Belarusian Economy A Month Before the Elections – Digest of the Belarusian Economy
In the last month before the Presidential elections, the Belarusian economy continues to disappoint. Although decline in GDP has slowed, the -3.5 per cent growth has failed to impress. The Belarusian rouble continues to depreciate as oil prices plunge.
The authorities have promised further liberalisation of the economy in the near future. For now the authorities are tightening the rules and raising taxes. But a relatively low inflation rates gives hope to the possibility of macroeconomic stabilization and future cooperation with the IMF.
Recession slows down
After a dramatic fall in July Belarusian GDP “recovered” in August where it slowed to a decline of -3.5 per cent. The decline of agriculture decreased to only -1.4 per cent in August, which helped to revive GDP. The rest of the economic sectors, however, have not shown any positive signs.
The only sector with a positive rate of growth is still the retail trade, but the future of this sector is murky, as real incomes continue to plunge, and the average wage in August was only $427.
The improvement in the financial state of enterprises represents a significant piece of good news. Outstanding debts to foreign companies declined in July for the first time in 2015. The same is true for received external loans. But this improvement in the accounts may stem from the devaluation of the Russian rouble only, and so not reflect any real improvements.
In September Alexander Lukashenka once again demanded that the level of foreign firm debt be decreased. Usually these debts arise when our exporters deliver the goods with deferred payments, underlining the importance of this problem for many state enterprises.
Liberalisation tomorrow, higher taxes and stricter importing rules today
At the end of September, the government pre-announced once again the new changes to Directive No.4 liberalising regulations for private entrepreneurship. The promises includes equal opportunities for all types of enterprise ownership; stricter legal rules for the cessation of property rights; and a three-year moratorium on the negative changes to tax legislation.
But before the moratorium, the authorities have decided to have one last increase in taxes. Given the difficulties in tax collection, the tax authorities are looking to close all tax loopholes. The proposed changes to the Tax code increase personal income tax from the standard 13 to 16 per cent for those that can legally be caught evading taxes. There is also the introduction of a new tax on gambling winnings and a substantial increase in taxes on artisans.
At the same time the government introduced stricter importing rules. According to the hellishly numbered Resolution No. 666, almost all imported consumer goods have to go through the sanitary controls. This is true for each entire batch and not for only one specimen. As often happens with legislation in Belarus, the Resolution did not clearly define the rules and is still subject to change. But it will clearly have negative effects on importers and will raise the price of imported goods.
The National Bank keeps inflation low
In August-September 2015 the Belarusian rouble suffered another blow, depreciating from 15,248 roubles per dollar on the 1st of August to 17,691 on September 30. The decline in the oil prices caused the depreciation of the Russian rouble, which eventually passed through to the Belarusian rouble. No wonder that the National bank struggles to revive the trust in the rouble.
However, despite another round of depreciation, inflation remains in single digits. In August 2015 prices increased 7.8 per cent compared to December 2014. This figure represents a big win for the National Bank. In the previous years half of the currency depreciation transferred into price growth.
Given the multiple currency depreciation episodes in 2015, we could expect inflation of at least 25%. But the new policies of the National bank managed to destroy the link between depreciation and inflation. The inflation rates in 2015 are so far lower than in 2014, when the exchange rate was stable (see Figure 1).
Figure 1. Inflation in 2014 and 2015, relative to December of previous year
Of course, relatively low inflation comes at a price. The “expensive money” policy and high interest rates put enormous pressure on the economy, making investments very costly.
Recently the vice chairman of the National Bank Taras Nadolny confirmed that the National Bank is not going to decrease the refinancing rate this year. On the one hand this decision makes the inflation forecast of 16 per cent by the end of the year realistic. On the other, the real rate of interest in this situation would be too high to make any kind of investment affordable.
IMF negotiations: will Belarus finally agree to reforms?
The first steps towards macroeconomic stabilisation in Belarus inspire hope for the future cooperation with IMF. On 26 September 2015 the head of IMF Christine Lagarde met with Alexander Lukashenka, presumably to discuss the possibility of a new $3.5bn loan.
Of course, the IMF loan will come with strings attached. Belarus will have to finally reform its economy. The main steps are macroeconomic stabilisation (through the decline in direct lending and money printing), the cancellation of universal utility subsidies and the introduction of proper unemployment insurance and other forms of social support for the labour market.
If the Belarusian government and IMF agree on the terms, after the election the economy will go through some painful reforms, which are, however, necessary for future development.
Kateryna Bornukova, 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)
Belarus Finally Reforms Its Economy?
On 26 September in New York, Alexander Lukashenka met with IMF chief Christine Lagarde. They discussed prospects for an IMF-supported programme.
According to the IMF statement “Lagarde welcomed some recent progress in strengthening the policy framework in Belarus, but emphasised that a more comprehensive reorientation of policies, consistently supported at the highest level, is needed to restore stability and sustainable growth”.
In fact, in the current presidential campaign Lukashenka is distancing himself from populism. Moreover, since the beginning of 2015 the Minsk's authorities have consciously conducted a conservative economic policy and slowly introduced structural reforms, despite the recession.
On 27 December 2014 Lukashenka appointed a new government and central bank chief. These new appointments consisted of several moderate reformers with rather liberal views. In contrast to Russia, the Belarusian president took advantage of the current difficult economic situation to change government and economic policy.
Russia’s recession and low energy prices, limit Belarusian exports, as well as energy subsidies from imports of cheap Russian natural resources. Without them the quasi-socialist Belarusian economy does not generate growth. Adverse external conditions will hardly improve in the coming years, and that is why Minsk has no alternatives but to carry out structural reforms.
Conservative monetary policy
The new Belarusian policymakers have been successfully fighting inflation. The National Bank of Belarus (NBB) immediately tightened monetary policy and introduced monetary targeting to curb inflation. The real interest rate, which explains how much the nominal interest rate exceeds annual inflation, is already over 13%. For comparison, in Poland it is currently at around 2 percent. This completely suffices to eliminate any price growth.
The inflation’s slowdown is clear on a monthly basis. In July and August, prices increased by 0.2% per month. Extrapolating such a pace of inflation for the whole year, the annual inflation rate will amount to only 2.5%.
In addition, the NBB successfully liberalised the exchange rate regime. As a result, transparent market conditions have formed the current currency rate, while the regulator has virtually withdrawn from intervening in the market. Finally, the exchange rate has served as an automatic stabiliser for internal and external shocks.
The strong depreciation of the national currency has balanced the country's current account. Since the beginning of 2015 the dollar exchange rate in Belarusian roubles has increased by 50%. As a result, in the second quarter of 2015 the NBB recorded a current account surplus of 4.3% of quarterly GDP, which is highest since the first quarter of 2005. By contrast in the fourth quarter of 2014 the deficit was 9.5% of GDP. The new currency policy automatically avoids high current account deficits which led in 2011 to the worst currency crisis in Belarus in the past 20 years.
Conservative fiscal policy
The current presidential campaign is the first during which the authorities have pursued a conservative fiscal policy. In January-August 2015 the public sector surplus debt amounted to $1 bn (2.7% of GDP) which facilitated servicing the public debt.
The government maintains a simple principle: wage growth should not exceed labour productivity growth. In January-August 2015 real salaries fell by over 3% or 0.5 p.p. more than productivity. Thus, unit labour costs declined and became an anti-inflationary factor.
Since 2012 Minsk has managed to control its growing foreign debt. In relation to GDP external debt fell from 58% at the end of 2011 to 55% on 1 July 2015. Last year debt decreased also in absolute terms, by around $3 bn. This is a fundamental change compared to 2007-2010 when the government stimulated economic growth by foreign loans.
Structural Reforms Implemented
Besides stabilising the economy, simultaneously the government conducts structural reforms, including restructuring state-owned industrial enterprises. Despite the elections, employment in the largest industrial factories decreased by around 10 percent.
For example, Minsk Automobile Plant “MAZ” and Minsk Tractor Works “MTZ”, the two biggest employers, employed over 2 thousand (10%) and 2.7 thousand (14%) people less in the first quarter of 2015 than a year before. Even the potash factory “Belaruskali”, the third largest employer and the most profitable company, fired 1.5 thousand (8%) of its employees. In fact, the authorities recommend or at least allow management boards to downsize industrial enterprises quicker than the whole economy.
Some state-owned companies plan to accelerate the privatisation of redundant assets. Currently, the State Property Committee offers more than one thousand properties for sale. Auctions for some of them are assigned for the coming weeks. However, despite the private sector’s demand for free commercial space, asset privatisation has not been carried out on a broad scale and is currently very slow.
The authorities occasionally decide to liquidate unprofitable industrial enterprises. For example, in August 2015 a court ordered the liquidation of a hosiery factory called “KIM”. Only two years ago the company, founded in 1931, employed more than 900 people.
Besides restructuring enterprises, the government has limited direct lending to the produce sector and planned to depart from future planning initatives. According to the independent news agency BelaPAN, the resolution’s draft, approving the prognostic parameters for 2016 departs from the compulsory nature of the forecasts and grants them only an indicative character. In other words, the state will not interfere with a firms’ production and financial processes in order to “accomplish” forecasts.
Moreover, Minsk has announced ambitious plans for further reforms. Earlier this year Belarus developed with the World Bank “a road map of structural reforms”. In accordance with this, Minsk has already adopted a plan of radical increases in tariffs for household servicing.
The new economic policy in Belarus has been gaining recognition from international organisations. The last IMF mission to Minsk in the first half of July praised the conducted economic policy and plans for structural reforms. The IMF assured the regime that if such a policy is continued, negotiations on granting a new IMF loan may be successfully finished by year-end.
To conclude, since the beginning of 2015 the new Belarusian economic policymakers have been conducting a conservative economic policy. As a result, the economy regains balance, after being hit by external shocks in the second half of 2014 and the first half of 2015. In these circumstances, Minsk has taken unpopular reforms, such as firms’ downsizing, the sale of idle assets, and the liquidation of some enterprises.
These reforms, in fact, are rudimentary and slow. Hence, they cannot bring immediate success. One hopes the reform will continue after the presidential campaign. Finally, Lukashenka reforms the economy not because he wants it, but rather because he has no choice. If external factors do not improve, perhaps at last the authorities will implement the changes that should have been implemented in the 1990s.