Lower interest rates in economy could make some Belarusian industries profitable in 2017
Thanks to the stability of the Belarusian rouble and decreased credit burden on enterprises, in January 2017 the Belarusian economy reported some profit. High interest payments on loans often ate up all profits in some industries and the agriculture. Lower interest rates in the economy enabled enterprises to save more than BYN 100 million on interest payments in just one month, which would facilitate cost-effectiveness in some industries.
According to the Belstat, in January 2017, net profit in the Belarusian economy totalled BYN 550 million. During the same period in 2016, the economy reported losses at BYN 1 554 million due to devaluation processes, which led to exchange rate differences. In 2017, the national currency was relatively stable. Meanwhile, every fourth enterprise in Belarus was unprofitable with the total count of 1836 entities. In January 2017, six out of 17 types of industrial production reported losses, including the most losses in oil refining.
Previously, interest rates on loans played an important role in financial performance of enterprises. In 2016, enterprises spent BYN 4 billion to repay interest on loans, which was only 9% less than the total net profit in the economy. In metallurgy, cement production and agriculture, interest payments were higher than the overall profits from product sales, and the total amount spent to repay the principal debt on loans including interest, exceeded half of all their revenues. In this case, apparently banks controlled most financial flows in industry.
Since April 2016, the National Bank has been consistently reducing the discount rate. In nine months, the rate fell from 24% to 15% per annum. The discount rate has a direct impact on the cost of loans for enterprises and their servicing costs. In January 2017, enterprises spent BYN 301 million to service loans, which was 25% less than in January 2016. Given the current situation with excess liquidity and government pressure on the National Bank regarding further rate cuts, interest rates on loans are likely to continue to reduce, leading to an overall decrease in the debt burden on enterprises. Wood processing, some machine-building enterprises and vehicle manufacturers are likely to report some profits. Cement factories and metallurgists are likely to reduce their losses in comparison with the previous year, albeit profits are unlikely in these industries due to high production costs.
Overall, some improvements in financial indicators in the Belarusian economy were partly due to the decrease in the loan servicing costs for enterprises. Amid anticipated further reductions in the interest rates, some industries could report profits in the future and chronically loss-making cement plants could reduce losses and lower appetite for required state aid.
Amid budgetary cuts on social protection, the Belarusian public sector is experiencing a management crisis and a balance shift in the state resource redistribution system. The authorities are forced to revise their most unpopular decisions during the implementation due to the pressure from affected social groups. The state is unlikely to oppose to some civil society and opposition organisations in strengthening their role in society in order to retain touch with the population and to be able to respond to the most harsh criticism of state initiatives.
The Architecture and Construction Ministry has acknowledged that the decree No 585 on assistance to large and young families in building and buying housing was prematurely rescinded.
The authorities are often forced to revise their decisions on curtailing social assistance to different social groups during their implementation, without preliminary impact assessment and feedback from the population, so as they lead to the growth in social tension. Due to the centralised decision making, languishing state resources and the lack of public debate as a balancing instrument in issues related to social protection, the state administration is losing control of the population.
Perhaps, the compensatory mechanisms of the state apparatus lack the time to adjust to dwindling state resources for supporting the existing social model, even in a reduced form. The authorities have completely or partially paralysed operations of independent public institutions and representative bodies, through which they could monitor public moods and receive feedback from the population, such as local councils, the parliament, political parties and NGOs. Last year, under the pressure of the authorities, the last independent institute for measuring public sentiment, IISEPS, suspended operations.
President Lukashenka’s self-removal from the decision-making on current socio-economic issues, also could have affected the state apparatus’ operations. The president has always been very sensitive about adopting unpopular decisions which could lower his popular support, hence demanded a careful preliminary assessment of such decisions. However, recently, especially after the introduction of the tax on social dependants, the president has mainly focused on the foreign policy agenda.
Hence, a lacuna has formed in the state decision-making after the president reduced participation in the current socio-economic policy formation, which leads to an increase in manifestations of dysfunction in the public administration.