Grant Components in Relationship Lending: Enhancing the Financial Sustainability of Government and Local Loans in Ukraine
Grant Components in Relationship Lending: Enhancing the Financial Sustainability of Government and Local Loans in Ukraine

Summary/Abstract: This study examines the integration of a grant component into relationship lending frameworks as a mechanism for ensuring the financial sustainability of government and local debt in transitional economies. Focusing on Ukraine’s wartime fiscal transformation, the research analyses how hybrid financing models, combining repayable loans with non-repayable grants, reshape debt dynamics and support structural adjustment under conditions of extreme uncertainty. The study applies comparative analysis, the Public Finance Sustainability Index (PFSI), and multivariate regression modelling with scenario forecasting to a panel of eight countries (Ukraine, Moldova, Georgia, Poland, Hungary, Latvia, Croatia, and Bulgaria) over the period 2020–2024. The results demonstrate that Ukraine exhibits the highest Grant Participation Ratio (GPR), exceeding 0.4 in 2022, while in EU countries it generally remains below 0.1–0.2. Regression estimates reveal a statistically significant positive relationship between the share of grants and fiscal sustainability: a 10% increase in the grant share raises the PFSI by approximately 0.025, whereas a higher loan share has the opposite effect. Scenario modelling indicates that maintaining a grant share of at least 25% in external financing is a necessary condition for preserving macro-financial stability in Ukraine during 2025–2027. The academic contribution of the paper lies in operationalizing the grant component within a relationship lending framework and embedding it into a quantitative sustainability assessment. Practically, the findings provide policymakers with an evidence-based tool for optimizing loan–grant ratios in public borrowing, particularly in post-conflict reconstruction and decentralization contexts, where fiscal resilience is critical for long-term institutional transformation.

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