Ukraine's banking system, although more stable than it was during the initial stages of Russian aggression in 2014, faces significant challenges in supporting the country's post-war recovery.
The system is considered too small and undercapitalized to drive the large-scale recovery efforts needed after the conflict. Ukraine's banking sector has one of the lowest asset-to-GDP ratios globally, with total assets amounting to approximately 60% of the country's GDP. The working loan portfolio is around 15% of GDP, further highlighting the limitations of the banking system in facilitating economic growth.
The current asset-to-GDP ratio is largely maintained by substantial international aid and liquidity inflows. Without these external financial supports, the ratio would be even lower, indicating a precarious situation for the banking sector. In the medium term, the banking system lacks the capacity to support significant economic growth or recovery efforts. The potential for large-scale recovery could begin as early as 2025, or more realistically by 2026-2027, contingent upon the cessation of hostilities or a truce.
The financial landscape in Ukraine is challenging, with recovery costs estimated at $486 billion by the World Bank. However, the total assets of the banking system are only about $85 billion, revealing a significant gap between available financial resources and the needs for recovery. The banking system, despite currently having surplus capital, may quickly deplete this surplus in a recovery scenario. The ongoing retrospective taxation of bank profits at a 50% rate could further hinder the banks' ability to lend and finance recovery efforts.
To address these challenges, Ukraine must attract a diverse range of creditors, investors, and donors from various countries. Foreign direct investments and loans from multiple sources, including foreign commercial banks, export credit agencies, and development banks, will be essential for forming the foundation of Ukraine's recovery financing. International financial institutions such as the European Bank for Reconstruction and Development (EBRD), the European Investment Bank (EIB), the International Finance Corporation (IFC), and the U.S. Development Finance Corporation (DFC) will play a critical role in mobilizing resources to support Ukraine's recovery efforts.
Preserving capital for larger-scale economic funding is crucial, and maintaining the corporate income tax rate for banks at 25% can help achieve this. The banking sector's ability to adapt and attract international investment will be crucial for Ukraine's recovery. A strategic approach to financial management and investment attraction is necessary to leverage the banking system and meet the substantial recovery needs ahead.
In summary, Ukraine's banking system, although resilient, is fundamentally too small to handle the extensive recovery requirements post-conflict. The focus should be on attracting international financial support and maintaining a conducive environment for investment. Collaboration between domestic banks and international financial institutions will be vital in laying the groundwork for a sustainable recovery.