It’s a necessary step, but a worrying trend. Just like last year, the government relied on optimistic scenarios that once again did not materialise due to the position of the United States.
What is changing:
- The government proposes to increase and revise spending by UAH 449 billion (of which UAH 412 billion is for military needs). That’s a 15% increase in the defence budget.
- These funds are meant to cover part of war-related expenses, particularly increased spending on weapons and ammunition amid active hostilities.
The new expenditures are expected to be financed through:
- Almost half – UAH 185 billion — will be covered through domestic government bonds (OVDPs), mostly purchased by state-owned banks. While this is not direct monetary issuance, in the medium term, it poses a threat to financial stability due to the sale of bonds at high interest rates.
- Another source is the exceeding of revenue targets (without raising taxes), by UAH 147.5 billion, about half of which has already been secured in the first five months of the year. Preliminary estimates of budget revenues turned out to be more conservative than reality.
- Redistribution of expenditures by UAH 51.3 billion, as well as savings on domestic debt repayments of UAH 65.1 billion. This was driven by a more favourable exchange rate than expected and the non-materialisation of risks under state guarantees.
The only positive sign amid the budget revision is the updated position of NATO countries. From now on, direct military aid to Ukraine will be counted towards the 5% of GDP defence spending required of alliance members.
In these circumstances, Ukraine should become more actively involved in diplomatic agreements with the EU and other partners to take advantage of this window of opportunity.
