Analysis-EU Loan Throws Ukraine a Lifeline but More Help Needed for War

EU Loan Gives Ukraine a Lifeline, But Funding Gap for War Remains in 2024

Ukraine’s Financial Challenges Amidst War and EU Support

By Daniel Flynn

KYIV, April 23 (Reuters) - The approval of a 90-billion-euro European Union loan throws Ukraine a lifeline, averting deep cuts to public services, but Kyiv may need more money to meet its military needs this year, economists and officials said.

Budget Deficit and Military Spending

Ukraine's budget foresees a massive deficit of around 1.9 trillion hryvnias ($43 billion) in 2026 - around one fifth of economic output - but economists say it significantly underestimates the cost of the war with Russia. 

Maksym Samoiliuk, economist at the Centre for Economic Strategy, a Kyiv-based think tank, said military spending would be more realistically assessed now the delayed loan had been approved to take into account factors such as a pay rise for military personnel, expected this summer.     

"The loan is crucial as it creates the space needed to address pressures in Ukraine's defence budget," Samoiliuk said.

Loan Disbursement and Allocation

Only half of the 90 billion euros will be disbursed to Ukraine this year, with the remainder coming in 2027. The bulk of the loan is earmarked for military spending, with around 17 billion euros each year destined for general budget needs such as health and education.       

In addition to Ukraine's own military budget, a group of more than 20 allies funds purchases of U.S.-made weapons under the PURL program. 

Political Roadblocks and Pipeline Dispute

Hungary's Prime Minister Viktor Orban had blocked the EU loan for months after accusing Ukraine of dragging its feet with the repair of an oil pipeline Kyiv said was damaged by a Russian drone. The pipeline carries Russian oil to Hungary and Slovakia.

The resumption of oil flows on Wednesday - which followed Orban's defeat in an April 12 election - opened the way for EU ambassadors' approval of the loan.

Rising Defence Costs and Budget Revisions

Yuliya Markuts, Vice President for Macro and Public Finance at KSE Institute, an economic think tank in Kyiv, estimated that the budget for defence spending would need to be revised higher by up to 10 billion euros, depending on how the conflict unfolded on the frontline.

Last year, Ukraine also raised its military expenditure forecasts, Markuts said, with part of that covered by government bond issuances as well as lending from the Extraordinary Revenue Acceleration (ERA) loans, a G7 initiative. 

"How will it be this year? It's hard to say now, but there could be some kind of repeating this," she said, adding that it was also possible the EU loan might cover the revised budget.

Impact on Public Services and Society

'Confidence in Tomorrow'

Economists had said Ukraine would start to run out of money by June if the EU loan was not disbursed by then, requiring deep cuts to public services.   

Many Ukrainians breathed a sigh of relief after the aid package won approval from EU ambassadors on Wednesday. The humanitarian sector in Ukraine has already been hard hit by U.S. aid cutbacks under President Donald Trump. 

Hanna Fedotova, a 58-year-old nursery caregiver, said the EU funding provided stability for Ukraine's state institutions, "and, crucially, for education and development".

"This aid is about having confidence in tomorrow, the certainty that we will be able to keep doing our jobs," Fedotova said in a basement nursery in the southeastern city of Zaporizhzhia, around 40 km (25 miles) from the frontline.

The EU loan only needs to be repaid if Russia makes war reparations to Ukraine.

Ongoing Funding Gaps and Future Needs

President Zelenskiy's Perspective

President Volodymyr Zelenskiy has said that, even with the EU loan, Ukraine still needs additional funding for the war. 

"We talk about 90 billion and say that this amount covers everything. That's false," Zelenskiy told Reuters in an interview last month.

Additional Military and Infrastructure Needs

Zelenskiy said the loan only allows Ukraine to order 60% of the weapons its domestic industry has the capacity to produce. Ukraine also needed to find 5 billion euros to strengthen its electricity sector after Russian attacks.

And, even though allies spent nearly $5 billion on the PURL weapons program last year, mostly air defence equipment, Zelenskiy said Ukraine needed $15 billion. 

"We can't protect everything, even though we must do so. So where to take the money from?" he said, adding he hoped defence cooperation agreements with Gulf states might provide additional funding.     

International Partners and Additional Financing

The EU acknowledges its two-year loan only covers around two-thirds of Ukraine's external financing needs. For 2027, international partners still need to commit the remaining financing, EU Economy Commissioner Valdis Dombrovskis said, though funding needs for this year would be covered. 

Ukraine has other sources of financing. Prime Minister Yulia Svyrydenko said last week it would soon receive 2.7 billion euros from the EU's Ukraine Facility, after parliament approved some overdue reforms. Ukraine also agreed in February a four-year, $8.1 billion IMF loan. 

Conditions and Reforms

All of this money comes with strings attached - including governance and tax reforms, some of them deeply unpopular. The IMF agreed last week to postpone the imposition of VAT on entrepreneurs after parliament baulked at the measure. 

"Ukraine's capacity to sustain the momentum of reforms will be the most pressing issue going forward," Samoiliuk said. "Ukraine's international partners should apply more pressure... and emphasise that Ukraine itself needs these reforms."

($1 = 43.9090 hryvnias)

(Editing by Gareth Jones)