Ukraine's Balance Of Payments On The Brink. What Is To Be Done

This year, the external stability of the economy is deteriorating and the balance of payments gaps are widening. According to the National Bank of Ukraine, the current account deficit for January-February 2025 amounted to $4.9 billion, 3.5 times as much as in January-February 2024. This is despite the fact that in 2024, the annual current account deficit already reached almost $25 billion, or 13 percent of GDP.

The trade deficit for the current year is now 1.6 times as large as last year, growing to $6.2 billion. According to the State Customs Service, in the first quarter of 2025, imports of goods increased by 11.6 percent, while exports decreased by 9.1 percent compared to the same period in 2024. The decline in exports may become permanent, as the European Union is likely to abolish the preferential autonomous regime for Ukrainian exports in June 2025.

Other components of the current account have also showed negative dynamics this year: net wages fell by 20.5 percent and private transfers diminished by 16.6 percent.

Ukraine's balance of payments gap (total deficit excluding international financial assistance) over the last 12 months increased to $40.1 billion, or 22 percent of GDP. In December 2024, the annual gap was $37.5 billion, compared to $33.1 billion in June 2024.

International financial assistance remains the main source of covering Ukraine's balance of payments deficit. The volume of this assistance to the state budget of Ukraine amounted to $42.5 billion in 2023, $41.7 billion in 2024, and is expected to reach $56.9 billion in 2025 (see figure).

In 2025, the Ukrainian government forecasts revenues of $33.1 billion from the EU, $15 billion from the US, $3.5 billion from Canada, $1 billion each from the UK and the IBRD, $2.2 billion from the IMF and $0.5 billion from Japan. Contributions from external donors totaling $9.1 billion will be transferred to the 2026 and 2027 budgets.

The situation with external financing will deteriorate significantly in 2026. After all, the commitments of international donors for that year barely reach $17.3 billion. The use of part of the funds raised in 2025 will make it possible to increase their volume in 2026 to $25.4 billion. However, even this amount will clearly not cover Ukraine's projected budget and balance of payments gaps.

In other words, the increase in the balance of payments deficit in 2025 is currently offset by the expansion of the sources of its financing. However, the availability of financing sources will deteriorate sharply in 2026 and is likely to become critical in 2027. Planned external financing of the budget will halve in 2026 and become negligible in 2027 (see table).

Expected external financial assistance to Ukraine per creditor/donor for 2025–2027, $ billion

Creditors / donors	2025	2026	2027 Q 1
EU	33,1	7,4	1,8
US	15,0	4,0	0,0
IMF	2,2	2,3	0,0
IBRD	1,0	0,0	0,0
Canada	3,5	0,0	0,0
UK	1,0	1,0	0,0
Japan	0,5	2,6	0,0
Norway	0,3	0,0	0,0
Other creditors and donors	0,3	0,0	0,0
Total financial commitments	56,9	17,3	1,8
Intertemporal budget transfers	-9,1	+8,1	+1,0
Planned external budget financing	47,8	25,4	2,8

Sources: IMF, Ministry of Finance of Ukraine, author's estimates.

The IMF's policy documents outline the problem of external financing deficits, which is camouflaged by an overly optimistic balance of payments forecast for 2026. According to the latter, the deficit will supposedly plummet and Ukraine's official financing needs will decrease sharply. The IMF's baseline forecast for 2026 includes unrealistically optimistic improvements in key balance of payments items relative to the expected figures for 2025. In particular, the IMF forecasts:

• an improvement in trade balance in goods (by $1.9 billion) thanks to an increase in exports of goods by $6.4 billion;
• an improvement in trade balance in services (by $9.3 billion) thanks to a $5.8 billion reduction in imports of services and a $3.5 billion increase in exports;
• a reduction in the purchase of foreign currency outside banks (by $9.7 billion) compared to 2025.

The IMF's estimates are also surprising: in 2026, the growth in cash currency outside banks should be lower than in 2021, while the volume of services exports should be higher than in 2021.

The IMF's forecast for 2026 regarding the amount of currency interventions by the NBU (to cover balance of payments deficits) also looks questionable: the volume of interventions should amount to only $26 billion, which is 60 percent less than the expected volume for 2025 ($42.7 billion).

In reality, there are no real prerequisites for a radical improvement in Ukraine's balance of payments, even if hostilities cease. Significant import needs will remain (for economic recovery, energy security and defense capabilities), while private and public transfers will decline. Therefore, a radical reduction in Ukraine's external financing needs should not be expected.

If these needs are not met, large-scale withdrawal of NBU reserves and a sharp devaluation of the hryvnia will become inevitable. The devaluation of the hryvnia, in turn, could trigger a banking crisis and a corporate debt crisis, plunging the economy into deep chaos.

In such conditions, it is already necessary to move towards prudent management of the country's monetary and financial flows by:

• reducing the unproductive outflow of national capital into foreign assets;
• intensifying dialogue with international donors on new forms of financial support for Ukraine;
• ensuring solid growth in international reserves in the context of large-scale external financing and a review of the foreign exchange control

Unfortunately, the central bank is currently moving in the opposite direction. The NBU's currency liberalization policy, in the form of easing restrictions on capital and current account transactions and moving to a flexible exchange rate regime, has been one of the factors contributing to the deterioration of Ukraine's balance of payments.

The abolished fixed exchange rate regime provided market participants with clear guidelines on exchange rate dynamics and acted as a kind of anchor of stability. However, the new flexible exchange rate regime deprived market participants of quantitative guidelines on the value of the hryvnia, which, given the significant uncertainty, destabilized their exchange rate expectations.

The flexible exchange rate regime is objectively incompatible with wartime conditions and the numerous structural shocks to Ukraine's balance of payments. It could not become a stabilising factor. Instead, it became a channel for generating additional demand for foreign currency and fuelled devaluation processes.

It should be noted that the NBU's currency interventions began to grow rapidly after the announcement of the currency liberalization strategy, the transition to a managed flexible exchange rate regime and the gradual removal of currency restrictions. The volume of net currency interventions by the NBU over the last 12 months increased from $28 billion in April 2024 to $38.4 billion in March 2025.

In the first quarter of 2025, the NBU's net interventions in the foreign exchange market reached $9.4 billion, compared to $5.8 billion in the same period of 2024. In absolute terms, the withdrawal of foreign exchange reserves for NBU interventions increased by 62 percent.

Such processes are in no small measure related to the fact that the said steps taken by the NBU destabilized the foreign exchange expectations of the population. In 2024, purchases of foreign currency by the public were 2.5 times as high as in 2023 ($12.2 billion). And in January-March 2025, the population bought foreign currency worth $3.2 billion, which is 26 percent more than in January-March 2024. The increase in cash foreign currency outside banks over the last 12 months reached a historic record of $16.3 billion.

The actual expenditure of the NBU's international reserves to support currency liberalization, including flexible exchange rate formation, consistently exceeds expected indicators. In particular, the NBU had forecast interventions of $24 billion for 2025, but since January, the estimated volume of interventions for this year has already reached $41.5 billion.

In 2024, 83 percent of international financial assistance to Ukraine was transformed into NBU interventions in the currency market. That is, of the $41.7 billion in assistance, only $2.9 billion was directed to increase the NBU's international reserves, and $4 billion was spent on payments from the government's foreign currency accounts. Another $34.8 billion took the form of NBU currency interventions, which partly covered wartime deficits and partly fueled dubious currency liberalization.

The excessive spending of foreign aid on unproductive interventions in the foreign exchange market clearly undermines the country's ability to withstand future balance of payments shocks. In addition, the outlined processes in the country's monetary and financial sector spur uncertainty, creating obstacles to real investment and a more vigorous economic recovery.

To avert a balance of payments crisis in Ukraine in 2026 and 2027, it is necessary to take measures in a number of priority areas.

Firstly, stimulate exports by relying on: affordable credit financing mechanisms for exporters, the launch of a full-fledged military risk insurance system, incentives for foreign investment in the modernization of the manufacturing capabilities and infrastructure, and the expansion of logistics links between Ukrainian exporters and European partners.

Secondly, abolish the managed flexibility exchange rate regime (which in itself exacerbates devaluation processes) and move to a fixed regime or a regime of creeping pegging of the hryvnia to the dollar-euro currency pair. Such a transition will stabilize the exchange rate expectations of market participants and reduce the outflow of national capital into foreign assets (FX, foreign securities and deposits), thus contributing to an improvement in the financial account of the balance of payments.

Thirdly, suspend the liberalization of capital and current transactions of Ukrainian residents with non-residents until the balance of payments stabilizes. The NBU should start effectively monitoring compliance with the foreign exchange control regime by entities engaged in foreign economic activity.

Fourthly, in the event of new powerful shocks to Ukraine's balance of payments, a return to the stricter currency regulation regime that was in place at the start of the war should not be ruled out.

Fifthly, but not least importantly, Ukraine should intensify its diplomatic efforts and initiate negotiations with EU institutions and member states on the creation of a special fund for economic and security support for our country within the EU's collective budget starting in 2026. Such a fund could be financed by contributions from member states from their own budgets in the amount of 0.25 percent of their GDP each year (a proposal by EU High Representative Kaja Kallas), confiscated Russian sovereign assets and the placement of EU defense bonds on the financial market.