Amid a full-scale military conflict on Ukrainian territory, the financial challenges facing the country are unprecedentedly complex. The need for substantial defense spending, combined with maintaining economic stability and social welfare, raises a logical question: how can borrowing policies be optimized so that public debt does not turn into a protracted crisis but instead becomes a driver for recovery and growth? This article examines the issue through the lens of modern economic theories and European experience, while assessing practical steps that could put Ukraine on a path of stable development despite the ongoing war.
- Defining and Understanding Public Debt
1.1. Essence and Structure
“Public debt” encompasses all obligations taken on by a state vis-à-vis its domestic and external creditors. Typically, it is divided into domestic (bonds issued on the national market) and external (loans from foreign governments, international financial institutions, private investors, etc.). The stability of a country’s public finances largely depends on how balanced the debt portfolio is and how effectively the government can service these obligations.
1.2. Fiscal Risks and Macroeconomic Equilibrium
When public debt grows without corresponding economic expansion, it can trigger fiscal risks. High debt-servicing costs, budget deficits, and reliance on external borrowing can foster financial instability. In the worst cases, these factors could lead to a debt crisis in which the government is unable to meet its payment obligations—a situation with severe socioeconomic consequences.
- Public Debt and War: Escalating Challenges
2.1. Defense Expenditures and Social Support
A full-scale war in Ukraine requires significant resources for defense, military logistics, and support for service members. At the same time, the state spends heavily on social benefits, assistance for internally displaced persons, and the restoration of critical infrastructure. Without resorting to debt financing and international aid, covering all these needs in a wartime economy would be virtually impossible.
2.2. External Shocks and Limited Market Opportunities
Warfare also affects export structures, domestic consumption, and overall macroeconomic stability. Declines in export revenues, logistics difficulties, and blockades of maritime routes reduce foreign currency inflows, thus increasing reliance on borrowed funds. Investors may be more cautious about placing funds in a country experiencing active hostilities. Ultimately, these external shocks further complicate access to low-cost credit resources.
- Public Debt’s Potential as an Investment: Modern Concepts
3.1. The Keynesian View: A Catalyst for Economic Recovery
Classical Keynesian models treat government borrowing as a way to stimulate economic activity during recessions or crises. If debt is channeled into infrastructure projects, defense, science, or education, the spending can yield a long-term multiplier effect. New jobs, industrial cluster growth, and increased exports boost the tax base, making it easier to service debt without excessive strain.
3.2. “Good” vs. “Bad” Debt
It is crucial to distinguish “productive” loans from those used solely for current consumption. If the state borrows to finance an infrastructure project (e.g., upgrading roads, railways, or ports), the resulting debt has the potential to generate future income and stimulate economic dynamics. Conversely, if the borrowed funds merely cover deficits with no prospect of an economic return, the risk of a “debt trap” becomes a reality.
3.3. The European Context: From Post-War Reconstruction to Modern Anti-Crisis Measures
After World War II, many European countries used external loans for rapid industrial and infrastructural rebuilding. The Marshall Plan illustrated how effective debt can be when its use is clearly defined. In later periods—during the 2008 financial crisis and the subsequent “sovereign debt crisis” in the Eurozone—the EU developed comprehensive stabilization tools (the European Stability Mechanism, debt restructuring, etc.) that helped avert catastrophic scenarios.
- How Can Ukraine Turn a Debt Crisis into Economic Growth?
4.1. A Transparent Strategy for Utilizing Borrowed Funds
For public debt to serve as a catalyst for growth, a carefully developed plan is essential. This plan should specify which economic sectors the borrowed funds will target. Key priorities should include:
- Infrastructure projects (roads, railways, ports, logistics centers)
- Defense-industrial complex, capable of producing high value-added goods and exports
- Energy sector, including renewable energy
- Innovation, education, and IT, focusing on human capital formation and high-tech industries
Without a clear and publicly available program, investors and international donors may doubt Ukraine’s ability to use resources effectively.
4.2. Institutional Reform and Anti-Corruption Mechanisms
Experience in EU countries shows that a debt policy can only be successful with transparent governance, strong oversight bodies, and an independent judiciary. Corruption and embezzlement of public funds undermine creditors’ trust and raise borrowing costs. Strengthening control institutions (Accounting Chamber, tax and fiscal services) and ensuring open budgeting and transparent public procurement are critically important for Ukraine.
4.3. Diversifying Funding Sources
One cause of debt crises is overreliance on a single segment of the debt market (for instance, short-term external bonds). Hence, spreading risk is necessary: part of the debt should be long-term, part short-term, raised both domestically and internationally. War bonds for the population, already actively employed in Ukraine, can be an effective mechanism for tapping savings from citizens and businesses. Loans from the IMF, World Bank, EBRD, and other global institutions also help diversify the debt portfolio.
- Practical Steps for Post-War Reconstruction
5.1. A “Marshall Plan” for Ukraine?
The scale of destruction from the war will demand substantial resources for rebuilding infrastructure, housing, and industrial capacity. Under these circumstances, Ukraine could benefit from a coordinated “reconstruction plan” modeled on the historical Marshall Plan, drawing on funding from partner governments and international organizations. Public debt, supplemented by grants, could form a comprehensive source of investment for a post-war “economic miracle.”
5.2. The Role of the Private Sector
Public debt should not be the sole source of reconstruction funding. In fact, a well-managed debt policy can encourage the private sector to invest in the country if the regulatory environment is transparent and corruption risks are minimized. Public-private partnerships (PPPs) in infrastructure, energy, and education could turn state-borrowed funds into a catalyst for larger-scale private investments.
5.3. Focus on Value-Added Projects
Investments backed by government guarantees should primarily go to sectors capable of quickly creating jobs and generating export revenue, or laying the foundations for sustainable development (science, high-tech). A successful transformation of the defense-industrial complex, for instance, could foster new technologies and enhance the economy’s export potential in the long run.
- Conclusions and Recommendations
- Balance Military Expenditures with Reconstruction Investments. Despite pressing needs in defense, it is vital not to overlook long-term investment priorities.
- Strategic Planning and Transparency. Without clear development plans and oversight of fund allocation, debt can quickly shift from an investment to a burden. In contrast, transparent mechanisms and strong institutions reduce borrowing costs and enhance trust in the government.
- Anti-Corruption Policy as an Integral Component of Debt Management. Effective investigations of corrupt schemes, transparent tenders, and judicial reforms form a foundation without which the cost of borrowing will rise, complicating access to international financing.
- Diversify Debt Instruments. A mix of short- and long-term loans, various types of bonds, and multiple creditors decreases the vulnerability of public finances to global shocks.
- Synergy with International Partners. Participation in IMF, World Bank, and other programs not only provides access to cheaper resources but also boosts the country’s investment image.
Overall, modern economic research and European experience show that public debt need not be synonymous with crisis if it is strategically employed in projects that yield strong socioeconomic returns. For Ukraine, currently at the epicenter of a war, borrowing has become essential for survival. Yet with proper strategy and institutional support, these loans can become the key to rapid post-war reconstruction and to transitioning from crisis to steady economic growth. Undoubtedly, the path ahead will involve major challenges—from stabilizing the financial system to combating corruption and effectively planning investments—but resolving these issues will determine whether Ukraine can begin a new chapter in its history, where debt serves as a driving force rather than a burden.
The publication was prepared by Olena Kravchenko, PhD in Economics, Associate Professor of 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.