Are Belarusian Authorities Ready For Market Reforms?
On 3-4 November three biggest Belarusian economic think-tanks organised the Kastryčnicki Ekanamičny Forum (KEF) conference in Minsk. The third annual economic conference gathered a number of high-ranking Belarusian and foreign experts, and representatives of international institutions like the IMF and the World Bank.
During Lukašenka's rule there has never been as many talks about implementing structural reforms in Belarus as this year. In 2015 virtually all the policy-makers responsible for economic policy advocated economic reforms.
It seems the authorities have realised that reforms are unavoidable. However, they cannot agree on the actual range of reforms and the speed of their implementation.
Why Reforms Are Unavoidable?
The Belarusian economy faces a systemic crisis. The decomposition of economic growth shows that the potential for economic long-term growth has steadily fallen from around 9% annually in the mid-2000s to around 0% in 2015. The deterioration of the external environment, mainly low energy subsidies and the recession in Russia, has only exposed structural weaknesses. As a result, Belarus has been experiencing its first recession since 1996.
The IMF and the World Bank have forecast a further recession or stagnation in Belarus in 2016-2017. Facing unfavourable external factors, the economy can no longer generate sustainable growth. Even the ministry of economy expects the economy to grow by only 0.3% in 2016. Given that in the past several years the official forecasts exceeded actual growth by 5.1 percentage point per year, the future seems indeed miserable.
The negative prospects of the Belarusian economy have forced officials to recognise the need for deep economic restructuring. Already in April 2015 the President's economic advisor, Kiryl Rudy, wrote a paper in the Belarusian Economic Journal on “Structural economic reforms: necessity for the Republic of Belarus and international experience”. Rudy focused particularly on why the present structure of the Belarusian economy needs reform, and what are the lessons of transition in post-socialist countries.
Noticeable Change In Public Rhetoric…
Already at the end of 2014 many Belarusian officials started discussing the topic of economic reforms. On 26 November 2014 the deputy minister of finance Maksim Jermałovič announced that:
“We are actively discussing these issues with the International Monetary Fund and the World Bank, to develop a common vision, and possibly to organise a joint programme of structural reforms in Belarus.”
In April 2015 the government and the World Bank confirmed the readiness to work together on “the roadmap of structural reforms”. Since then Minsk has discussed the initial roadmap with the IMF and the Eurasian Development Bank (EDB) in order to obtain new financing.
In the meantime, many other influential policy-makers in Belarus have expressed their positive attitudes towards reforms. Among them were, the Prime-Minister Andrej Kabiakoŭ, the Chairman of the Council (the parliament) Michail Miasnikovič, the Deputy Minister of the Economy Dzmitry Krutoj. Since political will is the essential precondition for successful reforms, such a change in public statements has drawn attention.
Moreover, during the 2015 presidential campaign Lukašenka announced a relatively liberal economic programme. It included, for example, the de-monopolisation of the economy; the introduction of corporate governance in state-owned enterprises based on best international standards; the separation of the state’s role as an owner and a regulator; the exclusion of any forms of needless interference in business activities; and a moratorium on tax increases for five years.
Unlike the previous four economic election programmes, however, this time Lukashenka did not advocate populist slogans but focused on problems encountered by the real sector of the economy and he proposed the right solutions.
But Little Change In Structural Reforms
2015 becomes a ground-breaking year in terms of the economic policy conducted in Belarus. Despite the recession and the presidential elections, the authorities have carried out sound monetary and fiscal policy throughout the whole of 2015. For instance, regardless of a 30% devaluation of the Belarusian rouble at the end of 2014, inflation fell from 17.1% in January to 11.5% in October 2015. Additionally, the economy's foreign debt decreased by $2 billion during the first half of 2015.
Apart from economic stabilisation, so far the Belarusian authorities have introduced very few meaningful measures aimed to boost long-term economic growth. They lack agreement on the scope of the market transition. For some policy-makers (mainly the President and almost the whole government), the economy needs only some adjustments. But for others (mainly the National Bank of Belarus, the Ministry of Finance and the Ministry of Economics), only a profound transformation will let Belarus catch up with the advanced economies.
At the KEF the Deputy Head of the Presidential Administration Mikalaj Snapkoŭ mentioned two structural reforms crucial for a successful transition: the division of the state’s function as a regulator and as an owner, and the shift to indicative economic forecasting instead of compulsory forecasting. Although these are important issues, they miss the basics like the equal treatment of private and state-owned entities (SOE), SOE restructuring, further deregulation and privatization.
At the same conference Kiryl Rudy explained without optimism why Belarus may avoid the reforms in 2016. He revealed five barriers that prevent the regime from making structural reforms, including an absence of broad public support for reforms and the absence of a comprehensive vision among the political elite.
Cosmetic Changes Instead Of Real Reforms
At the KEF the first deputy minister of the economy Aliaksandr Zabaroŭski announced the six priorities of the roadmap. Half of them focused on supportive measures for reforms (like macroeconomic stability, the formation of effective financial markets and the development of the labour market). The second half sounded like true structural reforms (the state sector transition, development of the private sector and liberalisation of the markets for goods and services).
Nonetheless, with insufficient political will for reforms, their implementation may end up as merely cosmetic changes allowing for additional financing from the IMF or the EDB. However, creditors will monitor the progress of reforms before the payment of each tranche. Therefore, avoiding any reforms is out of the question.
Unfortunately, the long-awaited “roadmap of structural reforms” did not emphasise the most urgent and necessary reforms. Surprisingly, it took Minsk almost a year to make the roadmap public. It shows that the authorities are not ready for large-scale market reforms. But the slow and partial structural reforms appear inevitable.
Belarusian Government: Strong on the Opposition, Weak on the Shadow Economy
The Belarusian government plans to step up its campaign against the shadow economy. In January 2016, new amendments to the Tax Code will come into force which introduce harsher punishments against illicit business. Last month, President Alexander Lukashenka demanded that Valery Vakulchyk, the head of the KGB, suppress illegal economic activities.
Belarus' shadow economy has been an elephant in the room for many years. Restaurants do not document all of their employees wages. Shops sell goods without receipts. State organs have for a long time closed their eyes to this, apparently fearing that more law enforcement would cause political repercussions.
State of Denial
The government downplays the problem of the shadow economy. This spring, the Tax Ministry announced that the share of the shadow economy accounts for only about 11% of national GDP. Two years ago the same ministry told that it accounts for 8-10%.
Yet a mid-level National Bank official, Lyudmila Stefanovich speaking at a conference in Minsk in May stated that, “the share of shadow economy in Belarus is very big. According to research results, it is about 35% of GDP.”
Indeed, in spring 2015, the IPM Research Centre conducted a survey asking small and medium enterprises whether some of their activities existed in some areas of the shadow economic. 35% of respondents dared to admit that there were such elements.
Some experts believe that the share may be even higher. In 2010 the World Bank published a study on the shadow economy which assessed its share in Belarus in 2007 at 43.3% of the GDP. Among Belarus's neighbours only Ukraine fared worse with 46.8%. The situation in the national economy has failed to substantially change since 2010.
Promises Instead of Documents
Tax evasion in legally registered private businesses is commonplace. The author recently visited the city of Maladzechna near Minsk and was impressed that very few private businesses even in respectable looking large trade centres, such as Troyka and Modul bothered giving receipts for bought goods.
The vendors promised to accept returns if customers found deficiencies. They had no concerns about possible undercover tax officers, although they hardly pay taxes for the goods sold. On top of this they probably pay somebody in order to be allowed to work so.
Last year, state agencies resorted to a new form of control by assessing the whole income of a vendor by measuring his income over a short time and then appropriately multiplying it. Tax officials conducted 80 raids using this method, and found irregularities in 70% of business entities.
Another sphere of tax evasion involves accommodation rent by private landlords, as well as renting premises to be used for commercial and manufacturing purposes. Houses and flats are often rented in Belarus without registering a contract with the authorities. In May, the real estate web-site Pro-n.by estimated that every second flat (i.e., more than 46,000) is rented in Minsk illegally.
Even production lines (for instance tile production) and workshops visibly consuming electricity and water have for years functioned without proper registration. Last year, the tax authorities conducted around 2,600 raids on premises which were suspected to be rented illegally. Almost in all cases it turned out to be the case, as more than 2,500 persons were found to rent property without paying the necessary tax.
Illegal car repair workshops, which have many customers, work on unregistered premises without encountering problems with the police or tax authorities. For instance, in Maladzechna local authorities do not care much about such illegal workshops. Meanwhile, because of this unfair and illegal competition legally registered workshops who pay taxes and social insurance have to reduce personnel and then close down.
Officials of the Tax Ministry articulated the problem of car repair workshops in the early 2010s and promised to take measures. Little has changed since then, thousands of these workshops seem to continue work throughout the country and government agencies no longer speak of the problem anymore.
The government apparently avoids antagonising private entrepreneurs engaged in illegal practises. The chairman of State Control Committee, the key control agency, Leanid Anfimau in September announced that the number of raids conducted by the Committee since 2000 decreased tenfold, from 14,000 to 1,500 last year.
Certainly, dubious business practises in Belarus involve much more than hiding income. Violations of labour law stand out as another common practice. Even a fashionable restaurant in the prestigious Niamiha neighbourhood of Minsk belonging to a known Russian businessman pays half of the employees wages “in envelopes,” its personnel told Belarus Digest. Therefore it avoids paying more taxes and social insurance for them, effectively cutting their future pensions.
It is easy to spot these violations as a minor cook gets officially just $250 per month. Without additional payment he would be unable to work. Yet no state agency has an interest in the situation because a raid on this business will bring the state agencies up against an owner who is well connected with the Belarusian regime.
And you do not need to be so influential to be able to break the law without punishment. Even low-level administrators of discount chains have no fear to say those willing to work as merchandisers that if employed they will be prohibited, for instance, to take any sickness leave for the child. This violates Belarusian law, yet the practise has functioned for years without causing the interest of state agencies.
The Belarusian Government: Strong Yet Weak
The Belarusian state faces a paradoxical situation. On the one hand, it controls the political life of the country, including election results. On the other hand, it fails to suppress the shadow economy. The size of the latter remains relatively stable. Moreover, the government displays little willingness to challenge the illegal economy.
For a good reason. It could not do anything about it. Analysing the problems encountered by new independent countries Samuel Huntington once wrote, “there is a failure to recognise that most countries are suffering from an absence of power in their political systems.”
The behaviour of the Belarusian government illustrates the point. State authorities fear the consequences if they touch illegal deals. So far, the Belarusian private sector has refused to finance the political opposition to the Belarusian leadership. The state effectively buys political silence by tolerating not just informal economic schemes but also outright illegal businesses.
The Belarusian state remains narrowly focused on political control. It achieved sophistication in preventing social and political unrest or doctoring election results. Yet its taxation organs let a large shadow economy thrive which seriously undermines honest competition, labour law, taxation and pension systems.