External Environment Poses New Risks for the Belarusian Economy
Economic performance during first two months of 2014 has been rather disappointing. First, almost all industries reduced their output which led to a decline in GDP by 1.6% year-on-year in January-February.
Second, Belarus has faced new challenges on foreign markets, which are a consequence of capital outflows and weakening growth in Russia.
These economic shocks will deteriorate short-term prospects for Belarus, although the scope and scale of the negative impact is still not clear. Nevertheless, the government will have to react to the new environment it finds itself in, as the volume of accumulated imbalances is too high to be ignored.
GDP Growth: Controversial Trends
Belstat reports that in January-February GDP fell by 1.6% year-on-year. The drop in output occurred in all major industries of the economy: manufacturing, agriculture, construction. The trade sector has become the only significant exception to this trend: it witnessed 7.8% year-on-year growth thanks, in large part, to retail trade (the value added of wholesale trade was roughly constant).
A number of controversial trends were seen developing in the Belarusian economy. For instance, it can be argued that the economic downturn has become more systematic, as some large sectors (e.g. construction, agriculture) have also become members of the long-term recession club in manufacturing.
At the same time a majority of branches in manufacturing (e.g.food, chemicals, woodworking) have begun to exhibit the signs of recovery. These manufacturers have already hit rock bottom in terms of their output and are now reemerging.
Nevertheless, the latter trend does not capture a number of the largest branches of manufacturing in Belarus including the production of transportation vehicles, electric equipment, and metallurgy. Overall, from a production point-of-view, the economic environment appears to be unstable and exudes a very low level of confidence.
When looking at demand, the only component that seems to be doing well is households consumption. It continues to provide a regular, positive contribution to GDP. For example, consider the fact that retail turnover, which is closely tied to households consumption, grew by 12.9% year-on-year In January-February.
However, this tendency seems to be more an issue of inertia than progress and can be attributed to a substantial hike in wages the previous year. Nowadays, the growth of wages has all but come to an end (see Figure 1), which is likely to diminish consumption in near future.
Capital investments, on the one hand, exhibited a huge drop of roughly 20% year-on-year in January-February. On the other hand, it does not necessarily imply a further recession in investment demand, as poor performance in January-February reflected high interest rates, though the authorities intend to bolster lower rates soon, and some statistical effects.
As for foreign demand, preliminary data appears to provide an argument for it being in a state of stagnation. Hence, demand tends to be rather sluggish and there are not any options apparent to provide its rapid improvement.
Macroeconomic Policy: Less Effectiveness and More Uncertainty
Macroeconomic policy during the beginning of 2014 was, to put it crudely, roughly neutral. For its part, the government intended to stimulate demand given its poor state at present. With this in mind, the authorities proceeded to somehow reduce policy interest rates and allowed for a minimal level of depreciation of the national currency.
Still, the government is concerned with the dangers of future financial turmoil, especially given its huge external imbalances and the fragility of the state's current financial equilibrium. The National Bank has subsequently decided to restrict banking activity, while the government abandoned its policy of wage stimulation.
Overall, stagnation with a high degree of uncertainty would be a good way to characterise the current domestic macro-economic situation. Weaknesses on many different fronts created this situation, and these weaknesses interact with each other, which influences the overall state of the economy.
First, a lack of natural mechanisms for growth has become a structural constraint that reflects the absence of incentives and sources for productivity growth. Second, unfavourable and volatile expectations propagate uncertainty and result in poor demand. Third, economic policy has fallen into a trap: the low effectiveness of traditional tools, given unfavourable expectations, results in uncertainty about the priorities of any potential policy.
External Environment: New Sources of Instability
In the beginning of 2014, capital outflow from emerging markets all over the world strengthened. In the case of Russia, the relative volume of outflow exceeded the average value for emerging markets (in relative terms), as weaknesses in Belarus' growth potential became more evident.
Furthermore, Russian involvement in the political tensions in Ukraine might have led more investors to withdraw from being exposed to Russian markets.
In this situation Russia has faced a considerable depreciation of its currency against all other major world currencies, including the US dollar against which it depreciated 10.8% in January-February. Moreover, other large CIS countries (Ukraine and Kazakhstan) also decided to undergo a round of currency devaluation as well.
As a result, the competitive environment on the markets of these countries has changed considerably. Alongside the capacity of these markets were shrinking due to their deteriorating growth prospects.
A new situation on foreign markets has created a new challenge for Belarus. Trying to restrain inflation and devaluation expectations, the National Bank preferred to follow a course of gradual depreciation in respect to US dollar, and actually ignored the devaluation happening throughout the CIS. This policy, however, led to a considerable appreciation of the national currency (see Table 1).
Table 1. The Evolution of Exchange Rate of Belarusian Rouble in January-February, %
vs. Russian Rouble
vs. Ukranian Hryvna
vs. Kazakh Tenge
Note: The exchange rates from 1 January – 1 March.
Thus, Belarus has faced a severe external shock, which is likely to hurt its exports considerably (and promote imports from other CIS countries). The already huge external imbalance that currently exists might increase even further, although it remains to be seen precisely what will be the effect of this phenomenon.
The economy has not yet fully felt the effects, which is rather typical, since there is usually a lag between the shock itself and its impact on the economy. For instance, the majority of foreign trade transactions that were finalised in January and February were negotiated before the shock set in. This means that the economy has yet to see the effects of the economic shock waves that hit the Belurasian economy.
Given the bulk of the already accumulated distortions, a new shock might trigger a more radical policy response by the authorities in near future. The government is doing its best to avoid intensive implementing either a policy of austerity and/or depreciation.
However, modest usage of these instruments cannot guarantee the successful neutralisation of new economic shocks. Most likely the government will try to provide rapid access to a new chunk of external financing, either due to political agreements and/or due to privatisation deals. Otherwise, automatic macro-economic adjustments in exchange rate and prices might pose a threat to Belarus.
Dzmitry Kruk, 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)
Record Violations at Local Elections, Freedom Day Rally, CRS Awards – Belarus Civil Society Digest
Two thousand people attend Freedom Day rally. Fund of Ideas delivers CSR awards to Belarusian companies.
CityDog rolls out competition for creative solution of Minsk urban issues. EuroBelarus holds international conference on civil society at local level. MediaBarCamp 2014 continues to accept applications until April 7.
EU notes positive trends in Belarus’ cooperation with international community on death penalty and higher education.
Electby.org recorded the record number of violations at the local elections. 635 violations during the recent local elections were recorded on the interactive map Electby.org. This is a record number of violations of the electoral process, starting since 2010, when the platform of civic monitoring of elections was launched. The traditional "leader" in the violations became the category of "Early voting."
Some 2,000 people attend Freedom Day rally. On 25 March an estimated 2,000 people attended a rally that crowned "Dzien Voli" (Freedom Day) demonstration in Minsk. The sanctioned event was staged to mark the 96th anniversary of the proclamation of the Belarusian National Republic (BNR). Ten people were detained after Freedom Day action in Minsk, two of them – activists of European Belarus – were sentenced to administrative arrests.
Civic education from Liavon Volski. On 25 March to the Freedom Day, the multi label 34 Piarshak presented a new album of well-known musician Liavon Volsky titled as Social Science/ Hramadaznaūstva. The musician describes his new CD in terms of civic education: "I think that time of compromises ran out. Time of trading, making rules of the game, the inner censor and manoeuvring ran out. Time of Aesopian language, hidden meanings and reading between the lines has passed." For the first two days in the internet the album was downloaded about 20 thousand times.
Belarus is to join the largest environmental campaign Earth Hour. On 29 March for one hour from 8.30 to 9.30 the campaign suggests everyone to turn off the lights and unnecessary appliances at home or in the office, and thus try to care about preserving natural resources. The initiator of the Earth Hour campaign in Belarus is Green Alliance together with the Ministry of Natural Resources and Environment. A number of Belarusian artists supported the campaign.
Folk Spring meeting. The last weekend was marked with the traditional Spring Meeting/ Hukanne Viasny ceremony, held in different parts of Belarus. The national folklore ritual is designed to greet the coming spring. The Student Ethnographic Society organised a ceremony in Vyazynka near Minsk, the youth organisation Talaka – near Gomel.
Peace Gallery photo project is just two weeks but more than 70 people have participated in it. The author of the project, a photographer Alexander Zharnasiek implements his idea to make a gallery of portraits of positive people who oppose the war. Anybody can become a participant of the Peace Gallery.
The Fund of Ideas delivered CSR awards. On 21 March the National Art Museum hosted an award ceremony in the field of corporate social responsibility (CSR). The event was organised by the Fund of Ideas for the first time. The awards went to the best CSR projects of Belarusian business companies in seven categories, for example, the company Velcom was awarded for the best CSR project in cooperation with the local community (the project VELOCITY); socially responsible media was recognised a state-run informational agency BelTA.
MinskFun competition indicates the Minsk urban problems. The independent Minsk portal CityDog.by composed a tentative list of Minsk urban problems that should be solved in a non-standard way. Mapping of problems is done in the framework of the MinskFun open competition announced by Volkswagen and CityDog.by to improve the urban environment of Minsk; the winner receives $1,500 for the implementation of ideas. Among the identified problems are lack of parking, lack of public toilets, dog feces on the streets, etc.
Acting with Unlimited Abilities 2014. The Association School of Leaders (Poland) and the Office for the Rights of Persons with Disabilities (Belarus) invite to participate in the second round of the Acting with Unlimited Abilities project. The purpose of the program is to strengthen organisations and informal groups of persons with disabilities through capacity building and leadership development. Participation in the program is available for nonprofit organisations or initiative groups of persons with disabilities or working for the benefit of this social group.
The EU remains committed to a policy of critical engagement towards Belarus. On 27 March the European Commission presented updates on the progress made by the countries in its Eastern Partnership program. The report, in particular, acknowledges that the EU-Belarus relationship is still dire but there has been a positive trend in "Belarus's cooperation with the international community on some specific issues, namely the death penalty and the higher education."
EBRD is to allocate €500,000 to Belarus small, medium-sized business. The European Bank for Reconstruction and Development (EBRD) plans to allocate at least €500,000 for subsidies to small and medium-sized enterprises in Belarus in 2014. Non-repayable subsidies will be available for small and medium-sized business that has at least two years of experience on the market and with the personnel of 10 to 250 workers. The EBRD grants can be spent on consulting services.
Education and Trainings
SYMPA held a session in Georgia. On 19-24 March the fellows of the School of Young managers in Public Administration (SYMPA) learned some basic reforms in the public administration in Georgia. The program included visits to the Ministry of Justice, Economy and Sustainable Development, Regional Development, University, as well as meetings with MPs and local experts. The next session will be held in Sweden with a special focus on the management of public finances.
Academy of the First 2014. Belarusian National Youth Council RADA invites to participate in its regular educational course Academy of the First aimed at preparing youth activists to be efficient in building the youth CSOs and manage them. The educational course consists of 5 workshops, a series of public activities, homework and pilot projects. Young people of 18-31 years, representatives of Belarusian youth organizations and initiatives are invited to participation.
Golden People at Golden Age nomination for journalists. Golden Age University announces its nomination for journalists within the national contest at the IV Festival of Youth Journalism Your Style, which is to be held on 16-18 May in Hrodna. The nomination accepts journalistic materials demonstrating active life position of older people who retired, but did not lose optimism and show that anyone can be useful to society at any age. This is the main purpose of the Golden Age University, an educational program implemented by the Hrodna-based Third sector Centre.
The MediaBarCamp 2014 continues to accept applications until 7 April. The 7th International MediaBarCamp will be held on 1-4 May 2014, in Lithuania, and dedicated to using new opportunities of Internet media and development of media activism. This year the MediaBarCamp is organized around the celebration of the 20th anniversary of Belarusian national domain .BY. Organised by Swedish International Liberal Centre (SILC), the MediaBarCamp invites all participants – media, public and political organisations, etc. – to present their projects online and find like-minded people.
Belarus Digest prepared this overview on the basis of materials provided by Pact. This digest attempts to give a richer picture of the recent political and civil society events in Belarus. It often goes beyond the hot stories already available in English-language media.