Ukraine is preparing to enter 2026 with a record state budget deficit and a critical dependence on external financial assistance.

The draft has been prepared under the same priorities as the current budget — concentrating resources on defence and security — and is based on a pessimistic scenario that assumes the war will continue into 2026.

All available domestic revenues — taxes, duties and excise — are being channelled to defence under wartime conditions, which means that financing social expenditure and reconstruction depends on the support of allies. However, the stability of these external inflows is directly linked to Ukraine’s fulfilment of its reform commitments. Any delay or failure in reforms now threatens not only the trust of international partners but also the country’s ability to finance the budget itself.

Budget 2026: record deficit and reliance on external support

On 15 September, the Cabinet of Ministers approved the draft state budget for 2026 and submitted it to the Verkhovna Rada. The document provides for expenditure of UAH 4.8 trillion against revenue of about UAH 2.8 trillion, implying a deficit of 18.4 per cent of GDP. This substantial gap stems primarily from defence needs: about UAH 2.8 trillion (27 per cent of GDP) is allocated for security and defence — more than the country is capable of collecting in domestic revenue. Virtually all domestic income is directed to the military, so about half of budget expenditure will have to be covered by external sources. The draft includes nearly UAH 2.1 trillion (≈ USD 50 billion) in external financing for 2026.

Following recent shifts in the United States’ position on aid to Ukraine (Washington has suspended approval not only of new military assistance packages but also of financial support — and, to indicate the scale, in 2022–2024 the US provided USD 31.2 billion in direct financial assistance), the European Union has become Kyiv’s primary donor and creditor.

In addition to the EU, the government is counting on support from the IMF, other G7 countries, the World Bank and others — negotiations on covering the deficit are ongoing. According to the Ministry of Finance, as at September a financing gap of approximately EUR 16 billion remains, which Ukraine hopes to close with the help of Western partners. In other words, the international community is effectively expected to finance 42.3 per cent of Ukraine’s 2026 budget expenditure, while about 58 per cent will be covered by domestic resources.

EU assistance under the Ukraine Facility: money in exchange for reforms

The European Union has structured its support for Ukraine through the new multi-year Ukraine Facility programme. This is a macro-financial assistance instrument worth up to EUR 50 billion for 2024–2027, with funds disbursed in tranches conditional on Ukraine’s implementation of agreed reforms. The programme sets clear benchmarks and indicators — from anti-corruption and judicial reforms to transparency in public financial management — with progress regularly assessed by the EU before releasing further sums. The “money for reforms” approach is not new for the EU, but for a country at war it has become a vital budget lifeline and, at the same time, a driver of change.

Ukraine is already receiving payments under the Ukraine Facility, but not without setbacks. The most recent regular tranche, transferred in August 2025, amounted to EUR 3.05 billion, whereas the planned amount was nearly EUR 4.5 billion. The European Commission officially confirmed that Ukraine had failed to meet 3 of the 16 agreed conditions on time, and therefore part of the funds was withheld. According to EC spokesperson Guillaume Mercier, instead of the full amount, Ukraine received only part of the fourth tranche — the remaining EUR 1.45 billion has been frozen until the necessary steps are taken. That equals about UAH 70 billion, roughly half of the Ministry of Defence’s July expenditure.

Which reforms have stalled?

The issues concern three critically important commitments: decentralisation reform; adoption of the law reforming ARMA (the Asset Recovery and Management Agency); and a transparent selection of judges for the High Anti-Corruption Court. Each of these areas saw delays. For example, the ARMA reboot law came into force only in August — after the EU’s reporting deadline. The competition for the High Anti-Corruption Court was also delayed.

Regarding decentralisation, the legislative package required to complete local self-government reform was likewise not adopted in time. Brussels has made it clear: until these “homework” items are completed, part of the funds will remain withheld. At the same time, Ukraine has been given a grace period to implement the remaining reforms so as to receive the frozen EUR 1.4 billion later. The funds are therefore not permanently lost, but their delay is, in itself, an alarming signal.

Risks of non-implementation: threat to tranches and trust

The reduced EU tranche has become a serious warning for the Ukrainian government. International aid has long been tied to reforms, but this was the first time a tangible penalty — delayed financing — was imposed for unfulfilled commitments. The signal is clear: further delays in reforms in areas such as anti-corruption, the judiciary and public financial management directly jeopardise the timely receipt of international aid. Consequently, implementation of the 2026 budget is at risk, since a large portion must be financed externally.

Beyond financial consequences, there are reputational risks. Western partners’ trust in Ukraine as a responsible actor that fulfils its commitments may erode if reforms continue to stall. In wartime, international support is not only money but also a symbol of political unity and solidarity with Ukraine. Breaking agreements undermines this trust. Moreover, partners are investing their taxpayers’ money and expect Ukraine to keep its word on reforms. When progress stalls, scepticism grows in Western capitals, and readiness to provide support at the same level diminishes. In other words, every unfulfilled promise damages the credit of trust — a resource as valuable as money.

Under current conditions, delaying reforms is risky. Foreign partners at times appear more invested in Ukrainian reforms than domestic authorities. Without the “carrot” of funding, government progress can slow markedly. There are numerous examples of critical changes being delayed or stalling until a sharp external signal or an internal scandal forces action.

For instance, customs reform remained largely on paper. In autumn 2024, a law was adopted to reboot the State Customs Service — with an open competition for a new head involving international experts, a comprehensive re-attestation of customs officers, and guarantees of independence for the service’s leadership. Yet nearly a year later, implementation was minimal: no competition had been held and incumbents remained in post.

Only in August 2025, under pressure from IMF and EU commitments, did Prime Minister Yuliia Svyrydenko instruct the urgent formation of a commission to select a new customs chief. The delay in this anti-corruption reform proved costly — in direct fiscal terms (lost customs revenue and thus budget losses) and reputationally, given that international partners had called for this reboot for many months.

Another notable case was the attempt to weaken anti-corruption institutions in summer 2025. On 19 July, parliament adopted amendments that effectively undermined NABU’s independence, and the president promptly signed them, provoking domestic and international criticism. Only mass protests in Kyiv and a strong EU reaction (after which President Volodymyr Zelenskyy urgently introduced a bill to repeal the changes) prevented damage to the anti-corruption framework. That same week, Brussels openly announced reduced financial support due to unfulfilled reforms — a telling coincidence. The episode demonstrated that rolling back reforms carries consequences, and that foreign partners may at times be more uncompromising defenders of Ukraine’s anti-corruption progress than some officials in Kyiv.

Such examples are numerous. The requirement to appoint the head of the Bureau of Economic Security, judicial reform (renewing the High Council of Justice and selecting judges of integrity), and reform of the tax service — all these commitments have either been delayed or still await completion. Every pause or instance of resistance to reform feeds the narrative of Western “fatigue” with Ukraine. Conversely, accelerating change can restore Ukraine’s image as a country capable of deep cleansing and modernisation even under wartime conditions.

Donor funds as the economy’s lifeline

International financial assistance is needed not only to cover paper deficits — it quite literally keeps the economy afloat. In wartime, consumption has become the main driver of GDP, fuelled by state payments (pensions, salaries, social support). Since domestic revenue is absorbed by defence, a significant share of these payments is funded by partners’ money. Thanks to donor funds, the state pays teachers, doctors, emergency workers and pensioners — who, in turn, spend in shops and on services, keeping the economic wheel turning.

In effect, virtually all civilian expenditure is now covered by Western aid, while domestic resources are absorbed by the military effort. This model is not sustainable in the long term, but for now it prevents economic collapse. According to the State Statistics Service, in the first half of 2025 the economy barely grew: +0.9 per cent year-on-year in Q1 and +0.8 per cent in Q2. Quarter-on-quarter growth almost stagnated at +0.2 per cent in Q2 2025 (seasonally adjusted). This indicates that economic growth has virtually stopped. Without billions of dollars in Western inflows, the situation would be markedly worse — likely a deep contraction driven by falling consumption.

International support today is therefore more than money. It is a credit of trust and a geopolitical gesture of solidarity that has enabled Ukraine to endure its most difficult moments. It is also a driver of economic resilience. Preserving this support must be the government’s top priority. The best way to ensure it is to avoid giving partners reason to doubt Ukraine’s determination to reform. Tangible change is what will convince allies to continue their support.

By contrast, delays in reforms today could deliver a blow to Ukraine’s financial stability tomorrow — because without trust and partners’ funding it will be extraordinarily difficult to hold the economic front. Ukraine must show it can move forward not only under pressure, but consciously — understanding that the reform path aligns with its national interests.

Ukrainians have already paid an exceptionally high price for freedom. It is important that these sacrifices are not squandered due to entrenched corruption problems or unfinished reforms. The state’s financial stability during and after the war depends directly on the authorities’ ability to fulfil their commitments. Western trust and support are not unlimited — they must be earned through concrete action. It is time to demonstrate that Ukraine can be a model of transformation even under the harshest conditions, justifying the credit of trust and thereby strengthening its own stability.

The path to victory on the battlefield is inseparable from putting the country’s internal house in order. Only by carrying out promised reforms decisively and on time will Ukraine preserve financial stability, accelerate its path to the EU and — most importantly — meet the expectations of its people and allies.