Belarusian public debt prompts cutting budget spending and pursuing tight monetary policy
As of May 1st, 2016, Belarusian public debt totalled USD 18 billion. Recently the public debt has grown so as the servicing costs due to domestic borrowing by the state administration. As the state has to repay previous loans, it is likely to cut budgetary spending and undertake measures to reduce public debt by lowering interest rates on government bonds.
As of May 1st, 2016 Belarus’ external public debt totalled USD 13.1 billion and has increased by USD 651.7 million since early 2016. Domestic public debt totalled USD 4.9 billion and has decreased by USD 350 million due to exchange rate differences. External debt has increased due to the USD 500 million loan from the EFSR, part of which has been used to repay both external and domestic loans. In Q1 2016, the government spent USD 305 million on repaying public debt and debt of local governments, which constituted 11% of the total budget expenditure during that period.
In the last three years, domestic debt has been growing most rapidly. On January 1st, 2013, external public debt totalled USD 12 billion and has grown by 8.3% by 2016, simultaneously, domestic public debt has increased from USD 3 billion to USD 4.9 billion or by 63%. Such a dynamics has led to a sharp increase in debt servicing costs. Amid overall growth in budget expenditures in Q1 2016 by 16% as compared with Q1 2015 the servicing cost has increased by 43.4%. Public debt servicing costs are comparable with budgetary expenditure on the defence, judiciary and the law enforcement.
The overall volume of Belarusian public debt is relatively small - on January 1st, 2016, foreign and domestic debt was estimated at 32.5% of GDP. The main problem is the lack of cheap resources to service it and Belarus’ inability to reduce its costs. Belarus is very unlikely to refuse to service her public debt, as it would only increase such costs in the future. The state is forced to raise foreign funds at 5% per annum and higher. This leads to the debt pyramid, which can only exist as long as there are funds to repay previous loans.
Due to foreign trade deficit, Belarus is unable to repay her foreign debt independently. Devaluation of the national currency is not a solution to the problem, as this only increases the debt and its servicing costs in rouble terms. That said, the state would be prompted to increase the debt servicing costs by reducing other budgetary costs and borrowing more funds on international and domestic markets in order to ensure continuity in repaying the debt servicing costs. Major efforts will be aimed at reducing the servicing cost by reducing loans’ interest rates, primarily on the domestic market and by means of tight monetary policy, which is also likely to reduce the pace of debt growth.
Amid limited opportunities for external borrowing, the government has found the money on the domestic market to service its debt. Belarus’ public debt is likely to continue to grow, albeit at a slower pace due to the tight monetary policy.