The Ukrainian economy is exhausted by the war, and its endurance is being tested to the limit of what is possible. The full-scale invasion of Russia did not just slow down development, it reshaped the very foundations of the country’s economic model. Businesses are suffocating under the pressure of taxes, trying to survive in an environment of instability, taxes, lack of labor and constant threats, while the state is torn between funding the army, social programs and trying to maintain financial stability. Inflation destroys incomes, international debts grow, and the budget deficit reaches critical levels. How long will our country be able to withstand this onslaught before the crisis turns into a protracted economic collapse?
The current economic situation in Ukraine
The economic situation in Ukraine is deteriorating sharply, and there are currently no signs of rapid recovery. War destroys not only buildings and roads, but also the country’s economic system. Despite the resilience of the business and the flexibility of the market, factors that destroy opportunities for growth dominate. Ukraine is entering a new phase of economic struggle, where without radical changes the system will simply not survive.
According to the updated forecast of the International Monetary Fund, published on February 28, the Ukrainian economy continues to slow down under the pressure of the war and the inflation explosion. The budget deficit for 2025 will reach 19.6%, and state finances are teetering on the brink of crisis. The fund points to the need for immediate reform of the economic system: without combating tax evasion and creating a favorable investment climate, the country risks getting stuck in a debt pit. The prospect of another increase in the NBU discount rate and further weakening of the hryvnia looks particularly critical.
Inflation has already reached 12.9% in 2024, and this indicator continues to rise. Due to the unstable exchange rate and general uncertainty, the prices of essential goods are rising rapidly. This hits both consumers and businesses, forcing businesses to cut back production and adapt to the reduced purchasing power of the population.
The IMF report itself emphasizes:
“In view of the risks associated with the growth of inflation, the recent increase of the discount rate by the NBU is appropriate. Further actions will be justified in case of further acceleration of inflation or deterioration of inflation expectations. The exchange rate should increasingly act as a shock absorber. Maintaining adequate reserves is a priority, especially given the risks to the forecast.”
The slowdown in GDP growth predicted by the IMF to 2-3% in 2025 only confirms the negative trend. The main reasons for this are the labor shortage, the destroyed energy infrastructure and the long war. The lack of qualified workers exacerbates the problems of enterprises that already work in difficult conditions. The mass emigration of Ukrainians abroad, the mobilization of a large part of the working population, and the destruction of enterprises create a situation in which the economy is simply unable to enter a stable development trajectory.
It should be noted that this is not the first time that forecasts have deteriorated. On July 1, 2024, the Cabinet of Ministers of Ukraine was forced to lower its own economic growth forecast for 2025 from 6.8% to 2.7%. This decision was the result of the realization of deeper problems than previously expected. In October, the IMF also adjusted its expectations for 2024 due to the destruction of the energy infrastructure due to Russian shelling, lowering the GDP growth forecast for 2024 to 3.0% and for 2025 to 2.5% instead of the previously expected 6.5%.
In addition, on January 23, 2025, the Chairman of the NBU Andriy Pishnyi officially announced the further deterioration of economic growth forecasts until 2027. According to the regulator, actual GDP growth in 2024 was only 3.4%, which is significantly lower than previously expected. This indicates systemic problems that cannot be solved by either monetary or fiscal measures.
The large budget deficit is caused not only by the growth of expenses, but also by insufficient tax revenues. Many businesses are forced to work in the shadows or even cease operations altogether due to economic instability. Despite the government’s attempt to increase the efficiency of tax collection, real results are not yet visible. This increases the country’s dependence on external creditors and creates additional pressure on public finances.
The increase in the NBU discount rate, which is predicted by the IMF, will make loans even more expensive, which will finish off the remaining solvency of businesses. If now the enterprises are barely surviving, then in conditions of further increase in the price of loans, the restoration of economic activity will become almost impossible. The business lacks available financial resources, and therefore, it is not worth waiting for new investments.
At the same time, the hryvnia exchange rate is becoming weaker and weaker, and although the NBU is trying to restrain devaluation processes, its possibilities are limited. Devaluation hits the import-oriented sector, increases the cost of goods and services and undermines confidence in the national currency. At the same time, the artificial restraint of the exchange rate only prolongs the crisis, which sooner or later will explode with even greater upheavals.
The destruction of infrastructure remains a separate problem. Russian attacks on energy, transport and industrial facilities are making it difficult for companies to operate and holding back any attempts at economic recovery. A large part of budget funds goes to the restoration of destroyed objects, which reduces opportunities for investment in other areas.
Against the background of all these challenges, Ukraine is in the period of economic survival for the fourth year. The projected 2-3% GDP growth in 2025 will not allow to restore the pre-war level of well-being, and without structural changes in the tax and financial systems, the country risks being stuck in a state of stagnation for many years.
National debt
The economic decline is accompanied by the fact that Ukraine is increasingly sinking into a debt trap, the exit from which is becoming more and more difficult. According to the Ministry of Finance of Ukraine, the state and state-guaranteed debt reached a record 7,068.00 billion UAH, which is equivalent to 168.99 billion US dollars. In January 2025 alone, the debt increased by UAH 87.03 billion, or almost $3 billion. This means that the monthly increase in the debt load is at a huge pace, and the opportunities for servicing it are decreasing every day.
72.74% of the debt is external borrowing, which amounts to more than 122.93 billion dollars. This debt structure makes the economy vulnerable to any currency fluctuations, decisions of international creditors and changes in global financial policy. At the same time, the domestic debt, which amounts to 1,926.66 billion UAH or 46.07 billion dollars, is also growing, although not at such a rapid pace. It is provided by the issuance of domestic state loan bonds (OVDP), which are mostly bought by the National Bank or Ukrainian banks. However, long-term financing of the budget at the expense of domestic borrowing inevitably leads to emission pressure on the hryvnia.
Every month the situation becomes more and more dangerous. At such rates of borrowing, in 2025 the public debt may exceed 200 billion dollars, which will bring it closer to the critical mark of more than 100% of GDP. Interest payments on debts will also increase, and in the worst-case scenario, Ukraine may find itself in a situation where a significant part of budget funds will be directed not to defense or social needs, but to repayment of debt obligations.
If international creditors begin to demand stricter debt service conditions or restructuring, Ukraine may face default or the need for drastic cuts in public spending. This will mean cuts in social programs, an increase in the tax burden and even possible delays in the payment of salaries and pensions.
Another consequence of such a debt policy will be further devaluation of the hryvnia. The more Ukraine attracts external financing, the stronger the pressure on the currency market will be. The growth of the debt inevitably causes an inflationary surge, because to service it, the government is forced to attract more hryvnia funds, which increases the money supply. Against this background, the dollar exchange rate in Ukraine in 2025-2026 may reach UAH 50 or more, which will intensify the crisis in the purchasing power of the population.
It is also worth considering that the excessive debt burden makes Ukraine extremely dependent on the decisions of international financial structures. The IMF, the World Bank, and Western creditors are already determining the country’s economic policy, dictating the need to cut subsidies, deregulate the market, and carry out unpopular reforms. The more Ukraine borrows, the less it controls its own financial strategy.
Forecasts and perspectives
As we can see, Ukraine is facing an extremely difficult period of economic adaptation, which will determine its prospects for the coming years. War, inflation, tax problems, production cuts, and a labor crisis create ideal conditions for economic decline. At the same time, the forecasts of international analysts indicate that the biggest challenges are still ahead.
One of the key risks is the growing financial dependence on external creditors. According to the IMF’s forecast, which is mentioned in its memorandum, Ukraine’s debt will not fall below 100% of GDP in the next few years. If the country is unable to meet the conditions of international creditors, there is a risk of debt restructuring, which may lead to a drop in investor confidence and trigger a new wave of devaluation of the hryvnia.
The budget deficit remains another critical factor. A 19.6% deficit in 2025 is an unprecedentedly high indicator, which means that the country will be forced to either increase the tax burden on businesses and citizens, or drastically reduce social spending. The most likely scenario is the introduction of new taxes, tighter fiscal policy and increased control over cash flows. However, such a strategy can lead to shadow business and capital flight.
In addition, a decrease in business activity threatens to increase unemployment. In 2024, the number of officially registered unemployed increased by 18%, and by 2026 this figure may reach 25-30%. Labor shortages due to war and migration mean that companies cannot find skilled workers, while the population does not have sufficient purchasing power. This vicious circle will intensify if employment stimulus programs are not launched.
As already mentioned, now the hryvnia will remain under considerable pressure. If in 2024 the dollar exchange rate stabilized at the level of UAH 39-41, then in 2025-2026 it may cross the mark of UAH 50. The main factors of this are the high level of hryvnia emission to finance the budget, the trade deficit and a possible decrease in international aid. Devaluation will create an additional burden on the economy due to the increase in the price of imports and the increase in the cost of servicing debts.
Another critical problem is the destruction of the energy infrastructure. Damage to power plants and power grids means that even after active hostilities end, the economy will not be able to recover quickly. Industrial enterprises will be forced to work in conditions of unstable electricity supply, which will slow down production and reduce the competitiveness of Ukrainian goods on international markets.
The agricultural sector, which remains key to the economy, is also under great threat. Due to limitations in logistics, mining of fields and lack of financing, Ukrainian farmers may reduce the sown area by 15-20% in 2025-2026. This will lead to a decrease in the export of grain and oilseed crops and a decrease in foreign currency inflows to the country.
However, the main risk remains the loss of Ukraine’s investment attractiveness. If until 2022, international companies considered the country as a promising market for investments, now they are not ready to risk capital in a war zone. Even if hostilities end, the process of returning investors could take years. Without an inflow of investment, economic recovery will be slow, and a large part of enterprises will remain in a state of stagnation.
The scenario of further economic development of Ukraine in the coming years looks extremely difficult and disappointing. Even with active international support and reforms, the exit from the crisis will be long-term. Ukraine will be forced to radically revise its economic strategy in order to avoid the worst consequences: uncontrolled inflation, debt trap and loss of competitiveness on the world market.
If the government continues to stifle business with excessive taxes and constant audits, build up debt, spend vast sums on inefficient government programs (such as Arctic research during the war), and patch up the budget deficit with new borrowings without creating conditions for the development of its own production, then the economy will eventually stagnate. Without effective programs to support entrepreneurship and investment in industry, the country will remain dependent on foreign aid, and any recovery efforts will be doomed to failure. The hryvnia will lose stability, prices will soar to critical levels, and jobs will disappear faster than they can be created. In such a reality, business will not develop, but will survive, and the state will receive a new wave of impoverishment and social discontent instead of economic growth.
The situation in the country depends on how effectively the government can find a balance between borrowing and the economic development of its enterprises. If the debt burden continues to grow without reforming the economy, the country risks finding itself in a state of permanent debt dependence, when the lion’s share of the budget goes to servicing loans, and there are practically no opportunities for development. An alternative scenario involves revising approaches to budget financing, revitalizing investment policies, and reducing spending on inefficient government programs, such as Arctic research.
