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Experts are calling on the EU to give Ukraine short-term budgetary aid in the form of grants instead of loans, citing concern over the impact of massive debt on the country’s economy.
On 18 May, the EU Commission announced a proposal to increase macro-financial assistance to Ukraine by €9 billion in the form of loans at low interest rates and with long-term repayment deadlines.
According to a Commission official, these loans “can provide the much needed and very sizable financing that Ukraine needs.”
However, there are growing concerns about the level of debt such loans are heaping onto the war-torn country.
“Economically, Ukraine needs grants, not loans at this stage,” Bruegel director Guntram Wolff told EURACTIV.
Ukraine’s economy has been shattered by the Russian invasion. According to the International Monetary Fund, the country needs $5 billion per month to keep its economy afloat.
“Ideally, the EU should provide actual grant flows to Ukraine every month, so that the country can continue operating its government under this extremely tough situation,” Wolff said.
Some EU countries, including Germany, are also reportedly in favour of grants instead of loans. According to EU sources, the matter is likely to come up at the upcoming EU summit early next week, where EU heads of state will discuss the situation in Ukraine.
Calls for grants instead of loans are also coming from the president of the European Bank for Reconstruction and Development (EBRD) Odile Renaud-Basso.
In her view, a portion of the funding for Ukraine should be given via grants rather than loans to avoid additional debt.
According to Commission’s estimates, Ukraine’s GDP is expected to shrink by 30 to 50% by the end of the year, while tax revenues dropped by around 50 to 80%.
“This is economically a massive shock,” Wolff said, adding that “this raises doubts about the ability of Ukraine to service and repay the debt.”
The former Ukrainian economy minister Tymofiy Mylovanov also expressed concerns about the impact of loans on Ukraine’s economy and its ability to repay the debt.
“This will come from the [Ukrainian] budget and hence it will crowd out other spending, like education,” he told EURACTIV, adding that “this will weaken the government economically and politically.”
Moreover, in Mylovanov’s view, the EU’s proposal to aid Ukraine through loans is “inconsistent with how the EU treats economically lagging countries within the Union,” as these countries receive structural funds to upgrade their infrastructure.
Asked whether the EU executive is concerned about possible over-indebtedness in Ukraine, a Commission official said “no”.
“The highly concessional terms of these loans are actually reinforcing public debt sustainability in the current circumstances,” the official added.
On Ukrainian concerns that an over-indebted Ukraine would crowd out private investors, the Commission official said private investment in the country was low even before the war.
“[The causes] relate to concerns with private property enforcement, state-protected vested interests, and corruption.”
In 2021, Ukraine ranked second most corrupt country in Europe after Russia, according to Transparency International’s Corruption Perceptions Index.
“Going forward, to put the reconstruction efforts on a sound footing, addressing issues with rule of law and governance will be key,” the official added.
In the past week, the EU not only proposed short-term macro-financial assistance but also proposed setting up a platform for the long-term reconstruction of Ukraine, which will involve large amounts of financing.
According to figures from the Kyiv School of Economics, infrastructure worth more than $97 billion has already been destroyed, with the total cost of the war so far for the Ukrainian economy reaching up to $600 billion.
When it comes to financing the reconstruction, the question of whether help should primarily come in form of grants or loans is likely to be the subject of fierce debates, as member states’ positions are divided.
Estonia is ready to support any form of financial aid to Ukraine, the spokesperson of the Estonian finance ministry told EURACTIV.
“We agree that Ukraine needs immediate financial relief, what form it takes is rather secondary,” the spokesperson said.
According to a German government official, however, it is too early to announce a decision on whether the reconstruction should be financed through grants or loans since the extent of the damages and the corresponding financing needs are not yet clear.
According to Wolff, reconstruction will require “significant, significant money.”
“It will require a big effort from the EU from the main member states of the EU, from Germany and others,” he said.
[Edited by Nathalie Weatherald]
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