The National Bank has updated its assessment of the rapid end to active hostilities in Ukraine

There remains a positive risk of a relatively quick achievement of a just peace for Ukraine through the efforts of the international community, which will significantly improve the prospects for economic recovery.

UNN reports this with reference to the National Bank’s “Inflation Report for April 2025”. 

The National Bank does not give forecasts regarding the duration of the war, but assesses the risks for the economy. Risks to the NBU forecast again include the chances of a quick end to hostilities. Compared to the January macro forecast, they have not changed – less than 15%.

The NBU assumes a gradual normalization of security conditions in the forecast horizon. The course of the full-scale war remains the main risk of the forecast.

The National Bank notes that the main assumption of this macro forecast is a gradual normalization of economic activity over the next years.

The speed of the economy’s return to normal operating conditions will primarily depend on the nature and duration of the war, as well as the results of efforts to ensure a just and lasting peace in Ukraine.

The ongoing war generates risks of further decline in economic potential, including through losses of people, territories and production, which limits the possibilities for rapid economic growth. War risks for Ukraine are also exacerbated by growing geopolitical tensions in the world. 

At the same time, there remains a positive risk of a relatively quick achievement of a just peace for Ukraine through the efforts of the international community, which will significantly improve the prospects for economic recovery. A significant reduction in the budget deficit is expected in the forecast horizon

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The NBU notes that the risks of increasing needs for defense support remain significant. The NBU maintained the budget deficit forecast for 2025 at 19% of GDP (excluding grants in revenues), which will be financed primarily through external assistance.

Budget expenditures will remain significant in the coming years, as there will be a need to maintain defense capabilities and reconstruction, as well as to comply with social obligations of the state. At the same time, the normalization of the economy, the reduction of certain expenditure items and the corresponding reduction in the need for external financing will contribute to reducing the budget deficit to about 7% of GDP in 2027

However, as the NBU indicates, the risk of additional financial needs for the defense sector or related to the restoration of critical infrastructure remains high. Their financing, taking into account the nominal growth of the economy, may be partially financed by increased budget revenues.

However, a scenario is quite likely when the budget deficit relative to GDP will remain at the level of the previous year. A significant part of the additional expenditures to meet the needs of the defense sector will probably be directed to imported goods, which will expand the trade deficit. The NBU will compensate for higher imports with foreign exchange interventions. As a result, international reserves will be lower, but will remain sufficient to ensure the stability of the foreign exchange market

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The NBU reports that, given the high probability of such a scenario, the record volume of international reserves, which is included in the forecast under the baseline scenario, should not be considered excessive and create a basis for unjustified optimism in making decisions on economic policy.

In the context of directing most of the expenditures to imports, the increase in the deficit will not give a significant impetus to economic growth. The impact on inflation will also be insignificant.  

Higher budget expenditures can be financed through the use of an international aid buffer, which is expected to be created in 2025. This buffer can be used both in case of increased defense needs in 2025 and to finance the additional budget deficit in the following years. 

“An increase in the budget deficit in 2025 will reduce the transitional balances of government funds for the next year, which are provided for in the baseline scenario, which will require an increase in borrowing in the following years. It is expected that the government will seek additional sources of financing by mobilizing domestic resources or external assistance without resorting to emission financing of the budget deficit,” the document says.