The Government is Preparing for a Recession – Belarus Economy Digest
For 2015, any positive growth would be considered a great success for the Belarusian authorities. Apart from external shocks, several structural challenges have emerged.
A spike in inflation, deeper depreciation of the national currency, the distress of the banking industry, and growing unemployment have all become urgent issues that must be addressed.
The government is trying to formulate a coherent response to all of these issues. So far the signals from the government suggest it is going to focus on tools of direct administrative control.
Economy in 2014: Weak Growith
In 2014, the Belarusian economy grew by 1.6%. Weak GDP growth demonstrated once more that the Belarusian economy has all but extinguished its potential for high growth. In other words, prior structural weaknesses continue to plague the economy.
However, cyclical factors also contributed to weak growth. In the spring and autumn a slow, but uneasy recovery took place. Since autumn, the economy started to suffer from lower demand from Russia, cheaper oil prices (which it re-exports from Russia), and deterioration in domestic agents’ expectations. Finally, in November and December, these factors overwhelmed the weak roots of the economic recovery. Since then, the Belarusian economy has started to dip into a recession again (see Figure 1).
Preconditions for a Recession in 2015
In 2015, the environment for the Belarusian economy will deteriorate further. First, a recession in Russia seems all but inevitable. During the last couple of weeks a majority of forecasts for the Russian economy have come to the consensus that its GDP is going to shrink by 3-5% in 2015. For Belarus, this means that the country can expect a further contraction in demand from Russia.
Second, Belarusian exports in Russia will suffer from a lack of price competitiveness. Despite the depreciation of roughly 40% against major currencies, price competitiveness is far from its ‘normal’ standing. For instance, the real exchange rate of the Belarusian ruble vs. Russian ruble remains much higher (15-20%) than it was just a few years prior. This will contribute to a further contraction in exports.
Third, real wages are declining due to wage policy restrictions and price growth. Reducing real wages will determine if a downturn in household consumption will unfold.
Fourth, the overall financial fragility, generally negative expectations, and high level of uncertainty will make banks more reluctant to provide new loans. Interest rates will be unaffordably high for a majority of comapnies (as of today, a lower threshold for nominal rates for ruble loans are hanging hesitatingly around 55% per annum). While other sources of financing capital investment are hardly accessible, capital investments will undergo a further contraction.
The 'internal reserves’ for a majority of companies, especially state-owned ones, have already been exhausted Read more
Fifth, the financial position of companies has become another serious concern. Due to their sagging competitiveness, the profitability of Belarusian companies not dealing with finance has remained very low. The 'internal reserves’ for a majority of companies, especially state-owned ones, have already been exhausted. Hence, many companies will either need one or another form of financial support (permission to raise prices, access to cheap loans, etc.), or will have to layoff employees.
Sixth, no affordable external loans are directly available as of today. Access to the IMF’s funds requires a strong commitment to structural reforms. New loans from Russia are hardly accessible, unless both parties agree on a new political deal.
Yesterday’s Problems May Look Like Success Today
The official forecast from the Belarusian government projects around zero GDP growth in 2015 (0.2-0.7%). However, it also assumes a more favourable environment than really exists at present. Taking into account the preconditions above, a recession is much more likely. However, projections for 2015 are still not clear. They depend on the extent and speed of the new problems that could soon appear as well as the government’s response.
First of all, there is the issue of an unstable and unpredictable exchange rate. Fundamental factors at play will push further rouble depreciation. The latter may cause a new round of financial stress on the deposit market. However, the National Bank is still demonstrating a lack of clarity in its intentions. On the one hand, it is claiming to support a free floating currency regime. On the other hand, it fears a deposit withdraw shock, which could adversely affect exchange rates as well.
Another issue is the relatively huge price overhang that has formed during last month Read more
Another issue is the relatively huge price overhang that has formed during the last month. If there were no price controls in place, the most optimistic projection for CPI inflation in 2015 would be 30% (official forecast project 12%). This kind of inflation will cause an additional push towards further depreciation. At the same time, long-term price controls will only enhance companies’ weaknesses and lead to a deficit in some commodity segments.
The poor financial standing of companies will require new financial injections. Moreover, deteriorating liquidity and a growing number of non-performing loans will push banks to seek cash injections too. This may result in pressure on the National Bank to soften its monetary policy. But the latter may become yet another trigger for a inflation-devaluation spiral.
So, the puzzle is extremely complicated and no good solution seems to be at hand. There are only really three major solutions still on the agenda. First, is the immediate launching of structural reforms, which will open access to cheap external funds (like, to the IMF) that are able to help mitigate the recession. In this scenario, a drop in GDP in 2015 might be significant (down to 10%), but in the long-term things could become much better.
Second, a ‘forced’ monetary softening that presumes new massive liquidity injections. Under this scenario, GDP growth rate may fluctuate around zero for 2015. But an inflation-devaluation spiral and a gradual disorientation of financial markets will be inevitable. However, the fresh memories of an inflation-devaluation spiral in 2011-2012 makes this scenario less plausible.
Third, a massive increase in administrative controls, which includes control of prices, imports, employment, wages, etc. In the view of the authorities, direct price controls may neutralise further depreciation. Direct import controls may help compensate for export losses, etc. Direct control over wages and employment may also help Belarus avoid a sharp growth in unemployment.
For the short-term, this solution may be effective in the sense of mitigating a recession and the associated outcomes of well-being. This scenario may secure either near zero GDP growth or a modest decline (down to 3%). However, for in the long-term it also assumes huge risks, beginning with a more fragile financial system up to significant losses in growth potential. As of today, the government is hesitating on whether or not to proceed precisely with this option.
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)
Major Independent Publisher under Attack in Belarus
On 9 January the Economic Court of Minsk charged the Lohvinaŭ book store with unauthorised book sales and ordered the confiscation of its whole year’s profit. This is perhaps the largest fine ever received by civil society in Belarus.
Until 2013 Lohvanaŭ was also the largest independent publisher in Belarus and one of the chief supporters of Belarusian language authors. However, the authorities withdrew its license after the store published a photo album, which the siloviki considered as extremist. In reality, it only contained photos of large protests.
Ironically, the persecution of the publisher happens at a time when the regime is evidently implementing a new national identity policy. Fearing the “Russian world” on Belarusian borders, the elites have demonstrated support for the Belarusian language and culture in their latest speeches. The regime has always seen civil society as the enemy, but now it should realise that it is undermining its potential partner in the building of national identity.
A Major Supporter of Belarusian Literature
In December 2014 the Ministry of Information ordered the Minsk Tax Inspection to check on the Lohvinaŭ bookstore. The inspection service stated that Lohvinaŭ was breaking the law by selling books without registration. According to Belarusian law, all booksellers are required to be registered with the Ministry of Information. The Economic Court of Minsk supported the charges and on 9 January the bookstore was fined $350 and its entire $56,000 income for 2014 was confiscated.
The Lohvinaŭ publishing house, a non-profit cultural organization, has been one of the chief supporters of Belarusian language authors. The firm brought in little profit and worked more like a self-financed cultural organisation.
In recent years, Lohvinau has become a central independent literary and intellectual platform in Minsk. Book launching events and book readings took place almost every day. The publishing house also attracted many tourists, who could find there rare Belarusian books, banned from official bookstores.
At a press conference on 20 January Ihar Lohvinaŭ, the director of the store, complained that Belarus has the most absurd legislation with regards to book publishing and trade. Around the world book publishing is usually subsidised by the government, while in Belarus a private entity has to use its own funds and on top faces constant repression. Lohvinaŭ said he had applied for registration six times over the course of the year, but each time received rejections on trivial grounds, such as indicating the wrong zip code.
Lohvinaŭ urged the public to help him to pay off the drastic fine. If the publisher fails to collect the necessary sum, the firm will go bankrupt and Lohvinau may face criminal charges for his inability to pay. Activists have launched a web site where anyone can donate to save the bookstore.
“Extremist” Literature Threatens the Regime
Belarusian authorities thoroughly control book publishing as a potential source of anti-government literature. Books which negatively portray the regime risk being considered extremist and banned from public distribution. Editions which show alternative historical view or discuss symbols regarded as oppositional also face censorship.
In 2013 the authorities used one of such cases to withdraw the publishing licence from Lohvinaŭ. The court charged the publisher with extremism for printing album Press Photo 2011. The album contained photos of the 2010 post-election as well as the 2011 “silent protests”.
A year earlier, in 2012 the authorities targeted another bookseller, Alieś Jaŭdacha, who sold books by post. The persecution started after he initiated distribution of a book about the Youth Front – a famous opposition youth organisation. Accused of conducting illegal enterprise, Alieś Jaŭdacha was charged with a year of incarceration and awarded a large fine.
Similarly, in 2012 the authorities confiscated over 5,000 books from independent publisher and bookseller Valier Bulhakaŭ. According to the authorities, the books projected extremist ideas. In reality, they presented an alternative view of World War II, inconsistent with that of the government.
Several people were sacked from Hrodna University for publishing a textbook supported by a Polish grant. The textbook contained Belarusian symbols that are not officially recognised by the government.
A New National Identity Strategy
The prosecution of Lohvinaŭ clearly diverges from the new policy on supporting Belarusian identity initiated in 2014. On 20 January at the 42th Congress of the pro-government youth organisation BRSM Lukashenka stated that only Belarusian (as opposed to Russian) culture, language and history can help forge national identity.
In concordance with Lukashenka’s statement, the Minister of Information Lilija Ananič encouraged parents and schools to teach children both official languages. As an effect of the previous policies of hampering the Belarusian language, many children don’t speak the language on daily basis and view tit as foreign.
On 21 January the recently appointed Minister of Education Michail Žuraŭkoŭ expressed the Ministry’s intention to foster the use of the Belarusian language in education. Žuraŭkoŭ promised that in future half of all subjects in Belarusian schools would be taught in Belarusian. According to the most recent policy, geography and history in schools will be taught only in Belarusian.
The events in Ukraine, where the military conflict has sharpened the divide between the Russian and Ukrainian identities, alerted the Belarusian authorities to the need for a new national identity strategy. Years of suppression of Belarusian language and culture have formed a society with a weak national consciousness and strong pro-Russian sentiments, vulnerable to Russian TV propaganda.
To eliminate the Russian threat, the authorities have evidently decided to launch a new strategy of for consolidating the Belarusian nation. Even Lukashenka himself has publicly acknowledged that his previous attempts based on Slavic ideology have failed.
Civil Society: Enemy or Partner?
Belarusian writer Uladzimir Arloŭ called governmental moves against Lohvinaŭ ridiculous since most senior Belarusian officials claim the importance of national values, language and culture. “Maybe the left hand does not know what the right hand is doing?” Arloŭ said. “If the authorities indeed want to support Belarusian language and culture, they should take Lohvinaŭ's side. Otherwise their claims are meaningless.”
Nevertheless, the reasoning of the authorities appears quite understandable. The government simply wants to eliminate any areas of public life that it cannot control directly, regardless of their nature and implications. Over the course of Lukashanka’s regime total control has been installed in all spheres of public life. Whatever their focus, civil society groups were dismissed as hostile and restricted. Searching for enemies at home has become an established practise for Belarusian bureaucrats.
Now, the enemy clearly lies outside, not inside, and the authorities have to accept the civil society as its best partner in strengthening Belarusians' national identity.