Economic situation: lessons ‘not learnt’

April 22, 2016 18:42

The key trend in 2013 was that Belarus continuously repeated its past mistakes in public administration. Such mistakes ended in devaluation in 2009 and 2011. In addition, the authorities wasted potential which had been built up by sound economic policies and favourable circumstances in 2011 and 2012.

In 2013, exports in goods fell due to the weak diversification of export markets; the potash cartel broke up, and investment demand on the Russian market reduced. Influenced by external factors, industrial production declined in 2013. The authorities tried to overcome this by building up stocks and stimulating domestic demand. Large-scale modernization in industry and agriculture failed to produce quick results – most projects were not completed and allocated funds did not return. Growing imports (mainly equipment for modernization purposes) amid falling exports resulted in problems on the foreign exchange market. By the year-end, Belarus’ gold reserves fell below the critical level of $8 billion, devaluation expectations increased and saving accounts’ currency preferences changed. The National Bank attempted to overcome the currency deficit amid substantial public debt payments by using available monetary policy instruments and increasing interference with banks’ operational management. High interest rates on loans were included in the production costs, making inflation higher than projected for 2013.

In 2014, the government will once again face two major challenges:

-       how to diversify foreign trade;

-       where to find cash to support the existing economic policy.

Industry: further industrial production slowdown will depend on the recession in Russia. Russia will focus on supporting her own producers, which will make Belarusian enterprises less competitive on the Russian market and will lead to further loss of the market share. There will be new attempts to restore the potash cartel, but there is no way back to the previous form of cooperation. Oil refineries may be partially privatized in favour of Russian companies, thus ensuring guaranteed oil supplies. The food industry is dependent on imported resources and key industries such as alcohol and tobacco production will experience a decline due to the excise-tax policy. 

In 2014, regarding foreign trade, there will be a war against imported goods, mainly using administrative measures. With stagnation on the Russian market, Belarusian exports will not grow significantly. On the one hand, Belarus will be unable to offer new competitive products to foreign markets, as their production is constrained by complex bureaucratic procedures. On the other hand, an unfavourable investment climate in Belarus prevents innovative investors from penetrating its market. The only exception may be China-led projects, since the Chinese are interested in penetrating the Customs Union market through Belarus.

The gold-reserves situation will depend on whether Belarus receives additional financial resources from Russia and whether she is fast with privatization-related decisions. There will be no mass-scale privatization. When Belarus receives the necessary amounts for operations in 2014 (circa $ 2.5-3 billion) she will suspend privatization until the next time of acute need. Pressure on the gold reserves from the population will be reduced by increasing the prices of socially important goods and services and by restricting pay rises.

The government will undertake measures for a large-scale financial recovery in the economy. The Government, the National Bank and the tax authorities will offset debts in the economy. In the short term, corporate interest rates can only be reduced by pumping the economy with cash, which could negatively affect the currency market. If interest rates on savings accounts in BYR for the population reduce, the population will respond quickly with an outflow of deposits. Denomination will not make economic sense until the situation with inflation and the BYR exchange rate normalizes.

In 2014, a positive outlook for Belarus’ economy would be 1-2% of growth. If Belarus fails to capitalize from privatization or raise additional loans, then devaluation, stocked warehouses, and a repetition of other negative trends from 2011 are possible. A negative outlook would be that Belarus falls into a ‘poverty trap’ from which she cannot escape within the existing economic model.