Ukraine

Abstract

Russia’s invasion of Ukraine continues to have a devastating social and economic impact on the country. Civilian casualties are mounting, over a third of the population has been displaced, and access to basic needs such as electricity, water, and heating are at risk while winter is coming. Macroeconomic management has been exceedingly difficult. The fiscal deficit has ballooned to accommodate a large expansion of defense spending, financed by a combination of external support and monetization, with multiple supplementary budgets since the start of the war. The inflation targeting regime was replaced by a hard peg to the US dollar, supported by FX controls and a sizeable increase in policy interest rates. The exchange rate has come under episodic pressure (and was devalued by 25 percent in July), despite sizable external financing. Notwithstanding all these strains, the authorities have largely managed to maintain macroeconomic and financial stability, and they are committed to take necessary measures to preserve stability.