Macroeconomic stabilization on shaky ground – digest of the Belarusian economy
On 3 April 2017, Economy Minister Vladimir Zinovsky announced a negative forecast for first quarter GDP growth in Belarus. This comes despite an increase in industrial output and exports at the end of March.
In this context, on 6 March a new IMF mission arrived in Belarus in an attempt to encourage the authorities to implement further economic reforms.
Meanwhile, insufficient efforts at liberalising the private sector still hinder the emergence of a new pillar of the Belarusian economy.
Economic growth: shaky stabilisation
Economic data for the first two months of the year show mixed results. On one hand, industrial production and exports have improved (see Figure 1).
On the other hand, the government continues to postpone measures which would aid in the financial recovery of enterprises. Authorities are also putting off fundamental decisions on structural reform, thus prolonging the economic recession.
For example, investment demand remains in deep trouble, shrinking for the 14th quarter in a row. During the first two months of 2017, it dropped by about 17.4 per cent year on year (see Figure 1).
Therefore, during the rest of the year, the economy faces the delayed effects of investment depression, such as reduction in output due to the reduction of production capacity; this affects such important industrial enterprises as Gomselmash, MAZ and MTZ. Moreover, firms facing financial losses influence not only the amount of investment and production, but also the employment rate and wages.
To address the latter issue, on 21 March President Alexander Lukashenka banned job cuts without the initial approval of local authorities. The promised $500 average monthly wage for 2017, however, remains off the table (it currently hovers around $370).
Therefore, taking into account the implausibility of reducing SOE costs, the painful process of sustainable stabilisation of their operations will be postponed even further.
For these reasons, the entire economy will take even longer to emerge from economic imbalances. Given the prospects of economic dynamics, such a pattern means that in 2016 the 'price' for structural weaknesses remains unpaid, and structural corrections will continue in the upcoming months of 2017.
The financial system: feeling the pressure of the money shortage
Under these conditions, on 16 November 2017 representatives of the IMF once again discussed the terms for a new credit programme with Belarusian authorities.
Six months before, during the IMF's previous visit, the economy was experiencing a long-lasting recession which called the stability of the banking system further into question. However, this time the National Bank of Belarus (NBB) tried to win over its sceptical visitors.
On 6 March 2017, regulators unveiled a new report, which evaluated the impact of potential shocks on the banking system. In particular, the NBB evaluated the impact of the devaluation of the Belarusian ruble on banking stability.
Judging by the results of the report, Belarusian banks are sufficiently strong. Banks would feasibly survive even a 30 per cent devaluation of the Belarusian ruble.
However, independent experts believe that the stability of Belarusian banks depends mostly on the state of public finances, first and foremost because struggling state-owned enterprises urgently need fresh money to repay their debts. According to the NBB, in 2016 SOEs contributed to a total of 81 per cent of bad-asset growth in the banking system.
Nevertheless, before signing a new credit programme with Belarus, the IMF will still insist on implementation of decisive structural reforms in the near future, regardless of what official figures say.
Private sector: prolonged liberalisation
In turn, the underdevelopment of the Belarusian private sector (in particular small and medium enterprises, or SME) still remains one of the key problems of the Belarusian economy.
For example, SMEs' share in the Belarusian GDP accounts for approximately 30 per cent, which limits competition on the domestic market and leads to inefficient allocation of both material and labour resources. In contrast, according to the World Bank, in other developing countries this parameter ranges from 60 to 75 per cent of GDP.
In this light, on 2 March 2017 a new presidential decree intending to improve the procedures of state registration and liquidation of economic entities was launched. The document limits the right of the tax ministry and other authorised bodies to invalidate the state registration of a business entity or its liquidation through the court to three-year periods.
The head of the Association of SMEs, lawyer Syarhei Balykin, considers the decree a progressive step, but he thinks that by and large it will make things easier only for official registrars. Moreover, according to him, this legislative act partially degrades the position of entrepreneurship.
For example, the document actually limits possibilities of creating new companies. In particular, the decree prohibits the registration of new business entities for founders of liquidated entities or for those going through bankruptcy proceedings.
In addition, the principle of collective responsibility (meaning that all of a given company's co-founders bear responsibility for violations in economic activity of any individual co-founder) still remains in force. In the opinion of Syarhei Balykin, such restrictions violate the rights of entrepreneurs to implement business projects.
The last month has shown certain positive trends in the stabilisation of industrial production and exports. However, the Belarusian economy still struggles with problems with its banking system, lack of external finance, and the unresolved issue of increasing private sector involvement.
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)