Ukraine battles economic pressure amid war

Ukraine’s economic stability has become a crucial but often overlooked front in its ongoing conflict with Russia. Maintaining financial strength is not only essential for sustaining the war effort today but also for securing the country’s long-term future.

According to Sergii Marchenko, Ukraine’s finance minister, Kyiv aims to emerge from the conflict as a strong partner for Europe rather than a struggling neighbour. He believes the country’s hard-earned military experience since the start of the full-scale invasion in 2022 could eventually help strengthen Europe’s defence capabilities.

Joining the European Union remains a major goal for Ukraine. Financial support from the bloc has played a key role in keeping the economy functioning while bringing the country closer to European integration.

A newly approved €90bn loan from the EU is expected to help cover Ukraine’s budget gap over the next two years. The funding package, endorsed by the European Parliament, could begin reaching Kyiv as early as April.

The loan forms the largest part of a wider international support package worth about $136.5bn. Officials say this financial assistance is critical for Ukraine as the government continues to fund both military operations and essential public services.

Ukraine’s leadership says the strength of its armed forces depends heavily on a stable economy. Domestic revenue is therefore being directed primarily toward defence, while international aid helps maintain social programmes and state operations.

In December 2024, the government introduced tax increases for the first time since the war began. These measures affected personal income, small businesses and financial institutions. As a result, domestic tax revenues are expected to reach $67.5bn this year, representing a 15% increase compared with the previous year.

However, planned government spending for 2026 is estimated at around $112bn, with roughly 60% allocated to defence. This leaves a projected budget gap of about $45bn.

To close the gap, authorities are seeking parliamentary approval for additional tax measures before the end of the month. These reforms are also part of the conditions linked to a new $8.1bn loan from the International Monetary Fund.

Under the IMF agreement, digital platforms operating in Ukraine will face higher taxes, while certain value-added tax exemptions will be reduced. The country already received the first $1.5bn installment earlier this month.

The IMF has stressed that Ukraine must strengthen its domestic revenue system and tackle tax evasion while keeping public spending under control. Its financial backing is also considered essential for unlocking further EU support.

Complicating matters, Viktor Orbán, prime minister of Hungary, has delayed the EU loan amid tensions with Kyiv over energy supplies. Hungary claims Ukraine has disrupted the flow of Russian oil through a pipeline, an allegation Kyiv disputes.

Despite these political disputes, Ukraine continues to rely heavily on international funding to maintain public services, including pensions, healthcare and education.

The economic pressure is also visible in daily life. Inflation has eased from its wartime peak of 26.6% to about 7.4%, but many households and businesses are still struggling with rising costs.

In Kyiv, pensioners say their incomes no longer cover basic expenses, forcing some to keep working despite their age. Businesses face additional challenges due to labour shortages and frequent power outages caused by damage to energy infrastructure.

Restaurants and other companies often rely on generators during electricity cuts, which increases operating costs and reduces productivity.

Ukraine’s central bank recently lowered its economic growth forecast for the year from 2% to 1.8%. Energy shortages remain a major obstacle, limiting industrial output and business activity.

Government officials say restoring electricity generation capacity has become a top priority, with multiple programmes aimed at rebuilding damaged infrastructure.

The broader scale of the challenge was highlighted in a joint assessment by the Ukrainian government, the World Bank, the United Nations, and the EU. They estimate that rebuilding the country will cost around $588bn.

This figure includes repairing housing, transport systems and other critical infrastructure, as well as clearing mines from areas near the front lines.

Despite the difficulties, business leaders say international investors are already preparing for the reconstruction phase. The Ukrainian Chamber of Commerce and Industry, which represents thousands of companies, reports growing interest from foreign firms.

However, a severe labour shortage remains a major challenge. Millions of Ukrainians have either joined the military or left the country since the war began.

The International Labour Organization estimates that Ukraine could face a shortage of about 8.7 million workers during the reconstruction period.

Financial support is also coming from the European Bank for Reconstruction and Development, which has invested more than $10bn in Ukraine since the start of the war.

Its president, Odile Renaud‑Basso, said rebuilding the country will be a major challenge but believes it can be managed if investors are confident that lasting peace will follow.

For now, Ukrainian officials acknowledge that international military and financial assistance remains essential. Still, they believe the reforms and resilience developed during the war could eventually help build a stronger and more modern economy.