CONTEMPORARY INSTRUMENTS FOR FINANCING THE MUNICIPAL SECTOR DURING THE WAR AND THE RECONSTRUCTION PERIO

Abstract

The full-scale war has fundamentally reshaped the operating environment of Ukraine’s municipal sector, exposing a tension between an unprecedented rise in communities’ expenditure needs and the narrowing of their revenue autonomy. This paper provides a critical analysis of the contemporary toolkit for financing local self-government during wartime and reconstruction, which the author classifies into four groups: internal budgetary sources (own revenues and intergovernmental transfers), debt instruments (local borrowing and municipal bonds), external targeted financing (the Ukraine Facility, resources of international financial institutions, and bilateral assistance), and extra-budgetary mechanisms (grants, city twinning, and public-private partnerships). The empirical basis comprises official data from the Ministry of Finance of Ukraine, the State Treasury Service, the analytics of the “Decentralisation” project and the Centre for Economic Strategy, as well as reports by the European Commission, the EIB, the EBRD, and the World Bank for 2022-2025. The study demonstrates that the centralisation of the “military” personal income tax and the accompanying increase in equalisation transfers have produced a model of “managed dependency” that secures short-term stability while undermining communities’ fiscal capacity to finance reconstruction. Drawing on the post-conflict experience of Bosnia and Herzegovina and the subnational lending mechanisms of the EBRD and the World Bank, the paper argues for a transition from a grant-and-donor model towards an investment-and-credit model, entailing the restoration of municipal creditworthiness, the development of the municipal bond market, and the institutionalisation of dedicated reconstruction funds. Recommendations are offered for diversifying funding sources, strengthening the revenue base, and integrating local investment projects into the public investment management system.