Belarus
Recent Economic Developments
Author: International Monetary Fund
Publication Date:
23 Oct 1995
eISBN:
9781451805000
ISBN:
9781451805000
Language:
English
Keywords:
ISCR; CR; U.S. dollar; gross domestic product; exchange rate; minimum wage; basic rate; first quarter; monetary policy; debt service
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This paper describes economic developments in Belarus during 1992–94. The difficult economic situation facing Belarus in 1992 and 1993 continued unabated in 1994. Two political developments compounded the economic problems in the first half of the year. Efforts were aimed at alleviating or mitigating the effects of the downturn in output on living standards in the run-up to the country’s first presidential elections. In September 1994, the government developed a comprehensive macroeconomic and structural adjustment program, or “Anti-Crisis Program,” which was approved by the parliament in October.

Abstract

This paper describes economic developments in Belarus during 1992–94. The difficult economic situation facing Belarus in 1992 and 1993 continued unabated in 1994. Two political developments compounded the economic problems in the first half of the year. Efforts were aimed at alleviating or mitigating the effects of the downturn in output on living standards in the run-up to the country’s first presidential elections. In September 1994, the government developed a comprehensive macroeconomic and structural adjustment program, or “Anti-Crisis Program,” which was approved by the parliament in October.

Basic Data, 1991-95 (QI)

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Sources: Belarussian authorities; IBRD; and IMF staff calculations.

Figures refer to January 1 of the following year.

The area of Belarus is 207,595 square kilometers.

Year-on-year changes.

For the first quarter of 1995 changes from previous quarter.

Excluding on-lending of government funds to agriculture.

Percent per annum, end of period.

I. Overview

The difficult economic situation facing Belarus in 1992 and 1993 continued unabated in 1994. Two political developments compounded the economic problems in the first half of the year. Hopes were high in the beginning of 1994 that Belarus would soon be able to reach an agreement on monetary and economic unification with Russia and as a result monetary and to a lesser extent fiscal policies were in limbo until the negotiations collapsed in June. Also, efforts were aimed at alleviating or mitigating the effects of the downturn in output on living standards in the run up to the country’s first presidential elections. However, following the election of Alexander Lukashenko as the country’s first president in July, and the appointment of a new government, it was acknowledged that decisive steps would need to be taken to halt the economic decline and establish a system conducive to market oriented relations. In September 1994, the Government developed a comprehensive macroeconomic and structural adjustment program, or “Anti-Crisis Program”, 1/ which was approved by the Parliament in October. 2/ Besides measures to stabilize the economy, the program contained major steps in the area of market reforms, including liberalization of prices and the exchange and trade system.

While there were some temporary set-backs to full implementation of the program after its adoption, such as in the area of price liberalization, significant progress was made. The reform efforts of the Government were supported by a second purchase under the Systemic Transformation Facility of the IMF in early 1995. More recently, the political situation has become more complicated, following Parliamentary elections and a referendum in May. The sitting Parliament’s term in office expired in June, but due to low voter turnout and many candidates the number of delegates elected was insufficient to form a quorum. 3/ A next round of elections is not expected until November 1995 and until that time there is no legal Parliament. This could influence implementation of measures that require Parliamentary approval. In the referendum, held at the same time as the elections, a majority of the population voted in favor of closer integration with Russia. 4/ The formal signing of a customs union agreement between the two countries, already under discussion for some time, was directly related to this outcome. 5/

The terms of trade deteriorated in 1994 for the third year in a row, by about 12 percent, almost the same as in 1993, as import prices for energy and raw materials rose further towards world market levels. Combined with a continued fall in demand from other Former Soviet Union (FSU) states, both the trade and current account balances worsened in 1994 compared to 1993, when it first recorded a deficit. Despite lower foreign financing, however, official reserves changed very little, mostly as a result of accumulation of arrears on payments for imports, mainly gas. At the same time, however, the process of diversifying Belarussian exports away from its traditional trading partners, mostly in the Former Soviet Union (FSU), gained ground in 1994, although it could not fully compensate for the problems associated with the breakdown of earlier links.

Given the production structure of the country, the higher prices for inputs, both energy and other raw materials, and loss of markets contributed to the more than 20 percent decline in GDP in 1994, double the rate of decline in the previous year. A severe drought in the middle of the year and the low buying capacity of population were other factors contributing to the decline. The cumulative decline of GDP since 1991 reached about 36 percent, which compares favorably with developments in other major FSU countries. However, this was partly related to the fact that, until recently, structural reforms were delayed and the role of market signals was limited. Despite the large decline in GDP, official unemployment, while increasing compared to previous years, did not rise sharply, as enterprises continued to hoard labor; as a result, productivity declined significantly. Interenterprise arrears, both domestic and foreign, were one of the results of the increasingly difficult financial situation of the enterprises.

Inflation in both 1993 and 1994 in Belarus was very high, both in comparison with earlier years and with inflation in other FSU countries, particularly in 1994. A relatively loose monetary policy during most of 1993 and the first part of 1994, were the main factors behind this high inflation. As mentioned above, in 1994 these policies were partly the result of the lack of a coherent strategy while negotiations with Russia on the establishment of a monetary union continued. Large amounts of credit, allocated in part to relieve the effects of a drought in mid-1994, but also to support enterprises, contributed to a large expansion of the money supply and thus inflation. Adjustments of administered prices did not significantly influence inflation for most of the period until mid-1994 because they took place only sporadically. After the elections and the adoption of the adjustment program, financial policies were tightened, although this proved not sufficient to reduce inflation rapidly.

Significant steps were taken in the second half of 1994 and early 1995 to liberalize prices; many prices were freed, trade margins eliminated and administered prices of other goods were raised to better reflect cost. As a result, inflation continued at double digit monthly levels into early 1995, also, fueled in the first few months of the year by large capital inflows, which were only partially sterilized. However, monetary policy was significantly tightened further in the second quarter of 1995, both by reducing liquidity of the banks through higher reserve requirements, and a more restrictive credit policy of the National Bank of Belarus (NBB). Interest rates were raised to positive levels in real terms in early 1995. Theses policies contributed to a rapid decline in the monthly level of inflation, which was contained to less than 3 percent in June 1995, the lowest level in over 4 years.

The high inflation during 1994, combined with the unfavorable economic situation, contributed to a sharp fall in the value of the Belarussian rubel (Rbl). In nominal terms the rubel depreciated by more than 1,400 percent against the U.S. dollar within the year. The large capital inflows in early 1995, partly associated with the higher interest rates, allowed subsequently the rate to be stabilized in nominal terms, which also contributed to the reduction of inflation in the second quarter of 1995. In real terms, mostly the result of the still high inflation in the first quarter of 1995, the rubel appreciated significantly against the U.S. dollar in the period.

Since independence the Belarussian authorities have had considerable success in keeping the fiscal situation under control with only modest deficits and even at times, surpluses. This was continued in 1994, despite difficulties in the beginning of the year, when subsidy payments to maintain low prices for consumers, in particular, grew quickly. With liberalization of many prices later in the year and adjustments of administered prices of some major subsidy-requiring commodities, the fiscal position improved, and on a cash basis the deficit for 1994 was slightly lower than in the previous year. Tight fiscal policies continued in early 1995, and a cash surplus was registered in the first quarter, although some strains on the system started to emerge and budgetary arrears rose significantly.

Structural reforms, which had been implemented only haphazardly for most of 1994, got a new impulse with the adoption of the Government’s adjustment program late in the year. Significant steps were taken, in the second half of 1994 and early 1995 to liberalize prices, adjust administered prices and reduce the role of the Government in price formation, including by eliminating trade and profit margins and eliminating the list of monopolistic enterprise subject to price controls. Major progress was also made in improving the functioning of the foreign exchange market and liberalizing the trade and payments system, including by eliminating export tariffs and surrender requirements. Several measures were also taken to strengthen monetary policy instruments and the position of the NBB. Nevertheless, in a number of areas, in particular privatization and enterprise reform, less progress was made than envisaged when the program was adopted. A clear sign of support for an acceleration of the privatization process was the issuance in March 1995 of a Presidential decree on privatization and subsequent approval of a privatization program for 1995.

II. Real Sector

1. Highlights

Following a sharp drop in the first half of 1994, the rate of GDP decline eased somewhat later in the year, reaching 20.2 percent for the year as a whole, twice the rate in the preceding two years. In the first quarter of 1995 GDP declined further at an annual rate of 12 percent (Tables 1 and 3 and Chart 1). Similar large output declines were also recorded in other major FSU countries (Table 1).

Table 1.

Belarus: Comparison of Economic Developments in Selected FSU States, 1991-94

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Sources: CIS Goskometat; data provided by the authorities; and staff calculations.

Percent change over the end of the preceding period, excluding foreign currency deposits.

Table 2.

Belarus: Gross Domestic Product, 1990-94

(At current prices)

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Sources: Ministry of Statistics and Analysis; and IMF staff estimates.

Provisional estimates currently under revision.

Including undistributed imputed payments to financial intermediaries.

Private consumption includes nonprofit organizations.

General government.

Table 3.

Belarus: Gross Domestic Product, 1991-94

(Percent change at comparable prices)

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Sources: Ministry of Statistics and Analysis; and IMF staff estimates.

Provisional estimates currently under revision.

Including undistributed imputed payments to financial intermediaries.

Private consumption includes nonprofit organizations.

General government.

CHART 1
CHART 1

BELARUS: Economic Activity

Citation: IMF Staff Country Reports 1995, 099; 10.5089/9781451805000.002.A001

Sources: Ministry of Statistics and Analysis; and IMF staff estimates.

The cumulative decline of GDP during 1991-94 was 36.3 percent, only slightly lower than the corresponding decline in Russia (40.1 percent), but well below the declines in Kazakhstan (50.6 percent) and Ukraine (53.3 percent). Like in other countries, the decline reflects, among other factors, the loss of traditional markets and the disruption of interenterprise relations that resulted from the disintegration of the FSU; enterprise restructuring in response to the increase in the relative price of energy and other raw materials; and a shortage of external financing. Belarus’s relatively more favorable development was achieved at the cost of delaying structural adjustments and hindering the role of market signals in allocating resources.

While inflation declined somewhat early in 1994, inappropriate financial policies, combined with rising energy prices, and, later in the year, adjustments of administered prices led to inflation exceeding the already high level in 1993. However, from very high levels early in 1995, inflation declined to less than 3 percent by June. Wage adjustments did not keep pace with the high inflation for most of this period and real wages declined dramatically before recovering somewhat in March 1995. Employment continued to decline in 1994 and early 1995, but the official unemployment rate increased by less, indicating some withdrawals from the labor force or moves into noncaptured private sector employment. However, hidden unemployment appears to be significant.

2. Output and expenditure

a. Overall developments in 1994 and early 1995

After falling at an annual rate of 10 percent in 1992-3, real GDP declined at an annual rate of about 21 percent in the first three quarters of 1994, although subsequently the decline eased to 18 percent in the fourth quarter of 1994 and 12 percent in the first quarter of 1995. 6/

National Account Statistics

The Ministry of Statistics and Analysis has switched from the NMP to the SNA methodology of compiling GDP at current and comparable prices. A full set of annual national accounts has been prepared for 1990-1993 as well as preliminary estimates for 1994. The production account is also compiled monthly and work is at an advanced stage for the compilation on a regular basis of quarterly national accounts. However, the estimates should be considered with caution because (i) antiquated accounting practices make it difficult to accurately estimate holding gains from inventories, (ii) occasionally, recommended prices are used instead of actual transaction prices, (iii) statistics on external trade flows and prices are inadequate making it difficult to reconcile the production and expenditure accounts, and (iv) the contribution of newly emerging sectors, mostly services and small enterprises, is likely to be under-estimated.

The acceleration of GDP decline in the first three quarters of 1994 reflected predominantly supply shocks, including a sharp increase of energy prices; a drastic reduction in raw material imports; a severe drought; and delays in implementing much needed reforms. Demand factors, including to a certain extent a drop in demand from other FSU countries, also played a significant role. A more favorable external economic environment as well as policy measures that were taken in the latter part of 1994 contributed to the subsequent deceleration in rate of decline of GDP.

Gas and oil import prices in dollar terms increased on average by 47 percent and 30 percent, respectively, in 1994, although the impact on enterprises was larger than implied by these price increases as the authorities tried to harden budget constraints by coercing enterprises to reduce their energy arrears. As a result, since the second half, of 1994 several enterprises were forced to scale down or even suspend their operations. Higher costs and the temporary suspension of gas deliveries from Russia in response to the rapid build up of gas arrears 7/ caused a sharp decline in energy imports and, consequently, given the country’s heavy reliance on imported energy, in energy consumption. In particular, gas imports declined by 12.3 percent in 1994, while the decline of electricity and heavy fuel oil (mazut) imports was 37.6 percent and 33.3 percent respectively. As in previous years, the manufacturing sector was particularly affected. Since 1990 this sector has drastically reduced its consumption of mazut by 62 percent, gas by 52 percent, electricity by 48 percent, and diesel by 35 percent. Nevertheless, notwithstanding the fact that the decline in energy use has been well in excess of the corresponding GDP decline, it is generally accepted that there is still room for further savings in energy consumption.

The reduction in imports of raw materials reflects mainly the further disruption of traditional interenterprise relations associated with the phasing out of state orders and the slow adaptation of enterprises to the new environment. It is also associated with liberalization of markets in Russia and other countries, which induced raw material producers to switch to world markets, where prices were more favorable. The increase of interenterprise arrears and the lack of adequate external finance were additional contributing factors. Being heavily dependent on inputs from other FSU countries and facing high short-term costs of switching to alternative suppliers, Belarussian enterprises were particularly affected by the decline in raw material imports.

Agricultural output declined by 8.3 percent in 1994, primarily because of a severe drought in the middle of the year. Accounting for about 16 percent of GDP, agriculture contributed 1.3 percentage points to the decline of GDP.

Finally, the election campaign and, mainly, the protracted and inconclusive negotiations for economic and monetary unification with Russia in the first half of 1994, created an environment of uncertainty and indecision, causing serious delays in the privatization effort and the restructuring of enterprises, both of which could have stimulated supply. 8/ In the hope of resolving their problems by gaining access to lower cost inputs and unrestricted financing from Russia, enterprises kept postponing production decisions until the (continuously shifting) time of unification, with detrimental effects on production.

The economic and policy environment changed soon after the June presidential elections, setting the stage for the deceleration of GDP decline. First, the cost of imported energy stopped climbing rapidly. Second, a number of enterprises received significant orders from clients in the FSU. Third, stockpiling increased as administrative pressure was put on enterprises to intensify production; to a significant extent this higher production was financed by the accumulation of arrears. Finally, administrative measures were taken in the context of the adjustment program to arrest the output decline. These included the renegotiation of the contracts of enterprise managers with a view to introducing specific performance criteria and linking their employment and remuneration to the performance of the enterprise; and requiring enterprises to develop business plans and increasingly making them a prerequisite for receiving bank credits and budgetary subsidies.

Nominal GDP increased by 1,588 percent in 1994 compared to 1,035 percent a year earlier. The acceleration was due to the implicit GDP deflator whose increase doubled to almost 2,000 percent. However, an 11.5 percent terms of trade deterioration and a trade balance deficit kept the increase of the implicit GDP deflator below that of the consumer price index and the domestic expenditure deflator.

b. Selected sectoral developments

Industry is the dominant sector in Belarus, accounting for 45 percent of GDP in 1994, followed by agriculture and forestry, 16 percent; construction, 9 percent; and banks and insurance, 8 percent (Table 2). The remaining 22 percent relate to public administration, procurement and other services. 9/ With the exception of banking, which, for the fourth consecutive year, expanded by 9.7 percent, all other sectors registered declines. Industry declined at about the average rate (-20.6 percent), while in agriculture the decline was substantially lower (-8.3 percent). 10/ On the other hand, construction, transportation, 11/ communications, and public administration declined at rates well above the average (Table 3).

The decline in agriculture was mainly caused by a severe drought which, in particular, severely impacted the production of potatoes, sugarbeets and grain. To a smaller extent the decline was also of a cyclical nature, reflecting the high yields for certain crops in 1993 (Table 4). Livestock production declined for the fifth consecutive year.

Table 4.

Belarus: Agricultural Production, 1990-94

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Source: Ministry of Statistics and Analysis.

End of period stocks.

Several structural changes have been underway in agriculture, despite the absence of a coordinated overall reform strategy for the sector. First, the use of land for agriculture has been steadily declining over the past few years, while at the same time the share of land allocated for crops has been increasing at the expense of land used for livestock (Table 5). Likewise, the share of crops (and in particular potatoes) in agricultural output has been increasing at the expense of livestock production, the main reasons being the change in relative prices, declining demand from traditional markets (mainly Russia) due to competition from low-cost non-FSU countries, shrinking profitability and irregularities in the import of fodder. 12/ Second, the share of agricultural output produced outside state and collective farms has been expanding rapidly and in 1994 accounted for 95 percent of fruits, 85 percent of potatoes, and 76 percent of vegetables (Table 6). Also significant has been the increase in the share of privately owned cattle. Reflecting the same trend, the share of agricultural production sold through state procurement organizations has been steadily falling, the only exception being grains (Table 7). Despite this, state and collective farms still account for about 60 percent of agricultural output. Third, the share of land allocated to state and collective farms has been decreasing at the expense of land allocated to private farmers and to individuals (Table 8). Fourth, the use of fertilizers has been steadily declining over the past four years, the decline being more pronounced for mineral than for organic fertilizers. The cumulative decline since 1990 has been 57 percent and 23 percent, respectively for these fertilizers, although the correlation with agricultural output has been weak.

Table 5.

Belarus: Territory and Agricultural Land, 1980-94

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Source: Ministry of Statistics and Analysis.
Table 6.

Belarus: Share of Private Sector in Agriculture, 1990-94

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Source: Ministry of Statistics and Analysis.

At comparable 1983 prices.

Table 7.

Belarus: Share of Agricultural Production Sold Through State Procurement Organizations, 1990-94

(In percent of total production)

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Source: Statistical Bulletin, Ministry of Statistics and Analysis.

Excluding amounts used for breeding and catering or sold at farmers’ markets.

Table 8.

Belarus: Distribution of Agricultural Land by Ownership, 1990-94

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Sources: Ministry of Statistics and Analysis.

Private gardens and orchards.

At end-1992, 2,372 private farmers managed 45,600 hectares. On April 1, 1994 and April 1, 1995, the number of registered private farmers were 2,817 and 3,013, respectively.

Including new collective farming enterprises.

Including agroindustrial enterprises.

In addition to the factors mentioned above, agriculture faced a number of structural problems which had a direct bearing on output in this sector in 1994. Some of these problems are currently being addressed (see Section VI). The domestic terms of trade deteriorated because of the maintenance of price controls 13/ on agricultural products at a time when the prices of agricultural inputs were being liberalized. Furthermore, working capital eroded due to the negative real interest rates on deposits. Agricultural enterprises have been particularly affected because of the relatively long period of production and have become increasingly dependent on bank financing. Arrears from retailers and delays in disbursing budgetary subsidies exacerbated the financial difficulties of agricultural enterprises, and profitability in 1994 dropped by half for the second consecutive year (Table 9). Finally, as indicated, restructuring and the creation of an environment conducive to the development of private agriculture, which could stimulate output in the short-term, were delayed.

Table 9.

Belarus: Enterprise Profitability and Number of Loss-Making Enterprises 1/, 1991-95(QI)

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Source: Ministry of Statistics and Analysis.

Profits and costs are based on Belarussian accounting standards and are not comparable to Western standards. For instance, certain costs are paid out of profits.

The number of loss-making enterprises refer to Jan-Feb 1994.

Includes kolkhozes only.

Through 1994, agriculture was supported by low interest rate credits and preferential allocation of fuel, fertilizers and other inputs through state orders. However, since the beginning of 1995, the degree of indirect subsidization has been reduced as interest rates were raised in real terms, bank credit became tighter, and interest subsidies, previously channeled through quasi-fiscal operations, were explicitly included in the budget. At the same time, to provide financial support for agriculture a one percent turnover tax was imposed on nonagricultural enterprises, to be channelled through a newly established Fund for the Support of Agricultural Producers.

Nonagricultural enterprises, many heavily dependent on imported inputs for their production saw their financial position deteriorating in 1994, as in agriculture (Table 9), although according to official statistics there were only 46 loss-making industrial enterprises in 1994, or about 3 percent of total industrial enterprises. 14/ Based on these statistics, profitability levels exceeded 20 percent for about 70 percent of these enterprises.

Industrial production declined by 19.3 percent in 1994, about double the rate of decline in the preceding two years (Tables 11 and 12). Performance was uneven throughout the year and across sectors. The decline was sharper in the first two quarters of 1994, particularly in the case of refineries, construction, and light industry. The subsequent deceleration of the decline was driven by the recovery of a few sectors, notably petrochemicals and ferrous metallurgy, while most other sectors continued to record large declines for the production of most commodities. Lack of domestic demand for many products, such as heavy machinery and fertilizers, led to an increasing share of this production being exported (Tables 13 and 14). Production of the defense industry showed a moderate increase for the second year in a row, due to a further modest switch towards producing commodities for civilian use (Table 15).

Table 10.

Belarus: Distribution of Profit-Making Enterprises in 1994

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Source: Ministry of Statistics and Analysis.
Table 11.

Belarus: Industrial Production, 1991-95(QI)

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Sources: Ministry of Statistics and Analysis; and IMF staff calculations.
Table 12.

Belarus: Selected Indicators of Industrial Production, 1990-95(QI)

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Source: Ministry of Statistics and Analysis.
Table 13.

Belarus: Share of Total Exports in Production of Selected Industrial Products, 1993-95(QI)

(In percent)

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Source: Ministry of Statistics and Analysis.

Represents sales from inventories. Inventories at the start of the quarter were 37.5 thousand items, while production in the first quarter was 8.7 thousand items.

Table 14.

Belarus: Share of Exports to Non-CIS Countries in Production of Selected Industrial Products, 1990-95(QI)

(In percent)

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Source: Ministry of Statistics and Analysis.
Table 15.

Belarus: Change of Output in Defense Industry, 1991-94

(in percent)

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Source: Ministry of Economy.