Mis-reporting Provokes Mismanagement
On February 13th ‘refined’ data about GDP growth in January 2013 was published.
Belarusian authorities by all means try to avoid GDP and international reserves’ fall. They use different means, but the basic idea is not to lower these indicators. Achieving the desired values, they create the illusion of proper economic development, but consequently make improper management decisions.
Published statistics reported 3.1% GDP growth. The growth was possible due to a significant increase in net taxes on products. Without this component, GDP decreased by 0.8%. In 2012, the way net taxes on products were calculated was changed. Finance Ministry found ways to calculate the volume of industrial subsidies, which resulted in an increase in net taxes on products. Conventionally, GDP growth is provided by increases in stocks and investments in fixed assets.
In 2012, capital investments were not actively used to increase GDP because of tight monetary policy, which had resulted in decreased value added in the construction and the GDP growth rate by 0.6 percentage points. In 2013 the government plans to increase the volumes of housing construction and investment in fixed assets. Thus, GDP is prevented from falling by manipulations with GDP components’ calculation methodology and increased investment in the construction. It is crucial not to show GDP drop in total over the period (month, quarter, semester or year). GDP fluctuations within the period are allowed.
The situation with foreign exchange reserves is slightly different. The key standard for reserves is USD 8 billion. The National Bank, using entire banking system, seeks to prevent the fall of the gold reserves below this figure to date. Unlike GDP, international reserves statistics is published as of a concrete date, which allows for certain manipulations to mask the reduced volumes: for instance, by short-term borrowings from banks and repayments after the reporting date in question. In addition, the National Bank has a certain amount of liquid assets which are not included in the gold reserves due to non-compliance with the IMF standards (because of their liquidity or the counterparty rated as lacking reliability). On June 1st, 2012 the funds not included in international reserves were net swaps with China (more than USD 2 billion). On February 1st, 2013 these resources fell to USD 1.2 billion. By maintaining the international reserves at the same level, the National Bank attempts to reduce population’s devaluation expectations, which could result in assets’ sharp outflow from the banking system.
There is rationale behind maintaining the level of international reserves: population is satisfied with the illusion of control. Most nationals are not financially literate enough and if the level of international reserves does not fall, they will not ask additional questions.
The situation with ensuring GDP growth rate is rather irrational and could have negative consequences. Certain manipulations allow reporting ‘correct’ GDP growth rates, as a result, target figures are set for enterprises, warehouses’ stocks grow, financial situation at the enterprises deteriorates, and new manipulations to show the desired result are invented. The overall picture in the economy is distorted to show better figures, which affects the adequate and timely response to emerging issues.
Thus, the Belarusian authorities are trying to improve the economic performance by distorting the picture. First of all, it affects themselves, when based on distorted picture they make wrong management decisions. This vicious circle can be broken by reorienting towards the qualitative parameters, rather than quantitative, but this solution does not find understanding at the highest governmental levels. Only economic challenges may facilitate the change in the attitude to economic indicators.
The Labour and the Tax Ministries are considering the possibility to include persons engaged in some economic activity without forming a legal entity in the social security system. When the decree No 337 comes into effect, the number of private entrepreneurs is likely to reduce due to the possibility of reducing the tax burden when switching to a tax payment as an individual. 95% of self-employed, including PE, pay insurance premiums on the basis of the minimum wage. The number of self-employed citizens is expected to increase, the number of insurance contributions to the pension system from PE will decrease, the number of citizens who will pay a fee to finance government spending will decrease by several tens. Self-employed citizens have the alternative not to pay social security fees and save resources for future pensions, which, given the gradual restriction by the state of pension requirements could be a more long-sighted option.