The Moment of Truth: Digest of Belarus Economy
On 16 February 2016, President Alexander Lukashenka announced zero tolerance for structural reforms being proposed by the government.
Meanwhile, since the beginning of 2015 state debt has increased by more than half and real wages in dollar equivalent have fallen to a ten year low.
Belarus's government is still trying to find a simple way out of the crisis by releasing new development plans while waiting for credit from the IMF and Russia.
Economic crisis: approaching phase two
On 18 January 2016 Minister of Economy Vladimir Zinovskii predicted a tough 2016, and said it would influence Belarus’s economic performance in the next five years. The World Bank believes Belarus' GDP will contract this year by 0.5 per cent.
Taking into account these forecasts, experts speak morosely of a "new reality", admitting that previous methods of dealing with the country's economic problems have been exhausted. According to representative of the National Academy of Sciences of Belarus Georgy Grits, the economy has entered a prolonged recession and unpopular measures are needed to find a way out of it.
Economic data published on 20 February 2016 indicates that the country has started the new year by repeating the acute problems that began in 2015. GDP has dropped by 4.3 per cent and industrial production has shrunk by 6.8 per cent (see Figure 1).
However, in contrast to 2015 the budget for 2016 is based on much more shaky ground. The state finances for 2016 assumed an average oil price of $50 a barrel and a small budget deficit. But turbulence in the oil market in January, when the price of oil dropped to $30 per barrel, has put hopes for such a scenario to rest. The government has announced that it will introduce deep spending cuts and tax increases.
All this adds up to trouble and a declining economy. Belarusian families will face a fundamental degradation in their quality of life. The process has just begun.
Last year real wages in dollar equivalent fell by more than 12 per cent. Additionally, on 1 January 2016 the government increased tariffs for heating and hot water by one third, and plan to cut back subsidies to increase the consumer payment level for utilities to 80 per cent.
So, the first phase of Belarus’s crisis in 2015 has revealed all its consequences for enterprises. But for ordinary Belarusians, phase two is only just starting, and looks to be much worse.
State debt: the warning signs of trouble
In previous years the bullish case for Belarus depended on the belief that the state machine could always combat a slowdown by repeating its well-known trick – printing roubles. As a result, with higher spending from people and increased industrial production, economic growth engaged its second gear.
But today’s situation differs. Without extra money from oil and new contracts with Russia, such a policy will increase prices and decrease the ruble exchange rate, further reducing income for Belarusian families. Add here increasing debts and drawing down of national reserves, mix the ingredients and you will get a toxic combination (see Figure 2).
The warning signs are there that despite a more flexible exchange rate, reserves are steadily evaporating. The only way to replenish them remains external borrowing. Thanks to the gods, Russia has decided to spare its neighbour and has announced that it will dispense a $2bn loan to Belarus in the near future.
Additionally, the weakening currency and the National Bank of Belarus’s (NBB) new policy for deposits are prompting savers to scrape up their money from the banks. According to the NBB, in the last seven months ruble deposits have declined by almost 30 per cent. The problem lies in people’s expectation of a further devaluation, creating a self-fulfilling reduction in savers' confidence.
However, the biggest trouble concerns state debt. Since the beginning of 2015 it has increased by 66.4 per cent and is approaching the threshold value for economic security. It has reached 22.7 per cent of GDP with a threshold value of 25 per cent.
Further, excessive government borrowing that is used to finance a sharply increasing budget deficit has caused a crowding-out effect in the economy. When the state becomes a borrower it pushes out competition from the private sector, leaving only crumbs on the investment market and thus decreasing the market's efficiency.
It is easy to say, but Belarus should have cleaned up its financial system and freed its exchange rate several years ago. Now the economy has slowed, debt has piled up and the dollar earnings from oil refining have been drained, leaving almost no painless way out.
Economic reforms: resting in peace
So far Belarus's rescuers have focused too much on raising taxes and cutting spending, and too little on reforming the state and freeing up the economy. The economic downturn has seen wages fall considerably, and the country remains chronically uncompetitive.
It will be essential to broaden and deepen Belarus’s economy before its biggest advantage, a cheap workforce, is spent. However, the government proposed to begin with budgetary reform and anti-crisis plan.
Next, the Ministry of Foreign Affairs declared its program for export development. State-owned enterprises are apparently uncertain of how to diversify the supply of products.
Meanwhile, on 18 February 2016 the Minister of Economy of Belarus Uladzimir Zinouski made the most significant proposal yet. He suggested carrying out government optimisation by reducing the number of ministries, thus increasing the efficiency of decision making.
However, experts have pointed out that on the whole these measures hardly count as game-changing reforms.
According to Belarusian economist Sergei Chaly, the authorities still have an ongoing dispute about the key problem in the economy: some senior officials propose to reform the public sector by privatising state-owned enterprises, while others argue that the biggest problem concerns the monetary policy that led to the high cost of loans and inefficiency of state companies.
If Belarus’s authorities still show exceptional resistance to implementing real reforms, decreasing reserves, increasing state debt and evaporating savings are transforming into an incurable disease for a slowing-down economy.
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)