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Are Belarusian Authorities Ready For Market Reforms?

The President's economic advisor Kiryl Rudy

On 3-4 November three biggest Belarusian economic think-tanks organised the Kastryčnicki Ekanamičny Forum (KEF) conference in Minsk. The third annual economic conference gathered a number of high-ranking Belarusian and foreign experts, and representatives of international institutions like the IMF and the World Bank.

During Lukašenka's rule there has never been as many talks about implementing structural reforms in Belarus as this year. In 2015 virtually all the policy-makers responsible for economic policy advocated economic reforms.

It seems the authorities have realised that reforms are unavoidable. However, they cannot agree on the actual range of reforms and the speed of their implementation.

Why Reforms Are Unavoidable?

The Belarusian economy faces a systemic crisis. The decomposition of economic growth shows that the potential for economic long-term growth has steadily fallen from around 9% annually in the mid-2000s to around 0% in 2015. The deterioration of the external environment, mainly low energy subsidies and the recession in Russia, has only exposed structural weaknesses. As a result, Belarus has been experiencing its first recession since 1996.

The IMF and the World Bank have forecast a further recession or stagnation in Belarus in 2016-2017. Facing unfavourable external factors, the economy can no longer generate sustainable growth. Even the ministry of economy expects the economy to grow by only 0.3% in 2016. Given that in the past several years the official forecasts exceeded actual growth by 5.1 percentage point per year, the future seems indeed miserable.

The negative prospects of the Belarusian economy have forced officials to recognise the need for deep economic restructuring. Already in April 2015 the President's economic advisor, Kiryl Rudy, wrote a paper in the Belarusian Economic Journal on “Structural economic reforms: necessity for the Republic of Belarus and international experience”. Rudy focused particularly on why the present structure of the Belarusian economy needs reform, and what are the lessons of transition in post-socialist countries.

Noticeable Change In Public Rhetoric...

Already at the end of 2014 many Belarusian officials started discussing the topic of economic reforms. On 26 November 2014 the deputy minister of finance Maksim Jermałovič announced that:

“We are actively discussing these issues with the International Monetary Fund and the World Bank, to develop a common vision, and possibly to organise a joint programme of structural reforms in Belarus.”

In April 2015 the government and the World Bank confirmed the readiness to work together on “the roadmap of structural reforms”. Since then Minsk has discussed the initial roadmap with the IMF and the Eurasian Development Bank (EDB) in order to obtain new financing.

In the meantime, many other influential policy-makers in Belarus have expressed their positive attitudes towards reforms. Among them were, the Prime-Minister Andrej Kabiakoŭ, the Chairman of the Council (the parliament) Michail Miasnikovič, the Deputy Minister of the Economy Dzmitry Krutoj. Since political will is the essential precondition for successful reforms, such a change in public statements has drawn attention.

Moreover, during the 2015 presidential campaign Lukašenka announced a relatively liberal economic programme. It included, for example, the de-monopolisation of the economy; the introduction of corporate governance in state-owned enterprises based on best international standards; the separation of the state’s role as an owner and a regulator; the exclusion of any forms of needless interference in business activities; and a moratorium on tax increases for five years.

Unlike the previous four economic election programmes, however, this time Lukashenka did not advocate populist slogans but focused on problems encountered by the real sector of the economy and he proposed the right solutions.

But Little Change In Structural Reforms

2015 becomes a ground-breaking year in terms of the economic policy conducted in Belarus. Despite the recession and the presidential elections, the authorities have carried out sound monetary and fiscal policy throughout the whole of 2015. For instance, regardless of a 30% devaluation of the Belarusian rouble at the end of 2014, inflation fell from 17.1% in January to 11.5% in October 2015. Additionally, the economy's foreign debt decreased by $2 billion during the first half of 2015.

Apart from economic stabilisation, so far the Belarusian authorities have introduced very few meaningful measures aimed to boost long-term economic growth. They lack agreement on the scope of the market transition. For some policy-makers (mainly the President and almost the whole government), the economy needs only some adjustments. But for others (mainly the National Bank of Belarus, the Ministry of Finance and the Ministry of Economics), only a profound transformation will let Belarus catch up with the advanced economies.

At the KEF the Deputy Head of the Presidential Administration Mikalaj Snapkoŭ mentioned two structural reforms crucial for a successful transition: the division of the state’s function as a regulator and as an owner, and the shift to indicative economic forecasting instead of compulsory forecasting. Although these are important issues, they miss the basics like the equal treatment of private and state-owned entities (SOE), SOE restructuring, further deregulation and privatization.

At the same conference Kiryl Rudy explained without optimism why Belarus may avoid the reforms in 2016. He revealed five barriers that prevent the regime from making structural reforms, including an absence of broad public support for reforms and the absence of a comprehensive vision among the political elite.

Cosmetic Changes Instead Of Real Reforms

At the KEF the first deputy minister of the economy Aliaksandr Zabaroŭski announced the six priorities of the roadmap. Half of them focused on supportive measures for reforms (like macroeconomic stability, the formation of effective financial markets and the development of the labour market). The second half sounded like true structural reforms (the state sector transition, development of the private sector and liberalisation of the markets for goods and services).

Nonetheless, with insufficient political will for reforms, their implementation may end up as merely cosmetic changes allowing for additional financing from the IMF or the EDB. However, creditors will monitor the progress of reforms before the payment of each tranche. Therefore, avoiding any reforms is out of the question.

Unfortunately, the long-awaited “roadmap of structural reforms” did not emphasise the most urgent and necessary reforms. Surprisingly, it took Minsk almost a year to make the roadmap public. It shows that the authorities are not ready for large-scale market reforms. But the slow and partial structural reforms appear inevitable.

Aleś Alachnovič is the Vice President at CASE Belarus and PhD candidate at the Warsaw School of Economics, an alumnus of the London School of Economics.​

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