Ukraine will remain critically dependent on external aid to sustain defense spending and macroeconomic stability as the war continues, according to the latest ICU Macro Insight. A new IMF program, the report warns, will be ineffective unless properly funded.
The EU’s ongoing talks over a €140 billion ($121 billion) reparations loan linked to frozen Russian assets are seen as a turning point. ICU analysts believe approval is highly likely, with the timeline remaining the only uncertainty.
Economy stagnant with no growth impulse in sight
Ukraine’s GDP inched up 0.7% YoY in 2Q25, implying it was at just 79% of the preinvasion (2021) level. Monthly data clearly indicate weakness was pervasive across key sectors, even though economic activity started to improve towards the end of the quarter.
Industrial production narrowed the decline from -6.1% in 1Q25 to -3.9% in 1H25. Cargo transportation turnover also narrowed the decline from -15.1% in 1Q25to -12.7% in 1H25.
Meanwhile, retail trade grew at above 6% in YoY terms in 2Q vssub-6% growth in 1Q25. The key drag on 2Q growth was the agricultural sector, as the harvesting campaign started later than in 2024 due to weather conditions.
We expect growth to pick up significantly in both 3Q and 4Q as agriculture gains pace and supportsrelated sectors, including food processing and cargo transportation. We maintain our full 2025 GDP growth projection of 2.5% YoY in anticipation of a temporary boost from agriculture.
The economy completely ran out of steam, and there is little hope growth will pick up meaningfully without a significant reduction of safety risks. The weakness is seen across all demand-side components.
Export is constrained by lesser agricultural harvest and a lack of new investments into sectors that are competitive abroad. Government consumption was a powerful growth pillar back in 2022-23, but now that the fiscal deficit started to narrow, its contribution is likely to be negative.
Investments are mainly supported by capex into the military segment and construction of fortification along the frontline. Domestic household consumption is the only positive contributor on the back of surging salaries.
Yet, even so, household incomes and private consumption are going to be less dynamic than in the previous years as social payments and salaries in the public sector arelagging behind salaries in the private sector.
Overall, we see economic growth remaining below 3% in the coming periods unless we see a significant improvement in safety risks. The recent resumption of massive strikes on Ukraine’s energy infrastructure by russia leaves no space for optimism with regard to trends in the economy.
Inflation remains below NBU forecast
Annual CPI slowed to 11.9% in September vs 13.2% in August and a peak of 15.9% in May. The end-September tally came in below the NBU forecast of 13.1%.
Core inflation was downto 11.1% YoY in September from the peak of 12.4% in March. The deceleration in prices wasseen across the vast majority of consumer basket groups with the notable exceptions beingeducation and hotels and restaurants.
The largest relief came from the deceleration in food prices (+17.2% vs the peak of 23.2% in May) on the back of ample harvest of fruits andvegetables.
Looking forward, we see no significant risks that may derail disinflation.
Household incomesare slowing in both nominal and real terms due to weak growth in social payments andsalaries in the public sector. Administrative tariffs for gas and electricity for households are likely to remain fixed at least for the next 12 months.
The harvest was not perfect this year, but should be more than sufficient to keep the food market fully saturated. On the other hand,we see little chance of inflation returning to the NBU target of 5% either in 2026 or 2027.
A tight labor market implies that salaries will continue to drive production costs, especially in the service sector. Unemployment rate is already close to the pre-2022 level, which implies employees will maintain their salary bargaining power going forward.
Yet, the most significant pressure will likely come from growth in energy (natural gas and electricity) prices for industrial producers as Ukraine will increasingly rely on more expensive imported energy since russia renewed massive strikes on Ukraine’s energy infrastructure. For 2025, we see the CPI slipping to single digits in November and landing at 8.5% at end-2025.
NBU left with no arguments for not reducing key rate
The NBU monetary policy is effectively getting tighter as the key policy rate remains flat while inflation trends down, and it does so much faster than the central bank expected.
The outlook for inflation also remains broadly favorable with the annual CPI likely to decline in every singlemonth at least until March 2026. Judging by the current inflation and mid-term inflation outlook, the start of the monetary policy easing cycle is becoming overdue.
Yet, the FX market and exchange-rate considerations also remain critical components of monetary policy decision-making.
However, at this point, it’s safe to say that the FX market is not showing any concerning trends as NBU reserves remain ample and the central bank uses them without limits to defend the hryvnia exchange rate.
With more external funding (via an EU reparation loan) coming in 2026 and beyond, the FX market should not pose any visible threats that need to be addressed via a high key policy rate.
Based on central bank previous actions and messaging, we assume it will want to ensure that hryvnia assets (term deposits and government hryvnia bonds) continue to offer a premium over yields on FX assets (so thatin FX terms hryvnia assets generate higher earnings), but this is possible with lower rates.
The NBU has kept the key policy rate at 15.5% since March, and we maintain our projections of two 50bp cuts in October and December.
If a new reparation loan is fully approved by theEU and the NBU gets the much-needed resources to control the FX market in the coming several years, the pace of rate cuts next year may be faster and an end-2026 key policy rate of 12.5% may become a reality.
Short-term commercial rates have become detached from the NBU key policy rate over the past couple of months. Yields on government hryvnia bonds with remaining maturities of six months or below offered in the retail segment decreased by 100-150bps in Aug-Sep due to scarce supply.
However, the rates on longer-term government bonds in both the primary and secondary markets have remained broadly unchanged since April. We don’t expect the government will be in a rush to reduce rates on primary auctions following cuts in the NBU key policy rate. Ukraine’s Ministry of Finance is very likely to face temporary liquidity pressures at the end of 2025v and also in 1Q26 and will maintain an extremely cautious stance on securities pricing so that demand for bonds from banks remains robust.
External imbalances are a major long-term concern
The ample current account (C/A) has become an essential feature of the war economy. In 2025, the C/A deficit is likely to exceed 14% of GDP.
Yet, net of budgetary transfers fromUkraine’s allies (recorded in the secondary income component of BoP), the deficit of the C/Ais going to be above 20%, a number never seen in the country’s history.
Surging deficit of trade in goods remains the key problem as import of goods is likely to be close to 38% ofGDP in 2025 (broadly in line with the pre-2022 number) while export is set to stand at 19-20% (vs. above 30% pre-2022).
Import is sizeable due to both purchases of defense-related goods and hefty supplies of consumer goods. Strong hryvnia (real effective rate was up by 5.4% in 12 months to August 2025) definitely bodes well for the strength of import flows.
A seemingly surprising fact is that the FX market deficit and the NBU interventions subsided recently despite a record-high foreign trade gap. The explanation for this is that household demand for FX cash hit its lowest level since the start of the full-fledged war.
The relative hryvnia stability has discouraged households from converting their savings into dollars and euros at any price. The de-facto fixed exchange rate (with only minor fluctuations) of hryvniavs US$ that prevailed over the past 15 months reduced incentives for short-term hedges by households.
On the corporate side, that stability of the hryvnia encourages companies to reduce the stock of foreign trade credits. Exporters transfer their sale proceeds from abroad with no delays. Thus, the financial account (net of official concessional loans) improved considerably and the NBU interventions declined to US$2.3bn in September from a monthly average of US$3.0bn in summer.
Reparation loan is the key to long-term macro-stability
The record-high current account gap would be a major problem and detrimental for macroeconomicstability, if not for foreign financial aid that Ukraine received since February 2022 in the form of grants and loans.
Foreign financial aid is critical for macroeconomic stability going forward.Ukraine needs at least US$40bn annually to cover the imbalances of external accounts thatare primarily driven by the trade deficit and demand for FX cash within the country.
Commitments of Ukraine’s allies under the current IMF program imply the NBU will have reserves of just above US$50bn at the end of 2025, and Ukraine will receive anotherUS$25bn in 2026-1Q27 (after which the current IMF program ends).
Overall, this implies the external accounts gap will be fully covered in 2026 (with reserves and new inflows), but largequestions loom in periods beyond 2026.
Without new sizeable funding (that is needed evenin a favorable scenario of subsiding safety risks) Ukraine would be facing unprecedented challenges.The new IMF program that is currently being shaped addresses this concern. The critical component of the program is the funding that is expected to be provided by the EU in theform of reparation loans linked to russian frozen assets.
While a long approval process lies ahead, there is a high level of confidence the loan of EUR140bn is going to be stamped. That implies Ukraine will be in safe territory and be able to cover its budgetary needs and the deficit of external accounts at least for the next four years ending 2029.
While the use of russian foreign assets is very much welcome, it creates/reveals anothersignificant longer-term problem. The russian assets were supposed to cover Ukraine’s reconstruction needs after the war, while the baseline scenario now is that the money will beused to fund the war efforts of Ukraine.
This implies that inflows of foreign financial aid will shrink and the economy is likely to see a cliff effect in terms of foreign funding in the midterm. While this now seems to be a distant perspective, economic policy decisions should definitely take account of this fact.
NBU has unprecedented flexibility over choice of FX policy
Over the past 15 months, the NBU has clearly demonstrated it has zero appetite for managed hryvnia depreciation.
With a sizeable reparation loan coming in on the horizon, the central bank will have all the resources it needs to maintain unlimited interventions in the FX marketin the years to come.
Yet, we think the exchange rate policy stance may be adjusted going forward.
The surging external imbalances cannot be left unnoticed for years, and we expect the NBU will have no reasonable choice but to gradually address this concern.
We bet on an NBU move towards a managed hryvnia weakening with a pace that will be comfortable bothfor households and businesses. We thus see an end-2025 rate of UAH42.4/US$ and end2026 rate of UAH44.5/US$.
Reparation loan set to close fiscal funding gap
The draft 2026 budget targets a deficit of UAH1.9trn, an equivalent of US$46bn at the current exchange rate, or 19% of GDP. Gross external financing needs are estimated at UAH2.1trn,an equivalent of US$52bn at the current exchange rate.
The government sends a clear signal that Ukraine’s reliance on foreign financial aid will remain critical in 2026 and beyond.
Apparently, at this point it is too early to assume any de-escalation of the war and a reductionof the war-related budget expenditures. Moreover, the proposed revisions to the 2025 budget boost the outlays on the national security and defense by another US$8bn that are expected to be funded with ERA facility from the EU (a part that was supposed to be a pre-financing for 2026).
Apparently, the 2025/26 fiscal financing needs make the existing IMF program fully irrelevant.Ukrainian authorities express a high level of confidence the reparation loan will be eventuallyapproved by the EU, implying the state budget deficit will remain to be safely covered in thecoming years without affecting the debt sustainability metrics of the country.
The views expressed in this opinion article are the author’s and not necessarily those of Kyiv Post.