Macroeconomic Policies for Ukraine
CEPR News Ukraine Initiative

Press Release: Macroeconomic Policies for Wartime Ukraine

As Ukraine faces the prospect of a prolonged war, there is a growing need to reassess the country’s macroeconomic strategy to ensure its long-term economic stability and survival. The current policy mix, which relies heavily on running down foreign reserves, tax suspension, and other temporary measures, is increasingly untenable. It could result in a major economic crisis that would cripple Ukraine’s ability to sustain its war effort over an extended period.

A new CEPR Rapid Response Economics report outlines key macroeconomic policies to realign the economy towards a more sustainable trajectory, capable of withstanding the pressures of a drawn-out conflict. This requires prudence and caution in public finances, a durable nominal anchor, a resilient financial system, careful management of external balances, and flexibility and efficiency in the allocation of scarce resources.

The report, by Torbjörn Becker, Barry Eichengreen, Yuriy Gorodnichenko, Sergei Guriev, Simon Johnson, Tymofiy Mylovanov, Maurice Obstfeld, Kenneth Rogoff, and Beatrice Weder di Mauro, builds on four key elements:

First, the government must mobilise more resources to improve its fiscal position (the fiscal deficit is running at around $5 billion per month) to fund military expenditures and maintain basic public services. The aim should be to increase the collection of tax revenues and for remaining shortfalls to be financed primarily through nonmonetary means: preferably through external aid, but if not, through domestic debt issuance, with much less reliance on printing money. Controlling and raising the effectiveness of nonmilitary spending will be critical for keeping public finances sustainable. Ideally, this would be accompanied by a substantial increase in foreign economic aid, which remains insufficient.

Second, there is an urgent need for a durable nominal anchor to facilitate low inflation. Heavy reliance on printing money to finance government deficits has been unavoidable in the first months of the war but if the current reliance on money finance is sustained, inflation, already over 20%, could drift much higher. Policies should aim to enhance national savings rather than rely on monetary financing from the central bank. In coordination with fiscal authorities, the central bank should implement a flexible framework to support macroeconomic stability. A managed float of the exchange rate is consistent with this goal.

Third, external imbalances should be addressed through a combination of strict capital outflow controls, restrictions on imports, and some flexibility in the exchange rate to avoid jeopardising internal macroeconomic stability in the face of huge fiscal needs. A comprehensive standstill on external debt payments is essential.

Finally, there is a need for more market-based allocation mechanisms to ensure cost-effective solutions that do not overburden the state capacity, exacerbate existing problems (such as corruption), or encourage (untaxed) black market activities. The war has caused a massive reallocation shock and the released resources must be employed elsewhere. Policies should pursue extensive deregulation of economic activity, avoid price controls, and facilitate matching of labour and capital.

Overall, the strategic policy mix proposed in this report has the potential to bolster Ukraine’s ability to withstand Russian aggression and avoid large scale economic collapse. Careful and difficult choices lie ahead, and the extent of economic support from Ukraine’s allies will be crucial to ensure its survival.

To reach the authors for comment, or for more information, email CEPR Press Officer Alexander Southworth.