The financial challenges Ukraine faces in the context of a full-scale war call for a fundamental rethinking of the role of public debt and its overall impact on economic policy. While the traditional view of debt tends to focus on risks and constraints, modern approaches increasingly consider government borrowing as a potential driver of economic growth. The question is how Ukraine, currently under extremely difficult security conditions, can transform debt management to benefit both the wartime environment and the post-war rebuilding process.
- The Role of Public Debt in the Economy: Theory and Modern Trends
1.1. The Classical and Keynesian Perspectives
Classical economic theories emphasize the negative impact of high public debt: increased budget pressure, macroeconomic risks, higher borrowing costs, and, in worst-case scenarios, governments losing control over the financial system. However, the Keynesian school of thought—and various modern adaptations of this paradigm—shows that government borrowing can have a powerful stimulative effect, provided that the funds raised are invested in productive projects such as infrastructure, industrial modernization, and human capital development.
1.2. Synergy of Infrastructure Projects and Macroeconomic Stability
When borrowed funds are channeled into critical investment projects—roads, bridges, digital infrastructure, healthcare, and more—a multiplier effect arises. By increasing employment and productivity, the government gains additional tax revenues that can be used to service the debt. This logic underpins various European practices: numerous EU countries have utilized public financing as “seed capital” for economic takeoff after crisis periods.
- Wartime Realities in Ukraine: Why Is Borrowing Necessary?
2.1. Military Expenditures and Public Support
A full-scale war requires significant resources to maintain defense capabilities and ensure social stability within the country. Weapons, military equipment, logistics, payments for service members, and assistance for internally displaced persons all add to the fiscal burden. Without government borrowing and external financial aid, these costs would quickly surpass the budget’s capacity.
2.2. External and Domestic Assistance
Ukraine actively raises funds from international financial institutions (IMF, World Bank), partner governments, and through the issuance of war bonds for citizens and businesses. These resources ensure critical liquidity and help avoid excessive issuance of the national currency (which could lead to hyperinflation). At the same time, it is crucial to structure the debt in such a way that it does not become an economic “trap” after hostilities end.
- Post-War Reconstruction: When Debt Turns into Investment
3.1. Scale of Reconstruction: A Challenge and an Opportunity
Once the active phase of the war concludes, Ukraine will face massive destruction of infrastructure, industry, housing, and educational and medical institutions. Yet this factor can also serve as a “growth point.” If post-war reconstruction is carefully coordinated and financed by both public and private capital—including debt financing—it could spark a new cycle of economic development. Accessing funds on favorable terms for reconstruction could act as a catalyst not only for returning to pre-war levels, but for achieving a qualitative leap forward.
3.2. Europe’s Reconstruction Experience
The examples of Germany and other European countries after World War II demonstrate how to effectively convert external aid and public borrowing into future growth. The Marshall Plan became a symbol of how “good debt” can pay off quickly through rapid economic recovery and an expanded export market. For this scenario to take hold in Ukraine, priorities must be clear: infrastructure, energy, digitalization, and the defense-industrial complex, among others.
3.3. Debt Structure as a Prerequisite for Stability
To ensure debt resources positively impact the economy, it is critical to plan the debt structure. A balance between long-term and short-term obligations, fixed and floating rates, and domestic and external borrowing can help avoid future debt “shocks.” Converting debt into high value-added investment projects will generate steady revenue streams to service it.
- Debt Management: Key Principles and Challenges
4.1. Institutional Transparency and Oversight
The most important element of a successful debt policy is process transparency. In the EU, independent fiscal councils, audit chambers, and parliamentary oversight mechanisms track the effectiveness of borrowing and help prevent corruption. It is extremely important for Ukraine to strengthen anti-corruption agencies and foster effective civic initiatives that monitor spending. Such an environment increases the trust of international creditors and makes access to cheaper resources easier.
4.2. A Flexible Monetary Policy
The National Bank of Ukraine plays a critical role in shaping the country’s debt architecture. On one hand, it must support liquidity during wartime; on the other, it has to contain inflationary risks and defend the stability of the national currency. Balancing these goals requires strong coordination with the government and maximum use of monetary and credit policy tools.
4.3. An Optimal Mix of Debt Instruments
EU countries provide experience in diversifying debt portfolios. Bonds with varying maturities, currencies, and interest structures help minimize vulnerability to global market and currency fluctuations. The war bonds issued for Ukrainian citizens and businesses are already a positive example of domestic financing that boosts economic patriotism while offering the government immediate liquidity.
- European Experience and Its Application in Ukraine
5.1. Tapping into Structural Funds and Special Programs
Within the European Union, a range of financial support programs exists, from regional funds to thematic innovation projects. As Ukraine aligns with EU standards and gradually integrates, it could eventually gain additional access to grants, low-interest loans, and other forms of aid. The country’s ability to present clear roadmaps for economic development that also consider Europe’s long-term interests (green energy, digital platforms, military-technical capabilities) will improve its chances of securing significant funding.
5.2. Reforms to Improve the Investment Climate
Beyond the financial aspect alone, European experience underscores the importance of a competitive environment, transparent judiciary, and equal market conditions for all participants. For public debt to become a driver of development, the private sector must be encouraged and long-term economic prospects ensured. In particular, large infrastructure projects funded through public debt should incorporate effective public-private partnership mechanisms, transparent tender procedures, and a high level of accountability.
- Recommendations for Ukraine: Turning Debt into a Driving Force
- Create a long-term development strategy that identifies priority sectors (infrastructure, energy, defense-industrial complex, IT, education, and science). Debt instruments should be tied to projects that generate added value.
- Strengthen transparency and accountability through independent auditing bodies, civic initiatives, and modern electronic platforms for government procurement oversight.
- Diversify borrowing structure by combining short- and long-term bonds, domestic and external financing, and partnerships with international organizations. This approach reduces the risk of excessive budget pressure.
- Develop partnerships with the EU and other global institutions, making use of grant and low-interest support programs.
- Reform the judicial and law enforcement systems to ensure creditor rights and maintain a transparent business environment—factors that directly affect borrowing costs and investment attractiveness.
- Synchronize monetary and fiscal policy to avoid inflationary pitfalls and maintain currency stability.
In wartime, public debt is not merely a forced measure for covering urgent expenses; it is also an opportunity to lay the foundations for the economy of the future. Examples from European countries show that effective borrowing can serve as a powerful engine of modernization and economic growth, if guided by principles of transparency, accountability, and long-term vision.
The post-war reconstruction phase will be decisive in forming Ukraine’s new economic model. If government loans are aligned with real infrastructure, industrial, and human capital needs—and if spending is properly monitored—public debt can evolve into an investment rather than a financial burden.
Ultimately, what is being determined now is whether Ukraine will emerge from the war with an outdated economic structure or manage to leverage debt mechanisms as a tool for systemic development, securing its position among Europe’s most promising markets. The key to success lies in strategic thinking, effective cooperation with international partners, and ensuring transparency at all levels of financial and economic management.
The publication was prepared by Nataliia Ovcharova, PhD in Economics, Senior Lecturer at the Department of Accounting and Taxation. The information is a part of the project “EU experience in public debt management: conclusions for Ukraine in the war and post-war period” (101127602-EUEPDM-ERASMUS-JMO-2023-HEI-TCH-RSCH), which is implemented with the support of the Jean Monnet Erasmus+ program.
Funded by the European Union. Views and opinions expressed are however those of the authors only and do not necessarily reflect those of the European Union or the European Education and Culture Executive Agency (EACEA). Neither the European Union nor EACEA can be held responsible for them.