Creeping Signs of the Approaching Crisis – Belarus Economy Digest
The first half of the year has shown clear evidence that the Belarusian economy needs better incentives to revive its industrial strengths.
In July the authorities announced their plans to provide financial assistance to several "giants" of industry. However, this decision has cast doubts over whether or not other taxpayers will ask the same from the state.
Also, this month the government carried on negotiations with the IMF and Eurasian Fund for Stabilisation and Development and are seeking to attract additional potential sources of loans. After their preliminary meetings all parties have decided to continue consultations showing striking unity on the necessity of economic reforms.
Economic Data: Spinning Down
Belarus’ GDP fell 3.3 per cent in first half of the year, which raises questions about the government’s official forecast growth rate of 0.7 per cent and fears that the country’s efforts to bring a halt to the nation's current economic turmoil by the end of August may not be enough.
The hardest hit were mostly exporters to the Russian market Read more
Belstat, the official state statistical body, released on 6 July its report on loss-making enterprises in Belarus for January-May 2015. Net losses for these enterprises hit around $0.8bn and more than doubled in comparison with the same period from last year. The hardest hit were mostly exporters to the Russian market, where shrinking demand was compounded by the further decline of the Russian ruble.
Yet in June, in comparison to May, industrial production rose by 3.8 per cent. Manufacturing seems to be in better shape, while the industrial activity of Russia continues to shrink by 4.8 per cent. If Russia’s economy does not start seeing a recovery in the near future, things will get nastier for its strategic partner as well.
The problem of wage arrears presents a particular concern. According to Belstat, by the beginning of July 555 enterprises (mostly from the agriculture, hunting and forestry sectors) not paid 95,200 of their employees. The overall amount of overdue debt has increased from May by a considerable 37 per cent.
The numbers indicate that economic reforms are taking much too long. But where to begin? So far the government has failed to show a proactive approach to improve the situation.
State Support: Saving the "Giants"
Belarus’ economy needs new ways to kick-start economic growth. However for the moment the government is relying mostly on increasing public borrowing. On 1 July, the President signed several decrees in order to support and stabilise the financial and economic situation at MTZ and Gomselmash (see figure 1) – two manufacturing "giants" dragged down by low sales.
Given this grim picture, Belarus has clearly decided to bear the burden. The Ministry of Finance provides the main chunk of state financial assistance by issuing $425.8m in foreign currency bonds. This currency injection is supposed to act like a shot of adrenalin for Gomselmash – a leading manufacturer of combine harvesters and agricultural machines.
The MTZ, producer of a wide-range of tractors, is the second party to receive the states help, it will receive currency bonds worth around $150m underwritten by the company’s assets. Operations with these bonds are exempt from taxes, which in reality is a tax credit for those who will buy the bonds.
This mechanism, supposedly, aims to hide the prohibition of direct financing of the economy using the printing of the domestic currency in order to restructure the bad debts of the loss-making industrial "giants". Apparently, in terms of the current regime of monetary targeting a broad money supply, this will lead to its expansion, which strictly contradicts the IMF rules.
In light of this, the only way to get around the IMF’s tough stance on this issue is the gradual closing of the pipeline of state support for all of the other collapsing manufacturers, meaning the remaining "giants" will be slowly edging their way towards extinction. However, in order to avoid the worst scenario imaginable from unfolding, the government may decide to utilise a policy by which it would create artificial demand for "machines" by distributing them to other companies in the country and paying for them out of the national budget.
In any case, all of this unavoidably leads to more money printing, and, thus, creates the necessary conditions to jump start the next round of the familiar inflation-devaluation cycle.
New Credit Negotiations: the Long Way to Make a Deal
The IMF turned down Belarus’ preliminary agenda of economic reform. The snail's pace progress on freeing up the economy and implementing reforms has cast doubts on a new credit line of $3.5bn from IMF. The IMF calls for something more radical than just "formation of a legal framework" meaning the actual liberalisation of prices, a reduction in subsidies, the cancellation of mandatory plans for enterprises, and really carrying out privatisation.
In July Belarus tried to sell new promises of structural reforms to the Eurasian Fund for Stabilisation and Development Read more
A deal with the IMF would help the country to pay for its imports and to refinance its previous debts. From the beginning of the year, Belarus’ foreign-exchange reserves have shrank by 9 per cent from $5,059m to $4,620m, less than what is needed to pay for one month and a half of imports. Without a deal debt payments during the year will eat up more than half of the country's international reserves and leave it with less than one month’s worth of imports.
In July Belarus also tried to reduce the tempo of their declining reserves by selling new promises of structural reforms to the Eurasian Fund for Stabilisation and Development, but they were also largely unsuccessful. However, the real obstacles of negotiating with the Fund have always been the political constraints implicit in working with it, particularly when it is taken into account that Russia holds the largest share of power in it.
Nevertheless, in order to not sink the economy of its strategic partner, the Russian authorities approved a loan of $760m for the repayment and servicing of Belarus’ debts to Russia and the Eurasian Fund for Stabilisation and Development.
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)
Will Belarus Ever Become a WTO Member?
Two weeks ago, Belarusian Deputy Foreign Minister Aliaksandr Hurjanau declared Belarus was planning to finish all of the necessary technical work for the country’s accession to the World Trade Organisation (WTO) in one year's time. However, exactly three years ago he also projected that Belarus would join the WTO by the end of 2013. Is this time going to be any different?
The history of Belarus applying to join the WTO is a story of unfulfilled promises to liberalise and privatise the economy. Instead of firmly declaring its aspirations to join the WTO by establishing its strong political commitment that could motivate it to introduce reforms, the Belarusian authorities have preferred to imitate engagement.
Belarus remains one of the very few countries in the world that does not belong to the WTO. To name but two issues, the overwhelming role of the state in the economy and its extensive agricultural subsidies are the clearest obstacles for Belarus' accession to the WTO.
Everyone but Belarus
The WTO's mission is to negotiate global rules for export-import relationships, developing multilateral trade agreements and reducing trade barriers. To date, 161 countries, which account for over 98 per cent of global GDP, have joined the WTO. Another 23 countries, including Belarus, are in the process of negotiating their accession, and only 14 states have shown no interest in joining. No country has ever left the WTO.
Russia's accession to the WTO in 2012 automatically forced other members of the Customs Union of Belarus, Kazakhstan, and Russia to comply with trade liberalisation policies in accordance with Russia’s obligations to the WTO.
Therefore, since 2012 Belarus has experienced the negative impact of Russia’s membership in the WTO with no direct benefits to its own economy. Goods made in Belarus neither have easier access to foreign markets, nor does Belarus have the right to use the WTO’s protection regulations for litigation purposes. Yet, Russia’s accession to the WTO has raised the level of competition within the Customs Union and squeezed out a number Belarusian manufacturers from the market.
Unfulfilled Promises of Successive Governments
Belarus started negotiations on entering the WTO in 1993. After 22 years its WTO membership remains a distant prospect, though other countries in the world have a track record of between 3 years (Kyrgyzstan) to 19 years (Russia) in their attempts to join the organisation.
In 2014 the Russian government decreed it would spend $0.6m on initiatives supporting Belarus’ accession to the WTO Read more
In over 20 years Belarus participated in numerous events to bring the national economy closer to the global organisation. The Working Party on the Accession of Belarus to the WTO, which is comprised of 41 countries, assesses the progress of Belarus in bringing national legislation into compliance with WTO agreements. To date, the Working Party has already held 7 formal meetings in 1997-2005 and five rounds of informal consultations between 2006-2013.
In 2008-2013 the UN Conference on Trade and Development (UNCTAD) and the United Nations Development Programme (UNDP) Country Office in Belarus conducted a technical assistance project in support of reforms. The project consisted of many analytical studies, expert study tours, technical know-how exchange, seminars, and round tables. Two independent think tanks, Warsaw-based CASE and Minsk-based IPM, implemented another minor project in 2013. Last but not least, in December 2014 the Russian government decreed it would spend $0.6m on initiatives supporting Belarus’ accession to the WTO.
Minsk, however, has only been putting on a facade of deep concern about its quick accession to the WTO. Belarus’ application process is abound with numerous declarations by the Belarusian authorities to accelerate the process. In 2005, 2010 and 2012 Minsk claimed that it would successfully wrap up negotiations in a year. Meanwhile, all of its neighbours and all of the current members of the Eurasian Economic Union have already joined the WTO (see the table below).
Stumbling Blocks for Belarus's Accession to the WTO
With an economy where state-owned enterprises produce about 70 per cent of GDP according to the European Bank for Reconstruction and Development (many of which are subsidised), Belarus does not have the slightest chance of joining the WTO.
WTO membership requires that candidate-country commits to liberalise their economy and reduce the role of the state. The WTO has never admitted a country with such a quasi-socialist economy. For instance, the private sector in all 22 (out of 29) post-socialist countries in Central and Eastern Europe and in Central Asia that have successfully joined the WTO accounted for 50 to 75 per cent of GDP at the moment of accession. The private sector's minor role in Belarus's GDP clearly reflects the scope of its lack of transition towards a market economy.
The agricultural sector would immediately go bankrupt without the support of state subsidies Read more
State support for the agricultural sector remains a particularly sensitive area of negotiations for Belarus’ potential accession to the WTO. Although its role in the economy has been diminishing over the last 25 years – from 23 per cent GDP in 1990 to 7 per cent in 2013, it still accounts for a rather significant part of the economy, employing 9.5 per cent of the total workforce according to the official government statistics.
The agricultural sector is comprised mainly of state-owned collective farms which would immediately go bankrupt without the support of state subsidies. Only 10 per cent of agricultural firms could operate profitably without this support according to a study published in December 2013 by the Economic Research Institute of the Ministry of Economy. If Belarus were to join the WTO, it would have to cut significantly its financial support to this sector. Without the prior liberalisation and privatisation of the agricultural sector, this would likely signal its collapse.
Yet, Belarus’s membership in the Eurasian Economic Union does not interfere with its aspiration of joining the WTO. On the contrary, since the customs policy in the Eurasian Economic Union is the same for Belarus and all other member-countries that have already joined the WTO, it means that Belarus is generally ready to instate a WTO-compliant customs policy. In other words, Belarus and the WTO could rather easily find some compromise in negotiations on tariff and non-tariff regulations of market access for goods and services.
Keeping The Quasi-Socialist Economy Alive
Though international competition defines growth in the long run, for an unreformed economy it poses a significant threat. The Belarusian authorities are aware of all of this, but remain reluctant to transform the economy. This is precisely why they continue to stall on implementing their promises towards quickly gaining membership in the WTO.
Without deep structural reforms, Belarus neither has a chance of join the WTO nor will it receive the benefits from accession. For the sake of its own national interests Belarus should at first advance its economic transition towards a market economy, including small and large scale privatisation, and at a later point focus on further foreign trade liberalisation, including its accession to the WTO.