Oleksandra Betliy, Iryna Kosse, Vitaliy Kravchuk
Although key economic forecasts assumed that the war would end in 2024, the past year proved to be another year of war, filled with uncertainty, risks, and challenges. The main difficulties included territorial losses, severe destruction and damage to the energy network by russian attacks, the need to secure funding for the ongoing war, and additional mobilization of defense forces. Thanks to the resilience of the government, businesses, and citizens, as well as continued international aid, Ukraine demonstrated moderate economic growth of 3.8% (IER estimate). Although inflation accelerated, it remained under control, and currency depreciation was mild due to the policies of the National Bank of Ukraine (NBU). International reserves increased by the year-end thanks to inflows of international aid. However, uncertainty remains high for 2025, and the ability to finance expenditures on time depends on the government’s adherence to its commitments to international partners.
Ukraine and the EU: A Major Step Forward
2024 marked significant progress in Ukraine’s cooperation with the EU. On June 25, the first Ukraine-EU intergovernmental ministerial conference officially launched membership negotiations. During 2024, 12 screenings were conducted for specific chapters, resulting in an agreed list of legislation requiring adaptation. Preparations were also completed for opening Negotiation Cluster 1 “Fundamentals,” and screenings for Cluster 2 “Internal Market” began. These two clusters are expected to be the first to open for formal negotiations in early 2025, marking a major milestone in Ukraine’s EU accession process.
International Support: Timely Fulfillment of Obligations is Key
2024 began with insufficient international support. Delays in military and financial aid from the U.S. forced the government to reallocate budget expenditures for defense, but these efforts proved inadequate. This negatively affected the situation on the front lines. The U.S. military aid resumed in the spring, while financial support from the USA only arrived in the summer.
EU provided the largest assistance in 2024, totaling EUR 16.2 bn (eq. USD 17.3 bn). For 2024-2027, budgetary support from the EU is mainly offered through the Ukraine Facility, which has a total funding capacity of EUR 50 bn: EUR 38.3 bn for budgetary support (loans and grants) and nearly EUR 7 bn for investments pillar. Budgetary support is disbursed based on performance indicators approved in the Ukraine Plan. In 2024, all indicators were met, albeit one with a delay, which postponed the disbursement of a loan tranche. Any delays in assistance pose a risk of interruptions in funding for defense procurement and military supplies.
The International Monetary Fund (IMF) disbursed USD 5.3 bn in 2024, enabled by the six reviews of its program (previous Ukrainian programs with the IMF had never exceeded three reviews). However, some structural benchmarks were delayed, and the IMF extended deadlines for others. The IMF’s flexibility played a critical role in ensuring timely disbursements. The IMF program remains essential for receiving additional financing from other partners, including Japan, the UK, Canada, and international financial institutions (IFIs) such as the World Bank.
2024 brought greater confidence in financing for 2025. The G7 agreed on a USD 50 bn support package, funded by profits from frozen russian assets. The first funds from this package arrived at the end of 2024, including USD 1 bn from the U.S., bringing the total U.S. assistance for the year to USD 8.3 bn.
GDP: Moderate Growth Supported by International Aid
In 2024, Ukraine’s economy grew moderately despite the challenges of war. Monthly business surveys conducted by IER revealed that key impediments for companies included safety risks, labor shortages, and lack of access to electricity. In the spring and summer, businesses faced planned power outages caused by russian attacks on energy generation facilities. International assistance, both financial and in the form of equipment for power grids, helped restore energy generation. Moreover, international support enabled the launch of active employment promotion measures under the SkillsAlliance program (including training and retraining programs), as well as grants and other financial aid for businesses.
According to preliminary estimates by IER, Ukraine’s real GDP grew by 3.8% in 2024. Increased production in metallurgy and iron ore extraction was supported by access to the Ukrainian Sea Corridor. Agricultural companies continued exporting their products via sea and rail. Improved logistics compared to 2023 contributed to a modest increase in goods exports. Defense contracts further bolstered the development of machinery and light industry. Rising wages due to labor shortages, along with social payments and pension indexation (partially funded by international aid), boosted the growth of real gross value added in trade.
Throughout the year, uncertainty remained high, somewhat constraining business investment. Efforts by the government and international donors to insure against wartime risks and provide guarantees are expected to yield better results in 2025. More investment financing is anticipated under the second pillar of the Ukraine Facility. Overall, real GDP growth of approximately 3% is projected by the IER for 2025.
Energy Sector: Tremendous Challenges and Heavy Losses
Thanks to integration with ENTSO-E, Ukraine began full-scale electricity exports to Europe, but these were halted due to russian attacks on power generation facilities. The Ministry of Energy described 2024 as the most challenging year for Ukraine’s energy system since the onset of the full-scale invasion. At the same time, integration with the European grid enabled increased electricity imports during outages, supporting industrial development. In December, the maximum import capacity from the EU reached 2.1 GW.
International support was also critical for the energy sector – Ukraine received humanitarian aid from 36 countries. Donors to the Energy Support Fund for Ukraine committed over EUR 1bn in financial assistance.
The shelling of large power generation facilities prompted the development of smaller-scale distributed generation. Over the year, 835 MW of such facilities were connected in Ukraine, with financing secured for an additional 430 MW under state support programs. Private businesses invested in energy independence, including solar panels, modular gas stations, and more. These efforts were supported by government programs, IFIs, and state banks. Decentralization of electricity production remains a key issue for 2025. Additionally, it will be the first year without russian gas transit through Ukraine’s GTS, presenting challenges and new opportunities for the country.
Transport: Improved Logistics and Anticipated Reforms
The Ukrainian Sea Corridor operated throughout 2024, boosting the economy by enabling companies to export their products more affordably and efficiently. Ukrainian ports handled 91.1 m tons of cargo, with 82% transported via the Sea Corridor. Exports were also supported by Ukrainian Railways (“Ukrzaliznytsia”), which increased both domestic freight transport and exports (146.9 m tons). Passenger transport volumes returned to pre-war levels, with 57.2 m passengers using long-distance and suburban services. In 2025, the company plans to receive funding from the state and IFIs to modernize infrastructure and complete the reconstruction of the European standard track (1435 mm) on the Chop-Uzhhorod section.
2025 is expected to bring significant legislative changes to the transport sector. This sector lagged in fulfilling commitments under the EU Association Agreement for a long time, but now it is time to catch up. Ukraine must regulate the unbundling of “Ukrzaliznytsia,” join key international conventions in maritime transport, update aviation transport legislation, and implement European standards in road transport. This is particularly relevant as Ukraine undergoes pre-screening of its transport sector with the European Commission and aims to open the relevant chapter of EU accession negotiations as soon as possible.
External Trade: Growth in Both Exports and Imports
According to preliminary figures released by government officials, exports grew by 15% in 2024, while imports increased by 8%. However, imports remained significantly higher than exports because of the war with russia. Export growth was primarily driven by simplified logistics through the Black Sea, though it was constrained by rising costs for Ukrainian producers and low demand for metallurgical products.
The recovery of consumer demand fueled an uptick in imports. Damage to the energy sector, as well as power outages, led to increased imports of energy equipment and electricity. There was also a notable rise in commercial imports of defense products, including finished goods and components. Meanwhile, restrained prices and greater satisfaction of domestic energy needs through local production limited energy imports.
State Budget: International Assistance Covered Non-Defense Expenditures
As in the previous two years, non-defense expenditures were financed by international assistance, which amounted to USD 41.7 bn as compared to USD 42.5 bn in 2023. Due to a longer-than-expected war, the government initiated tax rate increases in the summer. However, direct taxes were raised: the corporate profit tax (CPT) for banks was increased to 50% on 2024 profits and 25% for financial companies; the military levy rate rose from 1.5% to 5% and was extended to private entrepreneurs under the simplified tax system. At the same time, the planned increase in VAT, deemed crucial by experts, was postponed and might happen in 2025, should additional funds be needed to finance expenditures, as outlined in the IMF Memorandum. Since the President signed these changes with a 1.5-month delay, the amendments to the Tax Code came into effect in December 2024, with some provisions taking effect in January 2025.
Additionally, the issuance plan for domestic government bonds (OVDPs) was sharply increased in September 2024 to fund defense and security expenditures. As a result, the placement of domestic government bonds significantly rose in the last four months of the year due to better coordination between the NBU and the Ministry of Finance and improved communication with banks. Nevertheless, this was insufficient, and the plan was not fully executed. Throughout the year, about UAH 640 bn was raised on the domestic market compared to nearly UAH 570bn in 2023.
In 2024, state budget revenues (excluding grants) were supported by increased consumption (VAT), higher profits from commercial banks (CPT), and rising wages (PIT). However, the revenue plan for taxes administered by the State Customs Service (SCS) was not met, partly due to tax exemptions for importing energy equipment and a stronger hryvnia. Inflation remained lower than expected for most of the year, restraining revenue growth.
Traditionally, more than half of expenditures were allocated to defense and security. Despite insufficient domestic revenues, the government continued to pay all key social benefits, pensions, and business support, thanks to international assistance. For example, the 5-7-9% affordable credit program continued, although its scope was slightly reduced due to its high cost. According to the NBU, by the end of 2024, the state’s debt to banks within this program could reach UAH 10 bn. Businesses also received grants funded both by the government and donors.
At the President’s initiative, the government introduced a populist financial assistance program offering UAH 1,000 to the population. This program lacked targeted support and complemented the already existing National Cashback program, which also appeared more like a marketing move than a meaningful support initiative for businesses or the population. In 2025, the government is advised to refrain from populist measures, as funds from the G7 support program amounting to USD 50 bn must also be saved for 2026.
Reconstruction and recovery projects in 2024 were primarily funded by IFIs and aid from other countries. This included loans from the EIB and the World Bank. The same situation is expected in 2025. Prioritization of expenditures for reconstruction and ensuring their effectiveness and transparency will be critical.
A significant challenge in 2024 was the restructuring of Eurobonds. According to agreements, Eurobonds were replaced with new securities, reducing nominal value by 37%, with the possibility of recovering 12% of the value in 2028 if GDP exceeds the IMF’s current forecast. Maturity for Eurobonds was also extended. The restructuring is estimated to have reduced Ukraine’s public debt by USD 8.67 bn and saved USD 22.75 bn in debt payments through 2033. As a result, public and publicly guaranteed debt did not reach the previously forecasted 100% of GDP, and these expectations have been delayed further into the future.
Inflation: Acceleration Toward Year-End
After a long pause, inflation accelerated sharply in the second half of 2024. It reached 11% yoy in November compared to 3% yoy in May. On the one hand, certain food products became significantly more expensive due to a poorer harvest this year and rising export prices (primarily vegetables and dairy products). On the other hand, prices for the most remaining items in the consumer basket grew faster. This can be attributed to economic recovery, as producers and retailers previously gave up part of their price margins to maintain market share amid limited demand. Additionally, costs for electricity, labor, and imported components rose for most producers.
In 2025, the harvest is likely to be better than last year, which could lead to lower prices for some food items and slower price growth for others. However, inflationary pressure from rising costs and higher demand is expected to persist, though it will likely ease slightly. This is likely to allow inflation to return to single-digit levels later in 2025, but a sharp deceleration in inflation should not be expected.
Monetary Policy: Aiming to Ensure Macroeconomic Stability
In 2024, the NBU continued its course to ensure macroeconomic stability by focusing on limiting inflation and supporting the hryvnia exchange rate. However, inflation accelerated to 11% yoy in November 2024 from 5% in December 2023, and the hryvnia depreciated against the dollar from UAH 38 to UAH 42 per USD. The NBU’s ability to curb inflation without unjustified harm to other economic components (GDP growth, exports, debt servicing costs) is limited. The NBU’s interventions to support the hryvnia were constrained by the volume of external assistance and a policy allowing limited exchange rate fluctuations in response to market factors, such as increased demand for foreign currency.
Accordingly, the NBU lowered the key interest rate from 15% to 13% in the first half of the year but raised it to 13.5% in December as inflation accelerated. The NBU’s interventions to balance private foreign currency demand and support the exchange rate exceeded USD 35bn due to increased demand for foreign currency and some easing currency restrictions. However, the NBU’s reserves exceeded USD 43bn at the end of 2024, up from USD 40.5bn at the end of 2023, thanks to large external assistance inflows.
We expect the NBU to maintain its current policy in 2025, with further steps toward currency liberalization likely during the year. In 2024, the NBU allowed certain operations, such as profit repatriation and reinsurance contract payments, to support business development. Meanwhile, we estimate that the hryvnia to the dollar exchange rate will experience slight depreciation in 2025, though the changes are unlikely to be radical.
