Free Economy Institute
Work with public debt in a five-year perspective

The small size of the economy and the peak of payments in the coming years leaves little choice in how to work with debts. The basic scenario of working with external and internal debts involves either refinancing the obligations taken, or repaying the body of loans of old debts by attracting new ones. At the same time, an important component in raising the credit ratings of Ukraine is the introduction of a 3-5-year budget process with a minimum deficit of the consolidated budget, which will help to increase the credit ratings of the state and minimize the rates for restructuring external debts. For example, under a US guarantee, the rate is less than 2%. 

Based on the results of a comparative assessment of the state debt in a five-year period (with the condition of refinancing without reform and with the launch of the Free Economy reform program in two scenarios), three options for working with government debt obligations are considered, depending on the chosen development scenario of Ukraine - “no reform”, “soft transformation” or “active reform":  

  1. In case of refusal to carry out reforms, the budget deficit (the size of which is expected to reach 3% of GDP) is planned to be covered by obtaining external loans. The existing debt on external loans is supposed to be repaid through refinancing. As for domestic debt obligations, their constant refinancing is expected, while maintaining the nominal value of domestic debt. As a result, there will be a constant increase in total government debt, which by the end of 2021 will reach 2.3 trillion. hryvnia. As for public debt in relation to the size of GDP, its value will slowly decrease, starting from the level of 69%. However, in five years, it will still exceed 60% of GDP.
  2. When carrying out reforms under the “soft transformation” scenario, it is planned to repay government debt through accelerated GDP growth, which, starting from the third year of reforms, will lead to a budget surplus. However, it should be borne in mind that due to the fact that the “soft transformation” scenario does not provide for any noticeable reduction in government spending, in the first two years to compensate for a temporary decrease in budget revenues, it becomes necessary to attract additional external loans in the amount of 161 billion At the same time, the total public debt over the five years of reform can be completely reduced by more than 15%, which means a decrease in the relative public debt over five years from 69 to almost 20% of GDP. Everyday domestic debt as more expensive to maintain than external debt.
  3. When carrying out reforms under the “active reforms” scenario, it is planned to pay off public debt due to a sharp increase in the budget surplus starting from the second year of reforms. Thus, due to a significant reduction in government spending and a sharp increase in GDP, Ukraine will need additional external financial assistance only in the first year of reform. At the same time, the amount of necessary additional financing to cover the expected budget deficit in the first year of reforms will not exceed 40 billion hryvnias. The relative size of public debt over five years will decrease from 69 to a value close to 8% of GDP. Thus, it becomes possible not only to completely get rid of the expensive domestic debt servicing, but also a significant part of Ukraine’s external debt.

It is important that the implementation of the proposed reforms allows Ukraine to freely set priorities in paying off external and internal debts. Moreover, the economic potential obtained through the reforms allows, if necessary, painlessly attract additional loans to accelerate the reform of the armed forces, law enforcement agencies and the judiciary. And also to further reduce the tax burden on the economy, in order to provide the economy with even greater acceleration.