Page 34 - Ukraine OUTLOOK 2024

as in 2023, since outlays on national security and defence are anticipated to be cut by 18%. Such an assumption is one of the main risks to the budget plan. If the war drags on at the current intensity, any cuts in financing for the military sector are very unlikely. Budget revision is thus very likely, just as it was the case last October for the 2023 budget. Tax and non-tax revenues are predicted to cover 53% of expenditures, which is a substantial improvement vs. 2022/23.
The budget law envisages a state budget deficit (before grants) of UAH1.6 trillion, ($40bn based on our average projected exchange rate). This is an equivalent of 20% of the expected nominal GDP in 2024, which is considerably narrower than in 2022 and 2023. The state budget is supposed to be primarily funded with external loans and grants, with net domestic borrowings being equivalent to only 5% of total needs.
The government’s plan to raise a gross $43bn in external funding in 2024 looks quite ambitious. If external borrowings fall considerably below the target, the authorities will likely have to resort to money printing, similarly to the practice of 2022.
While printing is risky by definition, it may still be the lesser of the evils if compared with underfinancing of military expenditures. As long as the amount of debt financing by the NBU is reasonable and inflationary/exchange rate expectations are anchored, this should not pose material risks to macroeconomic stability.
The fiscal deficit is expected to remain elevated in 2024 driven by high defence expenditures. However, higher nominal GDP growth should increase revenues in 2025 and contribute to a narrowing of the deficit. Public debt is forecast to rise steadily throughout the forecast horizon.
The state budget anticipates total revenues of UAH1.78 trillion ($49bn), and expenditures of almost twice as much at UAH3.35 trillion ($93bn).
A substantial portion of the budget, approximately 22% of Ukraine's GDP, has been allocated for military funding, totalling UAH1.69 trillion ($46.4bn).
Within the military spending allocation, UAH43bn ($1.1bn) has been earmarked for the production of drones, with an equal amount allocated for the domestic manufacturing of arms and ammunition. Funding for the domestic defence industry will be sourced from internal revenue, including taxes and other financial streams.
Additionally, UAH15bn ($413mn) has been designated for veterans' services, with UAH1bn ($27.5mn) specifically allocated for prosthetics.
The budget also encompasses provisions for various other domestic expenditures and social services.
The remaining expenditures will contribute to the budget deficit, which has been set at UAH1.57 trillion ($44bn). To finance this, the budget includes UAH2 trillion ($55bn) in external borrowing and internal government bonds.
The budget gained approval in parliament during its second reading on November 9, with a majority of 276 in favour, one opposed and 22 abstentions.
34 UKRAINE OUTLOOK 2024 www.intellinews.com