Tetiana Bogdan

Devastating effects of the COVID-19 pandemic throughout the world enhance the societal requests for effective healthcare and social protection systems, modern education, and high-quality infrastructure. In Ukraine, education, healthcare, and social services have been chronically deteriorating, and the corona-crisis has further exacerbated their state and increased poverty in the country. The aim of this study is to reveal the main weaknesses of fiscal policy in Ukraine and to outline the prospects of public finance transformations under the impact of the COVID-19. To achieve this aim, the indicators of fiscal policy response to the pandemic in Ukraine are calculated and a comparative analysis of Ukraine’s public finance structure with the international patterns is undertaken. A moderate fiscal impulse and insufficient fiscal rescue package in Ukraine are shown. Moreover, the inconsistencies of anti-crisis fiscal policy instruments with the international best practice are revealed. Summarizing the available theoretical sources and recent applied research allows identifying the prospects of public finances transformations under the impact of the COVID-19 in a global context. Along with the obtained results of Ukraine’s fiscal sector analysis, these form the basis for shaping the fiscal policy response in Ukraine over the medium term. Proposals for public financing of Ukraine’s health care and educational sectors, of the social safety nets and infrastructures under the impact of the pandemic are developed. Offsetting measures from the expenditure and revenue sides of the budget are drawn up for closing the arising fiscal gaps.

The acceleration of the global economy’s financialization with the spread of the COVID-19 pandemic highlights the risks of financial markets volatility, boom and bust cycles, violation of price stability, and debt sustainability. In such conditions, the high degree of Ukraine economy’s external openness, significant amounts of external debt, and lack of domestic investment and credit resources raise the issue of external financial threats to the national economy. This study aims to identify the risks of financialization and debt accumulation across the globe, specify protective arrangements and vulnerabilities of Ukraine’s credit system to external shocks and develop a set of policy actions for global risks mitigation in Ukraine. To achieve this goal, available theoretical sources and policy studies were reviewed, and international databases of financial indicators have been analyzed. As a result, the underdevelopment of the financial system in Ukraine and insufficient use of the credit levers by the private sector are revealed, which impede economic growth but simultaneously mitigate the impact of external shocks in Ukraine’s economy. On the other hand, high external debt reliance is confirmed, which increases the risks of financialization and cross-border capital flows for Ukraine’s economy. A set of financial and organizational measures (targeted at eliminating credit and debt distortions in Ukraine and creating a financial basis for sustainable economic growth) are devised; they refer to development of the national capital market, fiscal policy adjustment, acceleration of the foreign direct investments inflows, shifts in the NBU’s monetary policy, and the management of foreign exchange reserves.

Since the outbreak of the russian invasion in 2022, Ukraine’s public debt has risen sharply, and debt sustainability turned out to be a matter of concern. This study aims to conduct a comprehensive debt sustainability analysis (DSA) for Ukraine, focusing on probabilistic judgments about the trajectory of public debt, the government’s gross financing needs in the 2025–2028 period, and essential policy measures to prevent an unsustainable debt situation. The DSA incorporates references to quantitative debt-related benchmarks and assessments of performing a debt treatment and changing the structure of budget deficit financing. Four medium-term scenarios are run: a baseline scenario, a negative scenario, a positive macro-scenario, and a policy shock scenario. The first three scenarios yield public debt stocks from 94.8% to 128.8% of GDP in 2028, above the intermediate threshold of 82% and far above the final threshold of 65%. Even under the baseline projections, public debt trajectory and gross financing needs magnitudes deviate considerably from the benchmark levels. Only the policy shock scenario is compatible with ensuring public debt sustainability, being conditional on a substantial extension of foreign grants, and applying a significant haircut through the second debt restructuring. The results suggest that avoiding public debt crisis while meeting recovery and reconstruction needs would require raising the share of grants up to around 45% in the structure of foreign official financing and debt reduction by at least 50% in the framework of new foreign debt restructuring, covering official bilateral debt and euro-bonds’ debt.

Acknowledgment
This study is published as an output of the EURIZON project “Ukraine’s Foreign Financing Needs and the EU’s Role in Restoring External Sustainability and Long-Term Growth of the Ukrainian Economy,” which is funded by the European Union’s Horizon 2020 Research and Innovation Programme under grant agreement No. 871072.