OECD Economic Surveys: Ukraine 2025

Amidst the burden of defence from Russia’s full-scale invasion, Ukraine is striving to reconstruct damaged infrastructure and businesses and is undertaking important reforms to improve the functioning of the state, the goods and services it provides its citizens, and the environment for businesses and investors. Stabilising the security situation, implementing reforms, achieving fiscal sustainability, and sustaining the provision of external support will determine the pace of recovery.

Ukraine is meeting the great damages and exceptional challenges of Russia’s full-scale invasion with efforts to transform its economy and policy environment. With significant ambitions for its post-war economy and society, Ukraine aims to increase productivity, diversify exports and raise incomes and well-being through alignment with European and OECD standards. Since the full-scale invasion, Ukraine has acted to stabilise the macroeconomic environment. It is pursuing reforms to strengthen its education and social protection systems, improve public governance and make inroads into the significant challenges of corruption and public integrity, and to reduce regulatory burdens. Nevertheless, the restrictions of martial law and full-scale defence have frozen the implementation of many reforms. Ensuring, as soon as conditions permit, reforms are fully implemented will be vital.

Reconstruction and recovery will require a deeper change in Ukraine’s approach to policymaking to drive productivity-supporting economic choices. The occupation, displacement and destruction of industries on the one hand, and the impetus to the defence sector on the other are transforming the economy’s structure and geography. Creating an enabling environment that fosters diverse investments and activities, rather than relying on specific incentives or regulatory interventions, would help to foster growth and better support Ukraine’s economic convergence with European and OECD countries.

The pace of recovery will be modest while the war continues (Table 1). Ongoing destruction of businesses and infrastructure, shortages of energy and workers, and fiscal pressures will limit the recovery. Once the security situation stabilises, the pace and quality of reform implementation, external support and population movements will determine the pace of investment and recovery. Extreme uncertainty surrounds the outlook, especially with respect to the security situation.

The costs of defence have led to wide budget deficits and rising public debt. After initially monetising part of these deficits, Ukraine is now largely financing deficits through external support and domestic debt issuance. Fiscal targets for the medium-term, once the security situation stabilises, are prudent but will require a large consolidation, even accounting for the potential cuts to high defence spending, highlighting the importance of revenue mobilisation, efficient spending and ongoing external support.

Very wide budget deficits are required to fund defence spending of 25% of GDP. The budget deficit is expected to be near 20% of GDP in 2025 and 2026, leading public and publicly guaranteed debt to rise towards 120% of GDP in 2026, from 50% of GDP in 2021.

Medium-term fiscal targets are prudent but will require a large fiscal contraction amidst high spending pressures and significant external financial assistance. Once the security situation allows, the government’s fiscal strategy envisages achieving a primary budget surplus of 0.5% to 1.5% of GDP and placing public debt on a path towards 60% of GDP. Lower military spending, particularly for defence personnel, will contribute to this consolidation but will be a considerable loss to household incomes and private consumption. While many will move back to private sector jobs, they generally pay less than defence salaries and many jobs have been destroyed by the war. Spending pressures for reconstruction and social support for the demobilised personnel and returning migrants will also be high.

The path to debt sustainability will require achieving the fiscal target, strong reform implementation and growth, and continued access to concessional finance. Boosting revenues while limiting the tax system’s burden on investment and employment will be necessary for fiscal sustainability. Tax revenues are high relative to countries near Ukraine’s income levels, but are slightly below their level prior to the full-scale invasion relative to GDP. Some labour income and corporate profit tax rates have recently been increased, collection measures improved and important reforms introduced, notably for customs and excise. Still, many weaknesses in collections remain. Indirect tax receipts could be increased by narrowing the coverage of reduced VAT rates and addressing collection shortfalls. A revenue reform strategy is being implemented to strengthen administration, align the revenue system with EU standards, and address many collection gaps.

The reconstruction needs will demand more effective public investment and social spending. While the public investment management and procurement frameworks have been strengthened, they are often circumvented, projects are poorly specified, and competition is limited, inflating costs, creating corruption risks and reducing the value for money of spending. Ukraine’s rapid progress in digitalising the public sector has accelerated with the full-scale invasion, and fully using these tools can help raise the effectiveness and transparency of spending.

Subnational governments have been central to Ukraine’s resilience and can further lift their capacity to support the reconstruction. Mergers and increased fiscal and operational autonomy in the late 2010s improved their capacity. Reinforcing subnational governments’ capacities, including by encouraging greater cooperation between subnational governments and local resource mobilisation, can leverage their role in raising public investment and delivering higher quality goods and services through the reconstruction.

War mobilisation and massive displacement of Ukrainians have made finding workers one of the main challenges to activity, at the same time as unemployment and poverty have risen, and amplified longer-term challenges of an ageing population and emigration. Effectively reintegrating veterans and internally displaced persons, motivating emigrants to return as conditions allow, and building on the war-induced increase in women’s employment can bolster the labour force.

The full-scale war has amplified the challenges of Ukraine’s labour force (Figure 2). The mobilisation of over one million defence personnel, the internal and external displacement of 30% of the working age population, and the demands of sectors key to defence such as IT and construction have created severe labour shortages and strong wage growth. This has drawn more women into the workforce, making inroads into Ukraine’s relatively low female labour force participation. These developments, further reduction in the low fertility rate and deteriorating general health during the war are accelerating population ageing. When martial law ends, new labour force challenges will arise, through the demobilisation and removal of travel restrictions on conscription-age men. The capacity of employment services is being boosted. Connecting adults with new job and training opportunities, and improving access to housing can accelerate Ukraine’s recovery.

Social policies can encourage participation in the labour force while protecting well-being. Physical and mental health challenges will continue with demobilisation, and well-designed and well-resourced social policies that support veterans’ return to work and society will be key for the recovery. Support measures for veterans will need to balance recognising their contribution and needs with encouraging their participation in the economy. Linking social support for all Ukrainians to skill upgrading can help increase productivity and incomes. Pensioners’ incomes have been largely protected through the full-scale invasion but are low and many workers leave employment early. Planned pension reforms and promoting financial literacy can help buttress retirement incomes and savings into the longer term, and encourage longer working lives.

Facilitating the return of approximately 6.9 million externally displaced entails improvements in labour markets, housing conditions and education services. Better regulating the largely informal rental market, and, once conditions stabilise, developing the mortgage market, can help rejuvenate and formalise the housing market and encourage new developments in areas suffering shortages. Improving access to quality childcare, and aligning facilities’ work hours with the working day would support women’s labour force participation.

The private sector will be central to Ukraine’s recovery, reconstruction and to raising incomes and well-being. Fully reaping the private sector’s potential entails increasing private investment, raising productivity and developing exports. Achieving these will require addressing long-standing structural challenges, many of which have been amplified by Russia’s full-scale invasion. Key priorities include strengthening regulatory frameworks, promoting competition and innovation, and improving access to finance to attract both domestic and international investment.

Several structural impediments have long undermined Ukraine’s investment activity and export dynamism, including policy-induced distortions, a large informal sector, and the prominence of state-owned enterprises (SOEs). (Figure 3). Underdeclared activity distorts competition, and weakens public finances. The private sector is dominated by small and micro firms, which struggle to scale up and invest due to high administrative costs in complying with the tax system, a lack of access to finance and an uncertain business environment. Burdensome tax compliance discourages VAT registration and increases informality. SOEs control almost 15% of the business capital stock but operate inefficiently, crowding out private investment and undermining competition. Energy price caps and the effects of the war, weaken incentives to improve efficiency and to invest in energy infrastructure.

Establishing transparent, predictable, and efficient business conditions is critical to boost investment, activity and exports. Ukraine has made significant progress in its institutions supporting public sector integrity. Despite progress, corruption remains a major concern, distorting competition and undermining business dynamism. Strengthening the rule of law, improving public integrity, and ensuring an independent and transparent judicial system are key to restore investor confidence. Public consultation and better coordination in the design of regulatory policy would create a more predictable investment climate. Digitalising the tax administration by automating reporting and adopting risk-based auditing can help to ease compliance, costs.

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Reforming state-owned enterprises (SOEs) and improving corporate governance is crucial for Ukraine’s economic recovery and long-term growth. Privatisation, alongside effective mechanisms to ensure markets are competitive and to improve SOEs’ governance, can attract private investment, improve assets' performance and boost fiscal revenues. Strengthening corporate governance for publicly traded companies, enforcing shareholder protection, and modernising insolvency frameworks will improve investor confidence.

Reducing barriers to trade and investment and further developing the Anti-Monopoly Committee’s capacity is necessary to ensure fair and contestable markets (Figure 4). Streamlining investment promotion, improving trade facilitation, protecting intellectual property rights, and providing targeted support for SME digitalisation and innovation can help diversify Ukraine’s production and exports, better integrate its economy into global value chains, and drive rising productivity.

Enhancing access to finance for businesses is critical for Ukraine’s recovery. While the banking sector has shown resilience, lending to the private sector remains limited. Increasing competition between banks, for example, through privatisation, should be underpinned by reforms towards resolving non-performing loans and reducing judicial uncertainty. Developing capital markets and non-bank financial institutions, such as leasing and insurance, can provide alternative financing sources. Improving the regulatory framework, and promoting SME participation in equity markets will help mobilise domestic and foreign capital.

Laying out and implementing a system of emissions and pollution prices, accompanied by well-designed regulations, can encourage reconstruction investment leads to an economy that is less polluting and better adapted to a changing climate. Ukraine’s businesses and households are exposed to significant climate risks, including flooding, fires, soil degradation and hotter and drier conditions, but preparation for the effects of climate change is at an early stage. The full-scale invasion has added to the legacy of pollution from economic activity. Greenhouse gas emissions are high relative to GDP. Strengthening carbon pricing, as planned by the government, and reviewing environmentally harmful subsidies and tax exemptions would provide incentives to lower emissions and improve sustainability.