Ukraine’s Economy Falters: Sluggish Growth as Foreign Aid Dwindles

A sliver of positive news amid existential threats. This is how Ukraine’s Institute for Economic Research and Policy Consulting (IER), a Kyiv-based think tank, experts characterized the local economy for the first four months of the year in their monthly monitoring report.

Despite isolated signs of stabilization, Ukraine's economy remains in a precarious “pause” with minimal growth, largely due to plummeting agricultural exports and the looming threat of drastically reduced EU financial aid. While some sectors show slowed decline and reserves are up, critical unfulfilled reform indicators risk cutting billions in vital external funding, demanding urgent, decisive action from Kyiv to avert deeper economic instability.

Decline Slowdown

According to Ukraine’s Statistics service, the mining industry decreased by 0.8% year-over-year and by 10% for the first quarter. Processing industries saw a nearly 5% year-over-year decline. The fall in electricity generation stood at 11%. As a result, real GDP is estimated to have grown by a mere 0.8% for the first quarter.

The IER reports a notable slowdown in the decline of real gross value added (GVA) in electricity production, down to 5.8% year-over-year in April from over 8% in March. This improvement is attributed to increased consumer demand and defense orders. However, a monthly IER business survey highlights labor shortages as the primary impediment for businesses, prompting wage increases.

In agriculture, real GVA contracted nearly 3%, a rate consistent with previous months. However, anomalous cold weather in April and May suggests that this decline could accelerate in the coming months.

Conversely, trade experienced a 2% increase in real GVA year-over-year, driven by continued growth in retail trade. The transportation sector, however, faced challenges, with real GVA shrinking by almost 6% year-over-year.

Overall, the IER maintains a modest real GDP growth forecast of 2.9% for 2025.

Foreign Trade: Grain Stock Depletion Curbs Exports

Ukraine's goods exports in April saw a 2% month-over-month decrease to $3.36 billion, primarily driven by lower agricultural stockpiles. Agrarian exports plummeted by 15% year-over-year to $1.87 billion, returning to January-February levels. Specifically, wheat and corn export volumes fell by over 60% year-over-year, though higher export prices partially mitigated the decline in dollar terms.

Conversely, sunflower oil exports registered their highest dollar value and one of the largest volumes since May 2024. Significant exports of soybeans, poultry meat, and soybean oil also continued.

Metallurgical product exports in April reached $397 million, marking a 25% year-over-year increase, despite being slightly lower than March figures. Iron exports returned to typical levels in April, consequently boosting the export of semi-finished steel products.

Mineral product exports declined by 20% year-over-year and compared to March, settling at $257 million. In April, the export price of iron ore was lower than in previous months, dampening exports from higher-cost producers.

Exports of machinery and engineering products totaled $321 million, marking an 89% year-over-year increase. The primary drivers of growth in this category remained the export of wires, cables, and electric heating devices.

Other goods exports were among the highest since the start of the Russian full-scale invasion, notably due to an increase in wood product exports.

Meanwhile, goods imports in April decreased from a record $7.15 billion in March to $6.37 billion, though they still represented a 7% year-over-year increase. Imports of machinery and equipment in April were lower than in March but rose by 11% year-over-year to $2.35 billion. While energy equipment imports continued to decline in April compared to prior months, they remained significantly higher than in April 2024, $249 million versus $112 million. Imports of smartphones and transmitters also saw an increase.

Energy carrier imports increased by 13% in April, reaching $763 million, driven by a sharp rise in gas, coal, and electricity imports. Gas import volumes surged 2.6 times year-over-year, and coal imports more than doubled (2.2 times). While gas demand remained high, it was lower than in March due to the end of the heating season. Simultaneously, import prices for petroleum products notably decreased.

Imports of chemical products dropped by 13%, with significant declines in medicines, plant protection products, and fertilizers. Imports of other industrial goods also fell by 6%. Conversely, food product imports increased by 7%.

Fiscal Policy: Budget Situation Rather Favorable

Preliminary data from the Finance Ministry indicate that total state budget revenues in April amounted to $8.1 billion (down from $9.38 billion in March). These revenues grew by 65% year-over-year, primarily due to high profits from the National Bank (NBU) and grants received, which are credited to the state budget's general fund.

In April, revenues to the general fund of the state budget reached $6.6 billion (compared to $7.7 billion in March). Special fund revenues primarily consisted of military aid. Following an audit of its financial statements for the past year, the NBU transferred $2 billion of its income to the budget, with $1.5 billion of this amount being transferred in April (the remainder in May).

In April, the budget also received $1.6 billion in international grants. Of this, $454 million was from the EU as part of the Ukraine Facility – the EU’s support mechanism – with the remainder sourced from the World Bank.

Personal Income Tax (PIT) revenues surged by 59% in April, driven by an increased military levy rate and a rise in minimum and average wages.

However, the growth rate of gross domestic VAT receipts slowed to 15.3% year-over-year. This likely reflects somewhat slower consumption growth amidst high uncertainty. Import VAT receipts increased by only 3.4% to $980 million (down from $1.08 billion in March) and fell short of planned targets. As a result, the State Customs Service underperformed its April revenue plan by 8%, or $111 million. The cumulative underperformance for the first quarter reached $149 million.

In April, the placement of government bonds (OVGZ) totaled $1.3 billion (up from $1.1 billion in March), with 15% being foreign currency-denominated bonds. However, for the first four months of 2025, funds raised from OVGZ sales were less than the expenditures for interest payments and redemptions of state bonds.

Ukraine received loans totaling $4.46 billion under the ERA and Ukraine Facility instruments: $3.5 billion from the Ukraine Facility and $1.1 billion from the EU under ERA. The World Bank also provided $50 million through the THRIVE program (Transformation in Health Care).

However, the next loan tranche from the EU's Ukraine Facility will be delayed. Ukraine failed to meet four indicators for the first quarter within the Ukraine Facility framework on time. This not only risks a later disbursement of funds but also a potential reduction in the overall financing from this instrument.

As the European Commission has adopted a methodology for partial tranches, each indicator now has its own value. Failing to meet specific indicators directly reduces the amount Ukraine can expect to receive. For instance, instead of the planned $5.1 billion, Ukraine might receive only approximately $2.84 billion if it doesn't fulfill the pending indicators soon. If the EU deems indicators unfulfilled, Ukraine will have a 12-month window to meet them, after which the funds will be permanently lost.

Exchange Rate and Monetary Policy

The Ukrainian hryvnia (Hr) remained generally stable against the U.S. dollar, fluctuating within the range of 41.2–41.7 Hr to U.S. dollar. This prolonged stability of the hryvnia's exchange rate, along with reduced imports in April, contributed to a decrease in demand for cash foreign currency. As a result, the NBU interventions for the four weeks ending May 18 amounted to an estimated $2.4 billion.

In April, the NBU's international reserves increased to $46.7 billion from $42.7 billion in March.

Meanwhile, consumer inflation reached 15.1% year-over-year in April. As before, high inflation was sustained by rising labor costs, significant expenditures on uninterrupted energy supplies, last year's low harvest, and domestic agricultural prices approaching global levels. Nevertheless, experts believe that inflation may soon peak and begin to decline in the coming months.

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The Ukrainian economy is in a complex transitional state. Despite isolated positive developments, such as the stabilization of the hryvnia exchange rate, growth in international reserves, and a slowdown in the decline across certain sectors, the overall picture gives rise to serious concerns. A particularly alarming signal is the risk of a significant reduction in EU funding due to Ukraine's failure to meet key performance indicators.

It appears the current state of affairs warrants immediate government attention. Specifically, there is an expectation to hear from the government regarding concrete steps to diversify funding sources, support critically important industries, and address the labor deficit. The window for systemic decision-making is narrowing, and procrastination could prove exceedingly costly.