KYIV, Aug. 3 – Ukraine’s public debt has increased to ‘critical level’ after the government’s rampant borrowing spree and may slow down its economic growth, Serhiy Verlanov, former head of the State Tax Service, said Tuesday.

Ukraine tapped global capital markets and borrowed money domestically at high interest rates after the International Monetary Fund had suspended its lending since June 2020, citing delayed economic reforms.

“The post-pandemic era of easy money on global markets has encouraged the government to unleash a borrowing spree like there is no tomorrow,” Verlanov said in an article published by Seeking Alfa, a financial information service aimed at U.S. markets.

Ukraine’s public debt increased almost 10% in the past seven months to $92.5 billion as of June 30, up from $84.2 billion as of November 30, 2020, according to the Finance Ministry.

“This problem is even more staggering over the longer period,” Verlanov said. “Ukraine’s debt shot up 18% over the past 25 months, an unprecedented increase, to fuel the government’s populist policies without undertaking serious economic reforms.”

Ukraine’s debt rose to 60.8% of GDP in 2020 from 50.3% in 2019, according to Trading Economics, which compiles data from the Finance Ministry. That’s “even before the rampant borrowing of 2021 has started,” Verlanov said.

Although developed economies can sustain debt levels of up to 75% of GDP, emerging economies, such as Ukraine, begin to experience significant economic problems, including high interest rates, at debt levels exceeding 60%.

Governments around the world resorted to increased borrowing to fight the pandemic and stimulate growth, but most borrowing has come at near zero interest rates. In contrast, Ukraine has been piling up high-interest debt, while its policies have been inhibiting economic growth.

“As a result of the government’s rampant borrowing, the National Bank of Ukraine has become one of a few central banks in the world that have started raising interest rates to cool off inflationary pressure,” Verlanov said.

The NBU raised key policy rate 50 basis points to 8% at a meeting July 22, surprising market analysts who had expected no rate change. This was the third rate hike this year, and the bank indicated it may further tighten its monetary policy if inflationary pressure continues to rise.

The bank also warned the 2021 inflation will probably hit 9.6%, up from its earlier forecast of 8%, and well above its target of around 5%.

The rising interest rates make business loans and mortgages more expensive and that slows down the country’s economic growth.

Ukraine’s economy contracted 4% on the year in 2020, but is expected to rebound 4% in 2021, amounting to zero growth over these two years.

Ukraine raised $1.25 billion in April through an issue of Eurobonds maturing in 2029 with annual yield of 6.875%, according to the Finance Ministry. The government raised $500 million in July through additional issue of the same Eurobond. It was borrowing domestically at annual rates of 8.5% for three-month T-bills to 11% for 12-month T-bills.

“Essentially, by stalling economic reforms and refusing to fight corruption, the government has replaced cheap IMF loans at rates of about 1% with commercial loans at rates of 6.875% or higher,” Verlanov said.

“The developments illustrate the government’s shortsighted debt management approach that has become the hallmark of Ukraine’s incoherent economic policies over the past 18 months,” Verlanov said. (tl/ez)