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Surviving year two of recession – digest of the Belarusian economy

On 3 January 2017, The Eurasian Development Bank​ announced that Belarus is the only economy among CIS countries with a forecasted GDP decline in 2017.

Meantime, the biggest problem of 2016 remains unresolved – on 28 January 2017, the Deputy...

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On 3 January 2017, The Eurasian Development Bank​ announced that Belarus is the only economy among CIS countries with a forecasted GDP decline in 2017.

Meantime, the biggest problem of 2016 remains unresolved – on 28 January 2017, the Deputy Prime Minister of Russia Arkady Dvorkovich once again raised the bill for Belarus's supposed oil-gas debt.

In this light, the authorities are trying to find a path to new external markets by intensifying negotiations on WTO accession.

Economic growth: an uncertain future

According to official forecasts for 2016, recovery should be on the way. Instead, the economy has remained unhealthy: the GDP contracted by 2.6 per cent in 2016 and will continue down this path in 2017, according to the Eurasian Development Bank. Industrial production fell by 0.4 per cent, year on year; investment in fixed capital collapsed by 17.9 per cent (see Figure 1).

Thus, economic output has decreased for the second straight year and the pain will almost certainly extend into 2017. This is primarily because Russia (as the main export market) will not make a strong recovery. Moreover, Belarus still struggles with weak internal demand and poor productivity growth.

Belarus's industrial sector, weighted down by debt, will still generate losses in 2017. As a result, the National Bank (NBB), searching for more ways to jump start the languishing economy, will lower the interest rate even further.

However, the banking sector, struggling with the NBB's intention to decrease credit rates, will stay in the 'red zone' due to a possible repayment crisis of bad loans generated by indebted 'giants' and excessive directed lending in previous years. As a result, the subsequent drop in investment spending will cause an additional downturn in the economy.

Given such uncertainty, businesspeople will also think twice before expanding their operations. What's more, by the end of 2016 the number of entrepreneurs in Belarus had decreased by 3.1 per cent.

The Chairman of the NGO Perspective, Anatoly Shumchanka, reckons that the reduction in their numbers reflects the generally bad business environment, a good business environment is needed to start businesses and work without excessive administrative and fiscal obstacles. The lack of incentives for development means the absence of a safe path to carry out the activity.

Consumption: the dark side of the new year

Due to the economic problems of companies, the real income of households contracted by 7.5 per cent year on year in 2016, suggesting that people will spend less on basic goods in 2017 as well.

However, the worst-case scenario will occur if the government decides to increase directive average wages. According to the new Head of the Presidential Administration, Natalia Kochanova, the task of increasing the average wages up to the equivalent of $500 still remains unquestionable.

The authorities believe that Belarusian consumers will increase their purchases in stores and the decrease in spending which occurred in 2016 will not happen again.

However, the implementation of such a stimulus plan would once again lead to a sharp depreciation of the Belarusian ruble and subsequently, a significant decline in real incomes of people at risk.

First, because the expectations of Belarusian consumers strongly correlate with the assumption that directive wage increase will lead to a devaluation of the Belarusian ruble. Thus, they will not spend their new money on products and services, but will put additional US dollars in their pockets, thus reinforcing the power of dollarisation in the country.

Second, increasing costs of utilities will keep consumption at its lowest level for nearly a decade. Finally, the government and enterprises have no extra money to pay the bills for higher wages. Therefore, the only way to increase wages without increased productivity is the power button on the printing machine at the mind, resulting in 'great devaluation' again.

Trade policy: diversifying the strategy

The government forecasts positive economic growth in 2017 based on increased agricultural exports and a long-awaited end to the wrenching recession in Russia, Belarus’s biggest trading partner.

However, neither seems assured. Russia’s strong recovery is still under question, and trade may suffer as Russia continues to discriminate against Belarusian goods in order to protect its market and gain the upper hand in the still unresolved oil-gas dispute.

According to forecasts made by analysts of the Belarusian Institute for strategic studies (BISS), prospects for Russian-Belarusian oil and gas cooperation in 2017 look 'pretty grim'. They suggest that the conditions for the supply of oil and gas will continue to deteriorate even further.

On 28 January 2017 the Deputy Prime Minister of Russia Arkady Dvorkovich announced that the Belarusian debt for gas has already reached $550mln.

Moreover, the limited influence of the economic indicators in the Eurozone, USA, and China on Belarusian economy constrains possibilities of trade and economic cooperation with other countries.

In this context, in January Belarusian authorities decided to accelerate the process of accession to the WTO.

Chairman of the Belarusian Chamber of Commerce and Industry Vladimir Ulakhovich suggests that Belarus could join the WTO before the end of this year, as the serious barriers to this have already been removed.

Belarus filed an accession application to the WTO 1993. However, due to the unwillingness of the authorities to significantly liberalise and privatise the economy, the country was not able to become a member of this club. On 29 March 2016, Alexander Lukashenko held a meeting regarding the country's engagement with the WTO and requested that the negotiating process be intensified.

Thus, macroeconomic stability at the end of the 2016 is shaky. Risks for the economy lie both outside Belarus’s borders and within them. Therefore, although the government still wants to increase the tempo of reforms, including trade policy; the foreign investors – the only easy path for recovery left – will be maintaining a distance once again.

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)

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