense, in a podcast for the Center for Economic Strategy (CES). "When we lack funds to invest in technology, we lose more lives (of our soldiers)," she emphasized. The CES noted, however, that the recent approval of the IMF loan to Ukraine worth $8.1 billion and the arrival of the first tranche in early March are signs of confidence that the EU will eventually provide its support, thus averting a financial catastrophe. According to the CES, the IMF loan acts as an "anchor" for other aid. While the €90 billion is crucial for covering the projected budget deficit of €119 billion over the next four years, Kyiv could also count on the backing of institutions like the World Bank and governments of countries that remain committed to supporting Ukraine.
