Zero GDP Growth in Ukraine: Why Stability Does Not Mean Development

Ukraine’s economy has stalled despite macrofinancial stability. Weak investment, rising imports, high interest rates, and external financing expose structural problems threatening long-term recovery.

Ukraine’s economy entered the second half of 2026 with rather mixed results. From the perspective of a senior official, macrofinancial stability is still holding: the state is funding defense and meeting its social obligations, the foreign exchange market remains under control, international reserves exceed $50 billion, and inflation has slowed, according to official statistics. External financing continues to flow in, and all previous commitments are being met. What more could one ask for?

However, behind these formal signs of stability, a fundamental problem is becoming increasingly apparent: why has the economy virtually stopped growing? In the first half of 2026, real GDP did not grow — 0.0% compared with the same period last year, while growth in the second quarter amounted to just 0.6%. By comparison, the initial forecast on which the state budget was based projected annual economic growth of 2.4%. The estimates are now much more modest: the Ministry of Economy expects 1.6%, the National Bank of Ukraine 1.8%, and the International Monetary Fund only 1.0–1.6%.

This is already a sign that the current stabilization model is running out of steam. There is much for both the new government and the National Bank to reflect on: today, there is effectively no functioning NBU Council made up of independent professional members, as there was during the tenure of A. Halchynskyi, V. Heyets, V. Koziuk, and others. At the same time, the NBU remains independent domestically, but not from international financial institutions. This was reported by ZN.ua.

The Economy Is Still One-Fifth Smaller Than Before the Full-Scale War

After the catastrophic collapse in 2022, Ukraine has still failed to transition to sustainable recovery-driven growth: real GDP now stands at only about 79% of its 2021 level. Structural decline across most civilian production sectors has effectively continued since the end of 2024. Growth is concentrated primarily in the defense industry, trade, oil and gas extraction, and certain segments of the construction materials sector.

The problem is no longer just insufficient GDP growth: we are witnessing a fundamental shift in the structure of the economy, which is increasingly reliant on government spending, defense procurement, imports, and external financing, while industry, investment, and exports remain weak.

The particularly worrying signal is investment: gross fixed capital formation fell by 7.9% in the first quarter of 2026, industrial production declined by 0.2% in January–May, and agricultural output fell by 1.6%. At the same time, retail trade turnover increased by 9% — consumption is growing significantly faster than the productive base.

The Import-Driven Model Is Increasingly Consuming Foreign Currency Resources

In the first half of 2026, goods imports increased by approximately 29%, while exports grew by just 5%; the goods trade deficit has already reached around $29 billion, compared with $19 billion in the same period last year. The largest increases have been recorded in imports of energy resources, electricity, energy equipment, electronics, and construction materials. Some of these imports are objectively related to the war, but the problem is much broader.

Over the past 12 months, the deficit in the balance of goods and services has reached $69.2 billion, while the structural foreign currency deficit stands at around $50.1 billion. It is covered primarily by international aid (around $60 billion), while foreign direct investment has provided just $1.7 billion in foreign currency inflows.

In effect, external aid is being converted into government spending that stimulates domestic demand and imports, increases demand for foreign currency, and leads to greater NBU interventions. This supports economic activity today, but does not build productive capacity for tomorrow.

This is precisely why the NBU’s foreign exchange interventions are constantly increasing: in January–July 2026, they already amounted to $28.1 billion, up 34% year-on-year, while in July the NBU sold an average of $207 million per day. The annual volume is estimated at $43 billion, with 86% of it going toward meeting business demand.

Thus, the stability of the hryvnia today is ensured not by balanced foreign trade, but primarily by large-scale external financing and the National Bank’s sale of foreign currency. These are two very different things.

The Budget Has Become the Main Driver of the Economy

The second fundamental imbalance is public finances: budget revenues excluding grants amount to around 39% of GDP, while expenditures reach as much as 65%. About 42% of expenditures are covered by external assistance, 70% of expenditures go toward security and defense, and another 7% toward servicing the public debt. In wartime, a huge budget deficit is inevitable, but the scale of the problem is striking.

Over the past 12 months, the budget deficit excluding grants has reached approximately 26% of GDP, while public debt has already risen to nearly 103% of GDP. At the same time, domestic debt accounts for only 22% of total debt, but it is responsible for 73% of all government interest payments. The problem is no longer just the size of the debt, but also its cost — a cost to which the NBU leadership has directly contributed.

Can a Country With Zero Growth Afford Such Tight Monetary Policy?

The NBU’s key policy rate stands at 15.5%, while annual inflation in July was 7.7%. The real interest rate is therefore approximately 7.8% amid virtually zero GDP growth. This raises a simple question: what macroeconomic problem is such a high real interest rate solving today?

If the main drivers of inflation are the destruction of energy infrastructure, rising production costs, global energy prices, currency depreciation, and higher excise taxes, then the ability of interest rates to combat inflation is objectively limited. Moreover, producer prices rose by 39.1% year-on-year in June, creating the potential for higher costs to feed through into consumer prices in the coming months.

By contrast, high interest rates have very tangible side effects.

First, it increases the cost of government borrowing: if hryvnia-denominated domestic government bonds had been issued at a fixed rate of around 10% since the beginning of the war, budget expenditures on servicing them in 2023–2026 could have been approximately UAH 260 billion lower.

Second, it constrains bank lending: total lending to the economy amounts to only around 14% of GDP, while outstanding hryvnia loans account for nearly 10% of GDP. More than UAH 240 billion is allocated to subsidized lending and mortgage programs, accounting for roughly a quarter of the outstanding loan portfolio.

This creates a paradox: the state maintains a high cost of money and then spends budget funds to offset that cost for businesses and households through subsidized programs. This cannot serve as a long-term development model.

Inflation Is Falling, but the Risks Have Not Disappeared

At first glance, the inflation situation is improving. At the same time, however, inflationary pressures are building up — producer prices, energy costs, excise taxes, and the exchange rate. In July, the hryvnia was approximately 7% weaker against the dollar than a year earlier, while the average exchange rate remains below the level factored into the state budget, reducing the hryvnia equivalent of external aid and customs revenues.

This makes the dilemma for the second half of the year particularly difficult: tight monetary conditions further suppress the economy, while rapid easing without broader policy changes risks intensifying currency and inflationary pressures. The policy rate alone cannot resolve this contradiction.

2027 Will Not Bring an Automatic Acceleration

For 2027, the Ministry of Economy forecasts GDP growth of just 1.3%, while the NBU expects 2.8% and the IMF 3.5%. Even the most optimistic forecast does not imply a rapid return to the pre-war growth trajectory — Ukraine risks facing several years of weak recovery.

For a country that has lost a significant share of its productive capacity, population, and capital, growth of 1–3% is effectively stagnation. What is needed is sustained above-trend growth strong enough to modernize the economy, bring people back, finance defense, and reduce dependence on external assistance.

From Stabilization Policy to Development Policy

The main conclusion as of mid-2026 is that a policy of preserving stability can no longer substitute for an economic development policy. During the first years of the war, the priority was clear: prevent financial collapse, ensure the budget was funded, and keep the banking system and foreign exchange market stable. To a large extent, this objective has been achieved.

However, the next stage is now necessary — a transition from an economy reliant on external financing and import-driven consumption to one based on production, investment, and exports. This requires a series of interconnected changes.

Monetary policy should take into account not only inflation but also the state of economic activity, lending, and investment: the real interest rate cannot remain one of the highest in the region for years in an economy that is effectively not growing.

Credit must return to the real sector — what is needed are mechanisms for long-term financing of industry, energy, defense production, and exports, rather than an expansion of compensatory budget programs.

Fiscal policy should become more investment-oriented: every hryvnia of civilian government spending should contribute as much as possible to domestic production, employment, and the expansion of the tax base.

Critical imports need to be combined with an import-substitution policy: part of this demand should be converted into orders for Ukrainian industry.

Exports must once again become one of the main drivers of growth. The gap between a 29% increase in imports and just a 5% increase in exports is not merely a trade balance problem — it is an indicator of the economy’s structural weakness.

The key question is: what will we have left after external assistance ends? The true measure of economic policy effectiveness should not be how much external funding Ukraine has received, but what productive capacity has been created with its help.

What Needs to Change Now

Essentially, this means moving from maintaining macrofinancial stability to achieving stability through economic growth. In the first case, economic activity is a variable that can be sacrificed in pursuit of inflation and exchange-rate targets; in the second, stability is ensured by expanding production, employment, and investment.

This does not mean abandoning macrofinancial stability. On the contrary, without rebuilding the productive base, maintaining it will become increasingly costly with each passing year.

The answer to this question will determine not only Ukraine’s economic performance in 2027, but also what kind of country Ukraine emerges from the war as — an economy that constantly depends on external financing, or a state capable of generating the resources it needs for the future.