Ukraine's public debt nearly doubles in three years of war: How concerning Is this?

In 2021, the public debt-to-GDP ratio was only 49%. In 2022, with the start of the full-scale war, this figure jumped to 77.7%, and in 2023, it reached 84.4%.The credit rating agency Fitch notes that countries with similar economic indicators as Ukraine (e.g., Argentina, Ethiopia, Gambia, Laos, Pakistan) have an average public debt-to-GDP ratio of 70.9%. Even within this less successful group of economies, Ukraine is lagging behind in terms of debt levels.

Three years of active warfare have made Ukraine a problematic country in terms of debt. While this situation could be manageable, Ukraine must continue to borrow, and creditors are becoming less willing to lend to a country already heavily indebted.

"Of course, such a high debt-to-GDP ratio is significant, but we must consider that the country is at war and cannot develop actively, which is why this indicator is so high," says Taras Kotovych, senior financial analyst at ICU Group.

However, he believes that discussing a debt crisis is premature and that there is no need to panic.

"Given the schedule of debt repayments, they are not threatening to the budget and the state, especially under the conditions of receiving new tranches of international aid," says Kotovych.

The financial and economic indicators required for EU membership stipulate that a member state's public debt should not exceed 60% of GDP. Ukraine's Budget Code also sets this level, but the provision is currently suspended.

"A 90% public debt-to-GDP ratio, three-quarters of which is in foreign currency, would be a significant burden on the budget and economy under normal conditions if this debt were taken on commercial terms. But Ukraine is not in normal conditions. The increase in public debt is mainly due to Russian aggression. A significant portion of the debt increase comes from official external loans from partners, which we use to finance non-military expenditures and cover lost revenues due to the war or defense spending," says MP Danil Getmantsev, head of the Verkhovna Rada's Finance Committee.

"Before the full-scale invasion, Ukraine's public and guaranteed debt-to-GDP ratio showed a stable downward trend. However, during the war, with a significant increase in defense spending, this indicator has risen," the Ministry of Finance told hromadske.

Ukraine increasingly borrows in foreign currency, not in hryvnia

If we look at some developed countries, they also have very high public debt levels. For example, Japan's public debt is 264% of GDP, Greece's is 173%, and Italy's is 142%.

However, comparing these countries to Ukraine is not appropriate for several reasons. First, they have larger economies. Second, their public debt has lower interest rates. Third, in the case of Greece and Italy, they are members of the Eurozone, so the European Central Bank would bail them out in case of a debt crisis, as it has done before. Fourth, these countries are not at war.

Ukraine, with its public debt, is in a different situation. As long as the war continues and Ukraine receives support from a large international coalition, a debt crisis is not imminent. However, this situation cannot last forever, and Ukraine's financial outlook for the next three years is uncertain.

The international coalition continues to provide loans to Ukraine, largely disregarding the country's debt level, as the priority is the war's trajectory. In 2024, as in the previous two years, about seven-eighths of the increase in public debt was due to external borrowing, with only one-eighth coming from domestic bonds.

The largest net impact on the debt increase in 2024 came from concessional loans from the EU under the Ukraine Facility, amounting to $11.1 billion, the World Bank Group with $8.9 billion, the IMF with $2.4 billion, and the Canadian government with $1.4 billion, according to the Finance Committee.

"The first important fact to consider when assessing debt risks is that these loans are provided on exceptional concessional terms," says MP Danil Getmantsev.

For example, the interest rates on most of these loans do not exceed 2%, and the repayment periods range from 25 to 35 years, as in the case of EU loans, with the interest payments covered by the EU. However, the IMF has significantly increased the cost of loans for Ukraine to about 7% annually.

"Of course, I understand the outrage that 7% is expensive for a country at war. That's true," says Getmantsev.

"A significant portion of the funds raised during the war are concessional long-term loans with interest rates close to zero and deferred payments for decades. Over time, the real cost of the borrowed funds will decrease. One billion dollars borrowed in 2022 will cost less in 2032. Conservatively, considering an annual dollar inflation rate of 2%, over ten years, more than 20% of the nominal value of the debt will be eroded," says economist Adrian Pantiukhov.

The Ministry of Finance has long emphasized the importance of issuing public debt in hryvnia to reduce the risk of currency devaluation. However, the current situation is the opposite: the structure of public debt is worsening. The share of debt in foreign currency has increased to nearly 75% from 65% before the war, while a safe level is considered to be 60%.

Risks of reduced international funding

The war cannot last forever, and neither can international financing of Ukraine's needs, with about half of the state budget covered by donors interested in Ukraine.

Therefore, it is crucial to consider how creditors assess the likelihood of the war ending in the foreseeable future.

"Fitch expects the war to continue in 2025 within the current parameters. Despite some territorial gains by Russia since late 2023, Western military support and strong resistance should help Ukraine avoid significant additional territorial losses. The new U.S. administration has officially stated its goal to end the war, which could lead to a ceasefire agreement. However, a peace deal is unlikely due to the difficult concessions required from both sides. The parameters of a ceasefire agreement, including security guarantees for Ukraine and the extent of territories remaining under Russian control, remain undefined," Fitch wrote in an analytical note.

Given that the international community expects the hot phase of the war to continue throughout 2025, partners have pledged to provide Ukraine with $38.4 billion this year.

"Ukraine is expected to receive $38.4 billion in external financing in 2025. Gross domestic borrowing is planned at 579 billion hryvnias ($14 billion), with net borrowing amounting to 17 billion hryvnias ($410 million)," the National Bank of Ukraine told hromadske.

This means that the Ministry of Finance can borrow only 17 billion hryvnias ($410 million) in new funds on the domestic market, with the rest of the 579 billion hryvnias ($14 billion) going to repay existing debt. Ukraine is approaching the point where it can only borrow limited amounts domestically.

"This is not an unlimited possibility; there are certain constraints on borrowing related not only to the volume of borrowing but also to debt sustainability," said Finance Minister Sergii Marchenko.

This is particularly concerning because if the war is frozen in 2025, international aid flows will decrease, the domestic borrowing market will be exhausted, and the reconstruction of the economy, energy infrastructure, and housing will not finance itself.

"For 2025, we have firm guarantees from the EU, U.S., and other partners, which will fully cover the need for external financing. The main sources are concessional financing under the ERA program (from part of the $50 billion in profits from frozen Russian assets), the Ukraine Facility, and the EFF program from the IMF. Some of the funds under these programs will also be available in 2026, which is already partially secured by external financial resources. In this regard, we feel more confident than at the beginning of last year," says Danil Getmantsev.

The central bank forecasts that the volume of international aid will decrease to $25 billion in 2026 and $15 billion in 2027.

However, the regulator assures that "there is still room to accumulate additional resources in case of unforeseen events. The option of 'printing money' (buying government bonds by the National Bank) is not currently being considered. Monetary emission as a source of budget financing will be considered only as a last resort if other sources are unavailable or insufficient."

"Clearly, a high debt level is undesirable, but the main risk currently lies not in its size but in the potential reduction of international aid in 2026-2027. Currently, partners finance a significant portion of the state's social expenditures, allowing Ukraine to service its obligations without cutting funding for critical sectors. Therefore, the main challenge for Ukraine is to ensure stable macroeconomic policy and create conditions for attracting investments that will gradually reduce the debt burden," says economist Adrian Pantiukhov.

When asked by hromadske what would happen if the war is frozen and international aid to Ukraine is drastically reduced, MP Getmantsev replied: “We'll see what happens next. The scenarios may be different, and they will primarily depend on whether the war continues or whether there is a sustainable peace. It is clear that in a negative scenario, the risks to debt sustainability will be significantly exacerbated. In my opinion, the most significant risk is the currency risk, as three-quarters of the total public debt is denominated in foreign currency.”

“First of all, we need to increase the depth and liquidity of the domestic debt market, especially hryvnia domestic government bonds, which has been happening since the end of 2022, but there is still room for improvement. And secondly, we need to maintain relative currency stability and prevent a collapsing devaluation, as this is usually a direct path to a debt crisis,” the lawmaker adds.

Meanwhile, Ukraine's external debt market remains largely closed. This is due to the restructuring of the public debt in 2024, when the Ministry of Finance had to negotiate with creditors to reduce its liabilities on Eurobonds by 37% and extend their maturity.

“The market rate for Ukraine with our credit rating would probably be 15-20% now. And it is still a question whether we would have been given a loan on market terms in a state of war,” says Getmantsev.

For now, thanks to the concessional loans, the weighted average cost of Ukrainian public debt is 5.09%, compared to 7.79% in 2022. The weighted average maturity has roughly doubled from 6.27 years to more than 12 years.

However, Getmantsev believes that Ukraine's return to the external debt market is realistic: “Yes, I think it is quite realistic. The Ministry of Finance has publicly announced plans to return to external commercial borrowing markets in 2025-2026. I don't know if it will happen this year, but in 2026, when two years will have passed since the last restructuring, it is quite likely. It depends on the conditions that will prevail.”

Is it possible for Ukraine to reduce its public debt?

Usually, countries that want or need to reduce their debt burden take rather drastic measures. This may include radical cuts in budget expenditures, tax increases, mass privatization, raising the retirement age, and meeting the rather strict requirements of the IMF and other creditors.

For example, a similar policy is currently being pursued in Argentina by President Javier Milei, which has earned the approval of both investors and international organizations. 

“In this context, Argentina is an interesting example. The country's new president has taken tough austerity measures: he has reduced the number of ministries, fired some civil servants, and stopped indexing salaries and pensions. As a result, 2024 was the first year in 14 years when Argentina achieved a budget surplus. However, it paid the price: in April 2024, consumer price inflation in Argentina reached 289% year-on-year, and now it has almost dropped to a double-digit level,” explains economist Adrian Pantiukhov.

Should Ukraine follow this path – if not now, then in the near future? The IMF will look at Ukraine's 90.4% public debt-to-GDP ratio much more negatively after the war is over and will demand concrete actions to reduce this burden.

“The improvement of the debt-to-GDP ratio should be driven primarily by economic growth, especially after security risks are reduced. Then the country will be able to refinance its debts at lower rates and, if necessary, reduce the total amount of debt, covering the repayments with better budget revenues,” said financial analyst Taras Kotovych.

“All debt risks should be calculated by the Ministry of Finance in its debt strategy, which should be updated soon. To minimize these risks, plans and specific measures are being taken to manage the public debt. The war has shown that we need to be prepared for any development of events,” said MP Danil Getmantsev.

“Ukraine will pass 2025 without cutting budget expenditures. In the near term, the scenario of cutting public spending remains unacceptable, as the state plays a key role in the distribution of international financial assistance, which currently accounts for more than 50% of the country's GDP,” predicts economist Adrian Pantiukhov. ”It is important for Ukraine to find a balance between optimizing public finances and maintaining social stability.”

“Being part of the IMF Program, Ukraine has committed itself to debt sustainability. In particular, the target debt-to-GDP ratio is 82% by the end of 2028 and 65% by the end of 2033,” the Ministry of Finance said.

But so far, it is not about reducing, but about further increasing Ukraine's public debt. The IMF predicts that in 2025, Ukraine's public debt to GDP will increase to 106.6%, and in 2026 – to 107.6%. In a negative scenario, the numbers will be even worse: 117.5% in 2025, 132.1% in 2026, and 134.3% in 2027.