Tax revenues have plummeted due to an economy in free fall while military spending has skyrocketed, leaving the government facing a budget shortfall of $5 billion (€5.02 billion) per month.
To make up for the lack of cash, the country’s central bank has effectively been printing money — buying government bonds to the tune of $7.7 billion over the past six months. The Financial Times reported that the printing presses effectively created $3.6 billion in June alone.
With the war now likely to drag on indefinitely, the country faces the prospect of runaway inflation and possibly even hyperinflation — very high and accelerating inflation.
That would further erode the value of Ukraine’s currency, the hryvnia, which has already dropped by about a third. Inflation is up to 20% and is on course to hit 30% by the end of the year.
Earlier this month, a report by the London-based Center for Economic and Policy Research (CEPR) urged a “decreasing reliance” on money printing, or seigniorage, warning that Ukraine would likely face much higher inflation, a currency crisis and even a banking crisis if it continued.
“Money printing makes sense at the beginning of the war, when there is a lot of chaos, and allows you to raise money very quickly,” report co-author, economist Yuriy Gorodnichenko from the University of California, Berkeley, told DW. “But it’s not a sustainable solution. If you keep doing this, you’re going to destroy the rest of the economy.”