Creeping Signs of the Approaching Crisis - Belarus Economy Digest
The first half of the year has shown clear evidence that the Belarusian economy needs better incentives to revive its industrial strengths.
In July the authorities announced their plans to provide financial assistance to several "giants" of industry. However, this decision has cast doubts over whether or not other taxpayers will ask the same from the state.
Also, this month the government carried on negotiations with the IMF and Eurasian Fund for Stabilisation and Development and are seeking to attract additional potential sources of loans. After their preliminary meetings all parties have decided to continue consultations showing striking unity on the necessity of economic reforms.
Economic Data: Spinning Down
Belarus’ GDP fell 3.3 per cent in first half of the year, which raises questions about the government’s official forecast growth rate of 0.7 per cent and fears that the country’s efforts to bring a halt to the nation's current economic turmoil by the end of August may not be enough.
The hardest hit were mostly exporters to the Russian market
Belstat, the official state statistical body, released on 6 July its report on loss-making enterprises in Belarus for January-May 2015. Net losses for these enterprises hit around $0.8bn and more than doubled in comparison with the same period from last year. The hardest hit were mostly exporters to the Russian market, where shrinking demand was compounded by the further decline of the Russian ruble.
Yet in June, in comparison to May, industrial production rose by 3.8 per cent. Manufacturing seems to be in better shape, while the industrial activity of Russia continues to shrink by 4.8 per cent. If Russia’s economy does not start seeing a recovery in the near future, things will get nastier for its strategic partner as well.
The problem of wage arrears presents a particular concern. According to Belstat, by the beginning of July 555 enterprises (mostly from the agriculture, hunting and forestry sectors) not paid 95,200 of their employees. The overall amount of overdue debt has increased from May by a considerable 37 per cent.
The numbers indicate that economic reforms are taking much too long. But where to begin? So far the government has failed to show a proactive approach to improve the situation.
State Support: Saving the "Giants"
Belarus’ economy needs new ways to kick-start economic growth. However for the moment the government is relying mostly on increasing public borrowing. On 1 July, the President signed several decrees in order to support and stabilise the financial and economic situation at MTZ and Gomselmash (see figure 1) – two manufacturing "giants" dragged down by low sales.
Given this grim picture, Belarus has clearly decided to bear the burden. The Ministry of Finance provides the main chunk of state financial assistance by issuing $425.8m in foreign currency bonds. This currency injection is supposed to act like a shot of adrenalin for Gomselmash – a leading manufacturer of combine harvesters and agricultural machines.
The MTZ, producer of a wide-range of tractors, is the second party to receive the states help, it will receive currency bonds worth around $150m underwritten by the company’s assets. Operations with these bonds are exempt from taxes, which in reality is a tax credit for those who will buy the bonds.
This mechanism, supposedly, aims to hide the prohibition of direct financing of the economy using the printing of the domestic currency in order to restructure the bad debts of the loss-making industrial "giants". Apparently, in terms of the current regime of monetary targeting a broad money supply, this will lead to its expansion, which strictly contradicts the IMF rules.
In light of this, the only way to get around the IMF’s tough stance on this issue is the gradual closing of the pipeline of state support for all of the other collapsing manufacturers, meaning the remaining "giants" will be slowly edging their way towards extinction. However, in order to avoid the worst scenario imaginable from unfolding, the government may decide to utilise a policy by which it would create artificial demand for "machines" by distributing them to other companies in the country and paying for them out of the national budget.
In any case, all of this unavoidably leads to more money printing, and, thus, creates the necessary conditions to jump start the next round of the familiar inflation-devaluation cycle.
New Credit Negotiations: the Long Way to Make a Deal
The IMF turned down Belarus’ preliminary agenda of economic reform. The snail's pace progress on freeing up the economy and implementing reforms has cast doubts on a new credit line of $3.5bn from IMF. The IMF calls for something more radical than just "formation of a legal framework" meaning the actual liberalisation of prices, a reduction in subsidies, the cancellation of mandatory plans for enterprises, and really carrying out privatisation.
In July Belarus tried to sell new promises of structural reforms to the Eurasian Fund for Stabilisation and Development
A deal with the IMF would help the country to pay for its imports and to refinance its previous debts. From the beginning of the year, Belarus’ foreign-exchange reserves have shrank by 9 per cent from $5,059m to $4,620m, less than what is needed to pay for one month and a half of imports. Without a deal debt payments during the year will eat up more than half of the country's international reserves and leave it with less than one month’s worth of imports.
In July Belarus also tried to reduce the tempo of their declining reserves by selling new promises of structural reforms to the Eurasian Fund for Stabilisation and Development, but they were also largely unsuccessful. However, the real obstacles of negotiating with the Fund have always been the political constraints implicit in working with it, particularly when it is taken into account that Russia holds the largest share of power in it.
Nevertheless, in order to not sink the economy of its strategic partner, the Russian authorities approved a loan of $760m for the repayment and servicing of Belarus’ debts to Russia and the Eurasian Fund for Stabilisation and Development.
Aleh Mazol, Belarusian Economic Research and Outreach Center (BEROC)
This article is a part of a joint project between Belarus Digest and Belarusian Economic Research and Outreach Center (BEROC)