Unexpected Growth, Unsold Reforms, and Optimism in the Belarusian Style

Article by Alexander Chubrik, Director of the IPM Research Center, for the web-portal TUT.BY

October 26, 2017

When all the economists studying Belarus suddenly happen to be unanimous, I feel uncomfortable. Especially when for a long time - sometimes for years – we have been talking about the same thing in different ways, not really thinking what is happening in the real world. Even if we regularly analyze the latest data, we have already settled down in our habitual thinking so much that we often fail to notice the emergence of certain trends that contradict such thinking. Now we see that the economic recovery is accelerating: 0.4% in the first, 1.7% in the second, and 2.7% in the third quarter. Everybody feels somehow even lost – although the growth is small, it is still unexpected. It seems accidental – the Russian ruble has appreciated, the oil sector has started recovering, so has potash. There are actually no structural reforms, it means that the growth is also “make-believe”. While listening to us, many people are already beginning to long for the “golden times” of preferential loans for housing and speculative interest rates for rubel deposits, and this is a dangerous tendency and a reason to deviate from the path of our habitual thinking to take a closer look at what is happening in the area of economic policies.

The first message: We have never had such a healthy macroeconomic situation

Until recently, Belarus’ economy had been growing solely owing to investment growth (mainly through "directed" lending) and growth of incomes (on the eve of elections and referendums). From time to time, exports also contributed positively, of course, but the boosted consumption and investments generated such an increase in demand for imports that the positive effect of export growth quickly faded away. At that time, we were receiving enormous energy subsidies from Russia (reaching 18% of GDP per year), and then began to actively borrow money from the outside world to invest in the economy. Well, how could we avoid growth?! Including growth of imbalances, which ultimately “buried” the Belarusian economic “miracle”.

Now, the energy subsidies are practically gone: the gas price for Belarus is close to the world price, while exports of oil products produced from Russian oil are no longer so profitable because of the Russian tax maneuver. Now we borrow to settle our old debts, and not to pump money into the economy. Over the last 5-6 years, budget expenditures have decreased by about 7% of GDP, following a revenue decline, and state investments and subsidies to state-owned enterprises were the first to be cut. The so-called quasi-fiscal operations have decreased (for example, when the state invests in the capital of state-owned banks and enterprises, but does not reflect these operations as budget expenditures). Now the exchange rate is quite stable, and the inflation rate is at its historical minimum, not because the National Bank maintains the exchange rate, spending its foreign exchange reserves, but because it does not mint "extra" money and works with banks a lot to prevent critical situations. We used to grow owing to the money pumped into the economy and the "brotherly support", and now we grow because we are gradually starting to earn money instead of speculating on exchange rates and deposits or waiting for support from the state. The macroeconomic situation is becoming more predictable, the policies followed by the National Bank and the Ministry of Finance are more responsible. In our modern history, we have never lived in such conditions. These conditions form the basis for economic growth.

The second message: All successful reforms have aimed at addressing long-term goals.

Why have we finally managed to bring the inflation down—if not to the level of developed countries, then at least to the level of Russia, which is our main trading partner? Because our monetary policies finally have a clear long-term objective: to restore and maintain confidence in our domestic currency. In a country, which experienced three currency crises over a period of six years, this challenge is not trivial and calls for consistent steps and long-term targets. But the efforts of the National Bank would not have yielded results if not backed by the Ministry of Finance.

Compared to the problems that the Ministry of Finance will have to solve in the next 5-10-15 years, any problems faced by companies during a most severe crisis seem to be temporary difficulties. The debt burden is growing, inter alia due to government guarantees for loans to state-owned enterprises and direct transfer of bad debts from banks to the budget. The deficit of the pension fund is expanding against the background of aging population and declining formal employment. There is a need to constantly search for sources of debt refinancing. There is pressure coming from line ministries and "strategic" state-owned enterprises. In fact, the government still addresses many of its short-term goals by generating long-term problems for public finance, so the Ministry of Finance is doomed to set long-term goals. And there was fiscal consolidation (reduction in public spending to maintain a balanced budget), which was implemented by the Ministry in 2014-2016 and demonstrated consistency of monetary and fiscal policy objectives and their focus on long-term goals. We should add here the source of special pride of the government – the rather high position of Belarus in the Doing Business ranking, which also was a result of implementing a long-term strategy. Belarus’ economic authorities have demonstrated that consistent efforts to achieve long-term goals give results – one just has to be patient enough to wait for them. But this is already difficult – and a striking example of this is the latest attempt to get long-term funding from the IMF.

The third message: Although the authorities have stopped their negotiations with the IMF, they have not scaled down their reforms.

The brief track record of the IMF financial programs for Belarus looks like this. In 1993 and 1994, the IMF provided us loans to support reforms (under the so-called "Systemic Transformation Facility "). In 1995, the IMF approved the first stand-by loan for Belarus; we got the first tranche disbursed, bought some grain and something else – and the program was terminated. Next time, the IMF approved a stand-by loan for us in 2009; as soon as the program was over, we started printing money at such a pace that in less than a year the economy was “hit” by a severe currency crisis. Finally, in 2015, we began negotiating a long-term loan under the "Extended Financing Facility". 2.5 years later, the IMF representative stated that "the negotiations on the program are paused because of the lack of clarity on the issue of high-level support of reforms, especially in the state-owned enterprise and housing and utilities sectors."

It’s true that we have not received any money, but these negotiations cannot be called futile. In a sense, they are the most effective of all: in the past, we were given money for reforms, and we implemented them "somehow" and then quickly reversed them, while now there is no money, and we have not folded the reforms. Ongoing discussions with the staff of the IMF, the World Bank and other international organizations, with a focus on qualitative analysis of problems and search for specific solutions, have, to a certain extent, helped form a consensus about the need for reform – one can recall at least one recent statement by First Deputy Prime Minister Vasily Matyushevsky, who said that “we see no alternative to reforms”. No, we have not folded the reforms ...

…but the reforms have never been unfolded (the fourth and the last message).

And this is the main reason why the optimism of this article is very much in the Belarusian style. After all, it could have been worse! After all, the state could have failed to hear the response of the society to some destructive ideas like fighting "social parasitism" or issuing indulgences for economic "crimes" – the "security deposit". After all, representatives of the authorities have started saying that courts set disproportionately severe punishments for economic violations, and that control bodies, instead of taking preventive measures, are working to meet their plan of collecting fines to the budget. After all, they have allowed some very persistent schools to start classes before 9 am. After all, they could have once again "dumped" the economy with cheap money and throw it into another currency and banking crisis. And much more, which we are already accustomed to and which stands behind the classic phrase "Well, you know!" But the feedback does play a role. They no longer feel unconditionally right – it is rather a defensive response to the increased uncertainty. But there are some first significant results achieved by those government bodies that have set long-term goals and taken responsibility for their decisions. The main of these achievements is low inflation, a necessary precondition for sustainable economic growth. It is necessary, but not sufficient. To generate catching up, inclusive growth, we need trust and ability to quickly find opportunities in a changing environment – hence, to ensure the rule of law and “inclusive and fair, high-quality education”. This is an integral part of the economic agenda for Belarus.

English translation is kindly provided by the International Monetary Fund