The Koretskyi Cabinet: Seven Risks and Five Tasks

Serhii Koretskyi’s Cabinet is inheriting an economy with near-zero growth, an investment famine and macrofinancial stability that keeps getting more expensive to maintain. Its main task is to ensure the country’s transition from compensating for wartime losses to building up productive capacity.

On July 16, the Verkhovna Rada appointed Serhii Koretskyi Prime Minister of Ukraine. Among his top priorities, he named defense, economic stability and European integration—the right priorities to have. But the Cabinet's real agenda will be set by the facts: zero growth in real GDP for January–May, an economy running at 79 percent of its prewar size, capital investment at around 7 percent of GDP, lending to the economy amounting to just 14 percent of GDP and a trade deficit of roughly $68 billion a year. This is no longer a set of imbalances; these are the hallmarks of a compensatory economic model.

Lost production is offset by imports, the budget deficit by foreign aid, the currency gap by central bank interventions, the credit shortfall by state subsidies, and the shortage of workers by wages unmoored from productivity. The system allows the country to hold on, but it builds no foundation for development. That is the central challenge facing the new government.

Risk one: stabilization could be sold as recovery

According to the Ministry of Economy's estimate, real GDP did not grow in January–May 2026. April and May brought weak signs of positive momentum, but it is too early to speak of a durable recovery, given how deep the slump remains in core sectors: industry is roughly a third below its prewar level, transport is down more than 40 percent, construction has decreased by nearly half, and agriculture has failed to recover about a quarter of its prewar output. Meanwhile retail trade is growing, and government spending has become the main driver of domestic demand—meaning economic activity rests less and less on production and more and more on consumption, imports and budget financing. Even the government's, the central bank's and the IMF's own forecasts for 2026 put real growth at just 1–2 percent—not a full recovery, but a slow stabilization after the damage. It matters that the Cabinet not mistake one thing for the other: a few quarters of weak uptick do not mean the economy has shifted into self-sustaining growth.

Risk two: reconstruction without investment

Capital investment excluding defense procurement stands at around 7 percent of GDP, against a global average for gross fixed capital formation of more than 25 percent. Annual civilian investment is estimated at roughly $16 billion, while reconstruction needs have already reached around $588 billion. That gap cannot be closed by firms' own funds alone, even though those funds finance more than 70 percent of capital spending: bank loans account for only about 4 percent, and non-resident financing for roughly 1 percent. Without a change in the financial architecture, reconstruction risks amounting to little more than patching up what was destroyed—restored infrastructure paired with weak industry, low productivity and dependence on imported technology.

Risk three: Ukrainian demand benefits foreign production

In the first half of 2026, merchandise imports grew by roughly 29 percent, while exports rose by only 5 percent; import coverage by exports fell to 40 percent. Part of the import surge cannot, and should not, be artificially curbed: Ukraine is compelled to buy weapons, fuel, energy equipment, machinery and components for reconstruction—defense goods alone already make up about a fifth of all imports, with energy carriers accounting for roughly another 14 percent. The problem lies elsewhere: an ever-larger share of consumer and investment demand is also being met by foreign production, as domestic supply fails to keep pace with the needs of the state, business and the population. The trade deficit in goods and services has approached $68 billion a year, or more than 30 percent of GDP; the structural balance-of-payments deficit, excluding international aid, exceeds $50 billion.

Exports have recovered to only about 63 percent of their 2021 level. Nearly 80 percent of that structure consists of raw materials, with high-tech exports accounting for only about 3 percent. A large share of every additional hryvnia of domestic demand leaks abroad. As long as international aid covers this gap, the system holds together, but it remains critically dependent on partners' decisions. What the new government needs is not a campaign against imports, but a policy of expanding domestic supply—backing producers capable of competing on the European market.

Risk four: the budget is substituting for the economy, but its resources aren’t unlimited

State budget spending already exceeds 60 percent of GDP, about 70 percent of all expenditure goes toward defense, and nearly a third of spending is financed by international aid. The budget deficit excluding grants remains near 25 percent of GDP, and public debt has passed 100 percent of GDP. A large deficit in wartime is not, in itself, a mistake—the state has to finance defense, social functions, energy and reconstruction. The problem lies in the shrinking economic return on every hryvnia spent: part of defense procurement goes toward imports, and interest payments on debt create no new productive assets. High uncertainty pushes recipients of state funds to save more and invest less, which is gradually lowering the fiscal multiplier. The government cannot cut wartime spending, but it can change its structure: procuring Ukrainian-made equipment, signing multi-year contracts with domestic producers, localizing components and supporting dual-use technologies would all deliver a bigger payoff than importing finished goods.

A separate risk is the cost of domestic debt: yields on hryvnia government bonds remain twice as high as the current inflation rate. Although domestic debt makes up less than a quarter of total public debt, it accounts for about 70 percent of interest payments. The budget is simultaneously financing defense, subsidizing loans, servicing expensive borrowing and propping up bank profitability—all of which crowds out room for civilian investment, education, healthcare and community reconstruction.

Risk five: macro-stability is getting too expensive

In June, the National Bank's real key policy rate stood at roughly 8.8 percent—one of the highest in Europe—even as growth stays close to zero. The economy has accumulated nearly 10 trillion hryvnias in household and business savings, yet bank loans amount to only about 1.3 trillion hryvnias, or 14 percent of GDP. The banking system is profitable, liquid and well-capitalized, but it fails to perform its core function—turning savings into investment: banks are channeling most of their hryvnia resources into National Bank certificates of deposit and government bonds, and trade, not the modernization of production, dominates the structure of business lending. Because money is so expensive, the state has been forced to build a parallel system of concessional financing—about a quarter of the working hryvnia loan portfolio is now tied to government programs, guarantees or subsidized mortgages.

The government cannot administratively dictate the decisions of an independent central bank, but the Cabinet and the National Bank need to jointly answer one question: how do you turn macrofinancial stability into lending for production? The answer can be neither an administrative rate cut nor uncontrolled monetary emission—what is needed is a sharing of wartime risk, state guarantees for investment projects, insurance, co-financing with international institutions and incentives for long-term lending. Otherwise, stability will keep being paid for in postponed investment.

Risk six: energy will bring inflationary pressure back

The drop in annual inflation to 7.2 percent in June may prove temporary—much of it reflects the seasonal cheapening of individual food items. Beneath the surface of consumer inflation, powerful cost-side pressure is building up: producer prices have risen by roughly 45 percent over the year, and the energy component by more than 80 percent. This kind of inflation stems not from excess consumer demand but from destroyed capacity, an energy shortfall, pricier transport, taxes and devaluation. A high interest rate can dampen demand, but it cannot expand the domestic supply of fuel or build anything—so the new government's energy policy will have to be both an industrial policy and an anti-inflationary one.

Risk seven: there will be a bigger shortage of people than of money

Ukraine has a paradoxical labor market: unemployment remains at around 13 percent, even as businesses simultaneously face an acute shortage of skilled workers. Employment in civilian industries fell by roughly 670,000 people over 2025–2026. Defense now accounts for about 11 percent of all employment, up from roughly 2 percent before the full-scale invasion. Real wages are rising at double-digit rates, even as labor productivity in industry declines. Rising incomes are necessary and fair for workers, but without investment in technology, equipment and scaled-up production, that growth turns into higher production costs and inflation.

The defense industry: an opportunity easily turned into just another enclave

The defense-industrial complex remains one of the few sectors with strong momentum: its share of realized industrial output has grown from about 1 percent in 2022 to more than 8 percent in 2026, and nominal production volumes rose by nearly 50 percent in the first quarter. Around 280,000 people are employed directly in the sector and in related industries. This is a chance to create a new technological circuit within the economy—but only if defense enterprises don't remain a closed enclave, entirely dependent on the budget and imported components. The defense sector should become a source of civilian technology to whatever extent security constraints allow: that requires long-term contracts, competitive access to orders for private manufacturers, lending, NATO and EU standards, protection of intellectual property and support for localization.

What the new government needs to do

The first track: the Cabinet needs to set a single, measurable goal for economic policy: building up domestic productive capacity. That is not the number of loans issued or budget funds disbursed, but growth in non-defense investment, new capacity, value-added exports, productivity and energy self-sufficiency. The first step should be a three-year investment plan listing specific projects, funding sources, and the officials responsible for them. International aid needs to work increasingly not as a budget stopgap but as first-loss capital that draws in private funding.

The second—building a full-fledged system of war-risk insurance and credit guarantees.

The third—changing the structure of state demand: major defense, infrastructure and energy procurement should be judged not only on price but on how much production, how many jobs, and how much tax revenue it generates inside the country. Local content requirements should not close off the market, but the state cannot stay neutral between importing finished goods and developing Ukraine's own production capability.

The fourth—an honest overhaul of macroeconomic coordination. The Cabinet, the central bank and the parliament need to see the full cost of decisions at the same time—the impact of interest rates on inflation, lending, the currency market, public debt and budget spending. Monetary and fiscal policy should not be used to paper over each other's negative effects.

The fifth track—a productivity policy: wage growth needs to be backed by investment in equipment, digitalization, vocational education, and management practices. Without that, the labor shortage will turn into a permanent driver of inflation and an incentive to move production abroad.

The new cabinet’s central choice

The government can keep running a compensatory economy: closing budget gaps with aid, currency gaps with reserves, credit gaps with subsidies, production gaps with imports. Given sufficient partner support, this model can keep macrofinancial stability propped up for a while longer, but its price will be rising debt, technological simplification, a shrinking production base and ever-greater dependence on the outside world.

The alternative is to start shifting the country toward a development economy, where defense spending generates domestic technology, international aid draws in private investment, banks finance production, and consumer demand is increasingly met by Ukrainian goods. The new government has no luxury of choosing between defense and development—developing the domestic economy has already become part of the country's defense capacity.

And one more thing. The previous government can be regarded as an office without a full political mandate: without a program approved by the parliament, accountability dissolves. The problem runs deeper than a single document—under the current model, changing the prime minister accomplishes little if the new head of government also fails to get sufficient autonomy, personnel authority and the ability to coordinate ministries. So this government's term will be a test not of personal qualities but of whether the Cabinet of Ministers can actually be a cabinet, rather than an executive secretariat. The previous government failed that test—a lesson for the new one too: will this be the Cabinet of Ministers of Ukraine or an Executive Office?

The central risk is that Ukraine could rebuild its infrastructure and still lose the economy meant to use it. What is needed is a New Economic Course, framed as a National Modernization Program for Ukraine.