Ukraine and its official donors and creditors are working on ways to mitigate a drop in US aid, should that be forced by a change of leadership in the US, National Bank of Ukraine governor Andriy Pyshnyy has told GlobalMarkets.
With campaigning for the 2024 presidential election in the US under way and leading Republican candidate Donald Trump criticising money spent helping Ukraine, Pyshnyy is “concerned”, although the country is “resilient”, he said, speaking through an interpreter.
“We know that our partners are aware of it, and they are working on it,” he said, discussing the eventuality of a cut in US aid, if there was a more isolationist turn in US politics. He added that the question was also being discussed during the World Bank and IMF annual meetings in Marrakech. “This issue cannot be left unnoticed,” he said.
The US provided Ukraine with $76.8bn of bilateral aid between January 2022 and July this year, according to the Kiel Institute for the World Economy. Financing support — comprising budgetary aid including via an Economic Support Fund and loans — was the largest part, totalling $26.4bn.
The governor said Ukraine was close to completing the second review of a $15.6bn 48 month Extended Fund Facility from the IMF, after technical consultations last week. That is part of a $115bn support package to Ukraine, contingent on policy commitments from Ukraine. This includes bilateral donor support, notably from the US.
“We are absolutely grateful for the support provided to Ukraine and for the support that I am convinced will be provided in the future,” Pyshnyy said. “These are democratic countries, the pool of countries where Ukraine wants to be. They all have their political cycles.”
He emphasised: “We believe that any fluctuation in democracies related to election processes will not undermine the sustainability of this support. We see a strong willingness to mitigate and avoid turbulence in this financial support.”
So far in 2023, Ukraine has received $33.8bn of donor support for its budget: $14.7bn from the EU, $10.9bn from the US and smaller donations from Canada ($1.8bn), Japan ($1.5bn) and the World Bank ($1.4bn).
By the end of the year Ukraine expects the total to reach $42bn. The US is therefore its largest single donor by far, as it is in military aid.
“If we did not get this money, the budget deficit would not be covered,” says Pyshnyy. “It’s not only about numbers. The US is a key strategic partner to Ukraine and its support cannot be overestimated.”
Monetary financing ended
At the beginning of the war and before the donor coalition had come together in a more structured fashion, the central bank was forced to do monetary financing of about $12bn.
The budget deficit reached almost 27% last year, he noted, partly due to the need to finance the war. Thanks to international financial support, Ukraine has not had to turn to monetary financing in 2023.
“Despite the war, and the fact that the war lasted longer than we initially expected, we managed to reduce this budget deficit, but we still depend on international financial support, critically and vitally,” Pyshnyy said.
Although the IMF still expects inflation to reach 17.7% in Ukraine in 2023, last week the central bank moved from a fixed to a managed exchange rate. That is part of a long term plan to move to a flexible exchange rate, including lifting foreign exchange restrictions and a shift in focus to inflation targeting.
Pyshnyy noted happily that the market received the change well — there was no dramatic depreciation in the hryvnia, but rather a small appreciation.
“At a certain point we realised that a fixed [exchange] rate may pose threats to the economy,” he said. “This was the medicine at the start of the war, but it may become more damaging for the economy.”
Further liberalisation will move in stages, linked to conditions, rather than specific dates. “Currency liberalisation will directly depend on how well we can ensure exchange rate and price stability under a managed exchange rate,” Pyshnyy said.
“At the start of the war Ukraine found itself under unprecedentedly tough administrative restrictions, limited resources, loss of export revenues, and an unprecedented deficit,” he added. “Exchange rate stability is ensured first and foremost thanks to international financial support, that allows us to refill international reserves.”