Ukraine’s economy has remained resilient. The economy is expected to grow by near 4% in 2024, supported by defence spending, agricultural exports and recovering metallurgical production. With the continuing war and plateauing external support, growth is projected to moderate to 2.5% in 2025 and 2.0% in 2026. Growth would be stronger if the security situation stabilises and reconstruction and recovery accelerate.

Monetary and fiscal policy are supporting macroeconomic stability, despite the ongoing economic disruption and costs of defending Ukraine from Russia’s full-scale invasion. The monetary authorities remain committed to the inflation target and halted cuts to the policy interest rate as inflationary pressures increased. Fiscal authorities are increasing taxes, which will help contain the large budget deficit. Mobilising more revenues domestically and implementing the substantial reform programme will help finance public spending and encourage greater private financing of the reconstruction. Mobilisation and emigration have made finding labour the leading challenge for businesses. Policies to support veterans and migrants to reintegrate into the economy can help address this when conditions permit.

Ukraine’s economy continued to recover through the second quarter of 2024, although at a slower pace than at the start of the year. High-frequency indicators suggest the pace moderated in the third quarter. The damage to energy supply and hot weather created electricity shortages through the summer, weighing on manufacturing, but reconstruction work recovered supply in the autumn. Ongoing Russian attacks have also weighed on production and continued logistical challenges. Conversely, good agricultural harvests early in the summer and a gradual recovery in metallurgical production supported output. Labour shortages have become the leading constraint for businesses, despite the decline in economic activity, due to mobilisation, emigration and undeclared employment. Employers are raising wages significantly, by 17.6% in real terms on average in the year to the second quarter of 2024, and by much higher rates for workers in sectors connected to military needs such as IT and construction. Together, these factors have lifted headline inflation to 9.7% in the year to October 2024.

Shipping routes through the Black Sea, despite Russian attacks, have helped Ukraine to sustain exports of bulk agricultural commodities, mineral ores and metals. Sea export volumes between January and September 2024 were 1.4 times greater than in the corresponding period of 2023, while agricultural exports have risen above pre-2022 levels. Export routes via Ukraine’s EU neighbours have become significant as well, accounting for 64% of non-agricultural exports and 26% of agricultural export volumes. Electricity imports from the European grid have helped Ukraine cover much of the supply shortfall while it repaired damages from Russian attacks.

The budget deficit is projected to remain large, near 20% of GDP in 2025 and 2026. As the full-scale war is assumed to continue through 2025, the government plans for defence and security spending to rise to 26.3% of GDP, not including in-kind support from Ukraine’s external partners. The 2025 budget aims to reduce social, health care and education spending to 8.4% of GDP, approximately 1% of GDP lower than in 2024. The government plans to increase to 57% the share of spending financed by domestic revenues through boosts to revenues from inflation and the depreciating exchange rate, and increases in the corporate income tax, excise tax, and the military levy on labour income. The tax rate increases are valued at 1.6% of GDP. The large deficits will raise public debt towards 110% of GDP in 2025, with three-quarters of new debt raised externally. External grants are expected to provide financing of 1% of GDP. External financial support of USD 27.2 billion in 2024 up to mid-November and military and humanitarian support of USD 32.7 billion in 2024 to 1 September have allowed Ukraine to maintain its foreign exchange reserves and allowed the exchange rate to stabilise against the USD between July and late November 2024. The central bank has maintained its key monetary policy interest rate at 13% since June 2024, but raised banks’ reserve requirements at its September meeting.

Moderate growth is expected to continue into 2025, as defence spending continues to support activity and consumer spending rises as labour shortages further propel wage growth. Energy supply and logistical disruptions, especially over the winter, and somewhat less favourable agricultural conditions are likely to weigh on industrial and agricultural output. Growth will ease further in 2026, assuming that the war continues, while few displaced people return. Together, these developments are likely to maintain inflation moderately above the central bank’s 5% target into the medium term. These projections assume that financial and in-kind support continue amid the ongoing war. Exceptional uncertainty surrounds these assumptions. Cuts to financial support would imperil broader macroeconomic stability, and reduced in-kind support risks leading to substantially higher on-budget military spending, weakening public finances. Conversely, an improved security situation could lift growth strongly as reconstruction and recovery activities accelerate, more migrants return, and implementation of the structural reform programme accelerates, boosting private investment and productivity. In either scenario, inflation pressures are likely to remain high.

Ukraine can strengthen its domestic revenue base while limiting the weight of taxes on investment and employment decisions, for example, by raising indirect taxes, easing the compliance burden and reducing evasion. After the urgent supply challenges of the coming winter, reforming the energy market to encourage investments in new generation capacity, including by moving towards market-based pricing for consumers and producers and by addressing legacy issues of unpaid debts, would help tackle one of the more pressing constraints to rebuilding economic activity and well-being. When security conditions improve, more displaced people will return and security forces can demobilise. Supporting their job search, training and reintegration will help them better contribute to Ukraine’s reconstruction and recovery.