Ukraine may be thrust to the brink of financial collapse
Ukraine's foreign exchange reserves are in drastic decline, threatening with the potential of grave consequences, such as state bankruptcy and financial collapse. Ukraine is currently dependent on Western aid and is not in a position to fully determine the circumstances that shape its own destiny.
Ukraine may be thrust to the brink of financial collapse if the West does not speed up the disbursement of aid, analysts have warned, after examining the development of Ukraine’s foreign exchange reserves, the Hungarian daily Magyar Nemzet writes.
In March, Ukraine’s international reserves were over 28 billion dollars, but this amount has been in steady decline and by the end of July, it was barely above 22 billion dollars. The Ukrainian central bank said that in June alone, more than nine per cent of foreign exchange reserves were spent. The rate of decline is significant, despite the fact that there is no doubt that some of the aid from the West has been put in reserve.
There are several reasons for the decline in foreign reserves, and it is particularly dangerous for Ukraine that it has little direct control over any of them. One of those is that
Ukrainian refugees who have fled because of the fighting are spending from their Ukrainian accounts even whilst abroad. Ukrainians abroad can use up to one and a half billion dollars a month from their hryvnia accounts,
which could deplete the reserves stored by the Bank of Ukraine. In June alone, the number of refugees could have reached five million.
The reversal in the ratio of exports to imports should also be mentioned. The war and Russia’s advance have significantly reduced Ukraine’s export opportunities, as illustrated by the case of two of the country’s most important exports, grain and metallurgical products.
It took months before large-scale grain exports could start after the partial lifting of the military blockade of the Black Sea in July, but even so, the volume of grain sold abroad is still less than half of last year’s. The situation with metallurgical products is even worse, with the two most important plants having been almost reduced to rubble by the Russian army when Mariupol fell.
Meanwhile, the country is in increasing need of import deliveries, which is also reflected by the financial indicators.
The drop in the level of foreign currency reserves was also a gloomy sign regarding national debt, in clear indication at the beginning of the year that Ukraine will – sooner or later – find it difficult to meet the repayment deadlines. This is precisely what happened, with Ukraine striking a deal with some of its creditors in August to reschedule the repayment of twenty billion dollars in debt. Some credit rating agencies have effectively described the move as a bankruptcy event.
Ukraine’s current economic situation in figures:
- National debt may double, reaching one hundred per cent of GDP.
- The country may suffer an economic decline of 35-45 per cent this year.
- Budget deficit may reach 50 billion dollars by the end of the year (or 20 thousand billion Hungarian forints, at the current exchange rate).
- Ukrainian government circles expect nine billion dollars a month (corresponding to 3600 billion Hungarian forints a month) from the West to keep the budget in balance.
- Ukraine has lost two-thirds of its coal industry, close to half of its gas deposits, and one-third of its ore mines.
- Ukraine can can bid farewell to two-thirds of its mineral deposits if it fails to reoccupy the areas that have been torn from the country recently.
- Due to difficulties in repaying loans, Ukraine essentially declared a state bankruptcy in August.
- In the spring, Ukrainian state revenues covered merely 40 per cent of operating and other expenses.
- Ukraine’s export capability is deteriorating, while its import needs are increasing. This year’s grain exports, one of the country’s main exported produce, did not reach half of last year’s volume.
- The country’s foreign currency reserves standing at 28.1 billion dollars in March dropped to 22.4 billion dollars by the end of July.