The Plan to Save the Economy: October Digest of Belarusian Economy
On the 10 October 2013 the government and the National Bank of Belarus issued a plan for structural reforms of the Belarusian economy aimed to increase its competitiveness.
Faced with major threats to its macroeconomic stability and the unfortunate timing of the potash conflict, the Belarusian government came up with a plan of structural reforms. The plan should reinvigorate the economy and improve expectations for the country's economic agents.
The current facts, however, give little reason for optimism in the short run. GDP is stagnating, currency reserves are melting away, the ruble is devaluating, and there is no money to pay off debts. The government has to cut back on social support, and it is important that it creates a new, efficient safety net for those in need.
The plan for structural reforms
The recently released plan for structural reforms of the Belarusian economy contains many ambitious goals and reforms, some of them more detailed and others only simple declarations of intent.
The main directions of the plan are the contraction of direct lending programmes, budget reform, tax reform, privatisation, a shift in its direct social supports and the further liberalisation of the economy. In other words, the plan addresses most of the structural problems Belarus has accumulated over the years.
Moreover, the solutions offered look surprisingly in line with the usual recommendations of international organisations like the World Bank or IMF. The plan also contains a lot of unpopular but necessary measures like cuts in utilities subsidies and in other socially oriented subsidies.
The government should carry out some of the points of the plan till the end of 2013. The major reforms are scheduled for 2014. Some experts have already expressed doubts about the government’s commitment to the plan. Indeed, the 2011 loan from EURASEC Anti-Crisis Fund came with similar conditions (the contraction of direct lending programmes, privatisation, liberalisation of the economy etc.), and Belarus did not meet them. Now the government is signaling its commitment more persuasively.
For example, on 22 October 2013 the Ministry of Economy revised its estimate of GDP growth for 2014 down from 5.7 to 2.4 per cent. On the other hand, this estimate is still more optimistic than the 1.5 per cent estimate of the World Bank.
The exchange rate and international balance
The creeping depreciation of the Belarusian ruble continued in October. Despite the continued efforts of the National Bank to regulate the demand for currency by restricting ruble liquidity on the inter-bank market, devaluation pressure itself has not disappeared. There are three main forces that affect the exchange rate negatively: the need to repay IMF loans, a negative trade balance and the unfortunate timing of the potash conflict. These forces will continue to put pressure on the exchange rate in the coming months.
Meanwhile, the international reserves at the National Bank of Belarus have declined significantly: on 1 October 2013 only $7,387.7m remained in the reserves when calculated using the IMF's methodology (compare it to the $7,701.4m on 1 September 2013). We expect reserves to contract once again in October due to several payments to the IMF.
The current situation on the currency market demands external sources of financing. Luckily, Sberbank agreed to refinance the $1bn loan issued to Belaruskali at the end of 2011. Out of this loan $800m went directly into the international reserves of the National Bank. Belaruskali had to repay the loan this year, and the new refinancing deal with Sberbank relieved part of the pressure on the country's reserves. But it is not enough.
Many experts believe that the government and the National bank designed the Plan of structural reforms mainly to persuade international lending organisations (IMF and EURASEC Anti-Crisis Fund in particular) to open new credit lines for Belarus.
The budget and changes in social policies
The 2013 is a year of frugality for Belarus, and not only because it is the country’s motto of the year. The budget revenues this year are lower than expected. The income tax revenues are especially low: in January-August 2013 the tax administration collected only 52.7 per cent of what it had in its annual plan. The low tax revenues are not surprising: the majority of the large taxpayers are not making any profits due to the burdens of high wages being paid out and low external demand.
The government realises that the budget deficit is not temporary. Budget cuts are now being carried out everywhere. In particular, the number of government employees is decreasing, and the government has cut back on many price subsidies. The tax administration is on the lookout for new sources of revenue. The plan for structural reforms includes the possibility of introducing a unified property tax that will be an effective redistribution tool.
The talks about the $100 exit fee are now in the past, but the government is still considering a tax on unemployed. Of course, this tax is not targeting the unemployed in the usual meaning of the word; the intent is to tax those who work abroad but come to live and receive education, health care and pensions in Belarus. Technically this tax is very difficult to implement, and this is arguably the only reason why it has not yet been introduced.
To sweeten the pill of budget cuts and lower social support, Lukashenka announced a big new social program for fertility support – the Big Family project. The main idea of the project is to give $10,000 for the first child, $20,000 for the second and so on. Projects like this are very popular, and may help some families overcome financial difficulties. However, very little evidence suggests that monetary stimulus can boost fertility on a macroeconomic level. Evidence of the effects from similar programmes in Russia and Ukraine also remains inconclusive.
The plan for structural reforms stipulates in general designs a transition to direct forms of social support: a shift from subsidising prices for everybody to direct income transfers for those in need. It is hoped that plan is followed through, as this reform is necessary, especially given the current level of unemployment benefits - which today stands at less than $15 per month in Minsk.
Kateryna Bornukova, BEROC
This article is a part of joint project between Belarus Digest and Belarusian Economic Research and Outreach Center (BEROC)