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According to the latest Ukraine Macroeconomic Handbook by KSE Institute, the budget shortfall for 2025–2028 could reach $53 billion, nearly double the July projection. Rising defense and social spending remain the main drivers, underscoring the urgent need for a new IMF program and the proposed €140 billion reparations loan to safeguard macro-financial stability. Meanwhile, we are proud to announce that, with support from the Danish government, KSE Institute is establishing the Center for Geoeconomics and Resilience and the Sanctions Hub of Excellence as one of its key pillars. The Center will strengthen KSE’s expertise in sanctions and macroeconomic analysis — assessing the impact of sanctions, developing new restrictive measures, studying the shadow fleet, and supporting Ukraine’s recovery and EU integration. Ukraine is in urgent need of additional financing from partners as the continuation of the war drives up defense spending and reconstruction needs, jeopardizes budget financing, weighs on the balance of payments, and slows economic growth. The budget gap for 2025-28 is assessed at around $53 billion, largely reflecting higher expenditures on defense and social protection during the war and thereafter. This is broadly consistent with the IMF’s $65 billion number for 2026-29. To preserve macro-financial stability, Ukraine urgently needs a new IMF program and the adoption of the proposed €140 billion reparations loan from the EU and other G7 partners. Importantly, the loan would be non-interest bearing and repaid only after reparations from Russia are received, thereby supporting debt sustainability. Key assumptions Ukraine’s near-term growth outlook has weakened due to intensified defense and energy sector repair needs. Weak performance in the first half of the year, with GDP growing only 0.8% y-o-y, and renewed Russian attacks on energy infrastructure weigh on economic activity, offsetting recent positive signs in the manufacturing and construction sectors. KSE Institute forecasts 2025-26 GDP growth in the 2-2.5% range, followed by a post-war rebound of 4.3% and 5.9% growth in 2027 and 2028, respectively. The post-war recovery will require sufficient investment, however, as growth will primarily be driven by capital formation. An investment-driven expansion, infrastructure reconstruction, and industrial renewal all require more effective attraction of both foreign and domestic capital to unlock the Ukrainian economy’s full potential. Forecast for key indicators Ukraine’s widening trade deficit poses a growing challenge. Higher-than-anticipated imports—partially due to weapons purchases, electric vehicles, and untaxed small parcels—contribute to an increasing trade deficit. The deficit is now projected to reach ~$42 billion in 2025 and is expected to remain seriously elevated over 2026-28. Closing the deficit will be quite challenging as imports are now effectively twice the size of exports, which means that the latter must grow at twice the rate of the former just to maintain the gap in absolute terms. Together with the war’s impact on capital flows and a projected sharp drop in committed foreign support, the trade deficit will dramatically reduce reserves to $12.4 billion at the end of 2028. Budget pressures remain substantial amid elevated defense and security spending, with the fiscal financing gap projected to reach $53.3 billion over 2025-28. The cumulative budget deficit is forecast to be $142.5 billion during the period, with currently committed financing significantly lower at $89.4 billion—largely under the EU’s Ukraine Facility and the ERA mechanism—opening up a significant financing gap that must be addressed by Ukraine and its international partners. Spending on defense is projected to rise to $83 billion in 2025. Although the defense spending is expected to gradually decline after the assumed end of the war in 2026, its share in total public expenditure will remain substantial, as Ukraine will need to maintain deterrence against future Russian aggression and rebuild depleted weapons stocks. Budget deficit Inflation continues to ease, supported by prudent monetary policy, and the exchange rate remains broadly stable with gradual depreciation expected in 2026. Headline inflation fell from its peak of 15.9% in May 2025 to 11.9% in September, driven by stable food and energy prices and the NBU’s tight monetary stance. It is expected to continue its downward trajectory through 2026, before increasing in 2027 as the recovery gains steam. The NBU maintained its key rate at 15.5%, which has anchored expectations, with significant easing anticipated only once inflation drops below 10%. Meanwhile, the Hryvnia remained broadly stable around 41-42 UAH/USD, aided by sustained NBU interventions and foreign assistance inflows; however, it is projected to devalue to ~45 UAH/USD by the end of 2026 amid foreign support concerns. Headline CPI, core inflation, and PPI, % y-o-y FX UAH/USD (lhs), UAH/EUR (lhs), UAH/CNY (rhs) The forecast presented in the October 2025 Ukraine Macroeconomic Handbook outlines Ukraine’s macroeconomic trajectory for 2025-28 under ongoing Russian aggression and identifies opportunities for recovery once hostilities end. The publication provides a comprehensive analysis of economic activity, sectoral dynamics, foreign trade, capital flows, the budget, public debt, inflation, monetary policy, exchange rate dynamics, and the labor market. The Handbook also includes four special features on the reparations loan, renewed energy challenges, local budgets, and agriculture.
