- Economic growth has slowed for the third consecutive year. Belarus continues to concentrate significant resources in the state sector and to stimulate domestic demand by raising social benefits. However, these policies are now leading to weaker growth, large external imbalances, and high refinancing and external liquidity risks.
- Belarus has secured new funding from Russia amid large external imbalances. The government negotiated new loans and energy subsidies with Russia to avert a sharp external economic adjustment. Belarus also signed the Eurasian Economic Union (EEU) treaty, which will come into effect in January 2015.
- Much-needed structural reforms are further delayed. There has been some progress on price liberalisation, although utility prices remain far below cost recovery. Over-regulation continues to negatively affect the economy.
Key priorities for 2015
- The authorities must establish a macroeconomic policy framework to reduce external imbalances. The central bank should be charged primarily with stabilising inflation. Wage growth should reflect productivity developments, and the use of output targets should be phased out.
- Deep institutional reforms are needed to encourage private sector development. Privatisation of enterprises must be encouraged and new private owners should be allowed to manage them on a commercial basis. State-owned banks should progressively increase the proportion of loans offered on a commercial basis, and directed lending should be reduced.
- The authorities should reform municipal infrastructure and increase incentives for greater energy efficiency. Cost recovery of municipal tariffs paid by households should be increased. Incentives for improving energy efficiency need to be strengthened through market pricing of energy and the establishment of a clear framework for renewable energy.
ECONOMIC GROWTH HAS SLOWED FOR THE THIRD CONSECUTIVE YEAR
BELARUS HAS SECURED NEW FUNDING FROM RUSSIA AMID LARGE EXTERNAL IMBALANCES
MUCH-NEEDED STRUCTURAL REFORMS ARE FURTHER DELAYED
Note: FI – Financial institution; ICT – Information and communication technology; Water – Water and wastewater; IAOFS – Insurance and other financial services; PE – Private equity.
Main macroeconomic indicators %
|Current account balance/GDP||-15.0||-8.5||-2.9||-10.1||-8.5|
|Credit to private sector/GDP||44.1||38.6||21.5||22.6||n.a.|
Note: Government balance refers to augmented general government balance
The country’s growth model has exhausted itself. Growth has slowed almost to a halt over the past two years (0.9 per cent in 2013 and forecast at 0.7 per cent in 2014), reflecting a weak external environment and insufficient export competitiveness. The continuous stimulation of domestic demand with real wage and credit increases resulted in a decline in competitiveness, wide external imbalances and recurring devaluation pressures. Partly bolstered by regulated price hikes, inflation remained high between 15 and 20 per cent year-on-year during 2014.
The authorities used external support to finance external imbalances, rather than seriously addressing them. Driven by the widening current account deficit, increased cash foreign exchange purchases and large public foreign currency debt repayments, gross foreign reserves have been in steady decline to far below critical levels, posing a serious threat to external stability. As Belarus remains cut off from external markets and lacks support from the International Monetary Fund (IMF), the authorities sought funding from Russia to avert a sharp devaluation. After receiving a bridge loan of US$ 2 billion from Russia in June 2014, international reserves improved slightly but remained low at seven weeks of import coverage. In October 2014 Belarus negotiated the right to retain all export taxes on oil products it had been previously transferring to Russia. This form of subsidy may total up to US$ 3 billion per year and could help Belarus finance its external funding gap in 2015.
Monetary policy became volatile as the central bank swung between supporting the currency and stimulating the economy. The National Bank of the Republic of Belarus (NBRB) continued to gradually devalue the rouble by 10 per cent in 2013, followed by another 10 per cent in the first nine months of 2014. In June 2013, as devaluation pressures increased, the NBRB tightened liquidity and hiked interest rates several times. In late 2013 the NBRB again gradually eased policy rates, with directed lending from state-owned banks at below-market interest rates. In May 2014 the central bank capped local currency lending interest rates for corporates in an effort to stimulate lending.
The existing economic model is not viable. The short-term outlook for Belarus’s economy is uncertain in light of heightened geopolitical tensions in the region. Sanctions on Russia could lead to an economic slow-down and reduce Russia’s ability to provide financial support, which could adversely affect Belarus. However, Russia’s move to ban European food imports could mean an increase in demand for Belarus’s agricultural exports. Uncertainty is aggravated by the upcoming presidential elections and its implications for the country’s economic policy. Persistently high external vulnerabilities, despite financial injections from Russia, keep the risk of a sudden adjustment high. In the longer term, economic growth is limited by the structural deficiencies of the existing economic model, which is based on full employment primarily in the state-controlled sector. This not only constrains the reallocation of capital and labour to new, more productive sectors of the economy, but also distorts the price system and misallocates resources.
Major structural reform developments
The authorities briefly resumed privatisation in late 2013 after shelving talks for nearly two years. Faced with foreign exchange shortages, the government decided to resume the privatisation of major enterprises, anticipating US$ 2.5 billion in privatisation revenues for 2014 (initially estimated at US$ 4.5 billion in the Joint Action Plan adopted in October 2013). However, most privatisations did not materialise. In late 2013 Belarus completed only two major transactions: the sale of the government’s 26 per cent stake in VTB Bank (Belarus) to a Russian holding company and the sale of the Kokhanov excavator factory to a local investor. In early 2014 Belgips, a producer of construction materials, was sold to a Russian company. The sale of Grodno Azot at auction and attempts to sell a stake in MTS Belarus failed due to a lack of investor interest at the proposed prices and terms. The government continued to reorganise its equity stakes in various state enterprises into holdings and fine-tuned the organisational structures of state-owned enterprises in an attempt to increase efficiency and to reduce costs.
The government loosened price controls by cutting its list of “socially important goods”. It also raised utility prices and other regulated costs (railroad, landlines, fuel), although they remain below cost recovery levels. Since January 2014 meat products, selected fish, flour, salt, sugar, sunflower oil and a few other products have been exempt from government price regulation, although the government retained the option to impose temporary price controls. Such controls may be introduced once a year for 90 days. Pork and beef were excluded from the list at the end of March 2014.
The NBRB continued to pursue policies to limit dollarisation and imposed heavy restrictions on foreign currency lending. Early in 2014 the NBRB banned foreign currency loans to corporates for all domestic operations (excluding gas payments to Beltransgas) and restricted such lending to export-import operations only. Consequently, since February 2014, the rapid build-up of foreign currency loans has virtually halted. The NBRB then eased regulations, allowing banks to lend in foreign currency to small and medium-sized enterprises (SMEs) under agreements with international financial institutions, and cancelling the ban on short-term foreign currency lending to exporters that have sufficient revenues.
The government is stimulating growth in the SME sector. The SME sector is significantly underdeveloped. In 2013 small and medium-sized enterprises accounted for only 22 per cent of GDP and 37 per cent of exports. In August 2014 the Development Bank of the Republic of Belarus announced an SME lending project amounting to 300 billion roubles (approximately US$ 29 million), with lending rates not exceeding 24.5 per cent and tenures up to 5.5 years. In addition, the NBRB suggested creating a guarantee fund to facilitate bank lending to SMEs.
The adoption of distorting regulations aimed at import substitution continued. A new law on trade, effective from the end of July 2014, envisages a comprehensive set of micro-level regulations for the retail sector. The law caps the share of any particular retail operator’s sales volume in a particular geographical area at 20 per cent. It also sets new requirements for the location of outlets exceeding 400 square metres and requires retailers to offer an increased number of domestic goods for customers. The law aims to raise consumer protection standards and to foster competition, although it also introduces barriers for existing and new market players, and favours producers of domestic goods over imports. In another attempt to cool down the growth of consumer imports, the government amended tax laws and introduced a 90-day delay for import value added tax (VAT) deductions.
Steps have been taken to address cross-subsidies in the utilities sector in 2014. The government launched a pilot project in Brest Oblast, which aims to increase residential tariffs in the public utilities sector and gradually phase out cross-subsidies. The programme’s main priority is to increase incentives for greater production efficiency. These incentives will allow district heating companies to retain their year-end savings, which can either be re-invested, or distributed as financial rewards to personnel (rather than all proceeds being returned to the local government). To simplify the system of cross-subsidies between the electricity and district heating sectors, and between residential and industrial customers, the government has phased out preferential heating tariffs for legal entities and individual entrepreneurs.