War forces Ukraine to divert $8.3bn to military spending, tax revenue drops — Minister

Ukraine has been forced to spend 245.1bn hryvnia (about $8.3bn or R33bn) on its war with Russia instead of development, the country’s finance minister said on Thursday, providing a glimpse into the huge economic cost of Moscow’s February 24 invasion.

The figure, which has not been disclosed by Ukraine’s government before, lays bare the economic maelstrom Ukraine is navigating as its soldiers try to keep Russia’s renewed offensive at bay in the country’s east.

The spending — drawn from some funds initially budgeted for development — went on everything from buying and repairing weapons to emergency support for internally displaced people, said finance minister Serhiy Marchenko. There are 2.7-million officially registered IDPs, according to data from the social policy ministry, although the real figure is many times higher.

The government only collected 60% of its planned tax revenue for April, a shortfall that was topped up to the equivalent of 79.5% by grants from foreign partners, Marchenko told Reuters in exclusive written comments.

Marchenko said Kyiv urgently needed foreign support to be ramped up as it is being forced to funnel billions of additional dollars into emergency spending.

He said Ukraine had received almost $2bn (about R32bn) in external funding in April, of which $719m (about R1.1bn) had come from grants. The figure for the period since February stands at $5.4bn (about R86bn), including $801m (about R1.3bn) in grants, he said.

“If we do not take into account foreign aid, we estimate the receipt of revenues in May-June at the level of 45-50% of (what was) planned, provided the situation does not worsen,” Marchenko said.

The $8bn in war expenses equates to more than a month of total state spending as measured by annual 2021 expenditures of 1.84 trillion hryvnias ($62.28bn or about R996bn).

Marchenko said Kyiv was discussing different kinds of external financial support.

He listed funds which Ukraine hoped to obtain through a special drawing rights (SDR) account launched by the International Monetary Fund.

Developed countries can direct part of their SDRs to the account.

“The finance ministry team is negotiating with our international partners, in particular  the G7 countries, on sending their part of the SDR to support Ukraine,” Marchenko said.

He said Ukraine expected to receive a loan of about 1bn Canadian dollars (about R1.2-trillion) from Canada in May through the account.

“We urge our partners to provide part of the funds as grants to reduce (our) debt burden, which is already growing due to martial law as well as the need for financing,” Marchenko said.

The minister said Ukraine remained committed to servicing its debt regardless of the war.

“Our stance on this issue remains unchanged. We continue to service our debts and the amount of our expenses because this is not large in comparison with the needs for financing the budget.

“Moreover, we don’t have reliable medium-term forecasts that would allow us to model the debt trajectory in the future.”

The government has borrowed about $2.4bn (about R38bn) by placing domestic war bonds and does not plan to issue other new commercial debt instruments, Marchenko said.

In addition, Ukraine’s central bank has provided the government with financial aid of 100 billion hryvnia ($3.4bn or about R54bn)) by directly purchasing war bonds to its portfolio.

Marchenko said the war had forced the government to ask the central bank for support.

“We are trying to maximise commercial funding through government war bonds and the volume of assistance from our partners, and only lastly count on funding from the central bank.”

He said such an amount should not lead to higher inflation.

Reuters