Belarus
Recent Economic Developments
Author:
International Monetary Fund
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Publication Date:
23 Oct 1995
eISBN:
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.

The decline in industry is mirrored in lost working time (Table 16). Lost working time increased by 52 percent in 1994 and by 126 percent because of deficient demand, 118 percent due to the lack of working capital, and 35 percent due to shortages of raw materials. Based on these statistics, the improvement in early 1995 appears to be related to the greater availability of raw materials and stronger demand. 15/

Table 16.

Lost Working Time in Industry, 1993-95 (April)

(In thousands nan-days)

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Source: Ministry of Statistics and analysis.

The sharp decline of industrial production in the beginning of the year and its subsequent improvement towards the end of the year was typical in past years as well (Chart 2). To a large extent it is the legacy of the planned economy, with enterprises trying to catch up with their annual production targets and contractual commitments, although it may also be influenced by statistical problems. Other seasonal factors, including harsh winter conditions, also play a role, as in the case of food production. The recovery at the end of 1994 was also associated with stronger external demand, mainly for fertilizers and tractors, and supply factors: government instructions to enterprises to raise production and the restoration of ties among enterprises in the FSU. The first factor was of a temporary nature, but could have lasting effects by forcing enterprises to explore and develop new markets for their products. Failing this, it would only result in higher inventories, arrears accumulation, and subsequent production declines. The second factor can have a lasting positive impact on production. It involves the establishment of conglomerates between related enterprises in the FSU to exploit their comparative advantages and strengthen their competitive position vis-a-vis enterprises from the rest of the world. 16/ Belarussian enterprises in the energy and petrochemical sectors have been particularly active in sub-contracting work from their partners in Russia and receiving financial and technical assistance to improve their production lines.

CHART 2
CHART 2

BELARUS: Industrial Production

(1990 average = 100)

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

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

c. Domestic expenditure

For the third consecutive year, private consumption declined less than GDP, leading to an increase of the average propensity to consume to 66 percent (Table 3). The highly negative real interest rates on bank deposits and the absence of other financial instruments (with the exception of foreign exchange) offering protection against inflation have pushed households (and enterprises) to consumer durables. However, the situation is likely to have been reversed in 1995 with the emergence of positive real interest rates; corroborative evidence can be found in enterprises’ proposals to introduce discount sales as a means of reducing inventories.

Public consumption is estimated to have declined by 11 percent and its share in GDP increased slightly to 20 percent reflecting to a certain extent slow progress in reducing the size of public administration bodies.

Gross fixed investment declined by 25 percent, accounting for 19 percent of nominal GDP in 1994, compared to a 29 percent decline in 1993. The decline was especially pronounced in agriculture and the construction sector (Table 17). Lack of clarity in government policy intentions, uncertainties relating to the legal and regulatory framework, the fluidity of the economic environment, low enterprise profitability, the high cost (due to the high risk premium) and scarcity of long-term bank credit, and the paucity of nonbank financing have all contributed to the decline of investment for the third year in a row. In their attempt to stimulate investment, the authorities have instructed banks to earmark 10 percent of their deposit liabilities for financing investment, and they have also provided directed credits for the same purpose. In the first half of 1995, these directed credits were in the form of foreign exchange amounting to US$42 million or 0.4 percent of GDP.

Table 17.

Belarus: Capital Investment in Comparable Prices in Different Sectors, 1991-94 1/

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Source: Ministry of Statistics and Analysis.

The data differ from the national accounts tables due to different sources.

According to national accounts.

3. Prices, wages and employment

a. Inflation and pricing policies

Consumer price inflation, after reaching more than 45 percent a month at the end of 1993, slowed in the beginning of 1994 and reached 10 percent in March 1994 (Tables 18 and 19 and Chart 3). The deceleration in part reflected the authorities’ “successful” efforts to avoid hikes in administered prices and to increase price controls. However, soon thereafter inflation accelerated again as monetary and fiscal polices became more expansionary. The average monthly inflation rate during 1994 was almost 30 percent, with a peak at 53 percent in August when many prices were either liberalized or adjusted, as in the case of tariffs for household utility services (Table 20). Inflation remained high after that, in part because producers tried to make up for earlier controls and in part due to further price liberalization, including the elimination of maximum trade margins (see section VI.1). 17/ Other factors contributing to the high inflation in 1994 were increasing energy prices and a sharp depreciation of the rubel. Inflation increased again in early 1995 reflecting further price liberalization and the failure of the NBB to sterilize substantial capital inflows. However, it decelerated quickly thereafter, as financial policies were tightened and reached a level of only 2.5 percent in June 1995, the lowest level in more than 4 years. The stability of the exchange rate since January 1995 also played an important role in reducing inflation.

Table 18.

Belarus: Price and Wage Developments, 1991-95(QI)

(Percentage change; period average unless otherwise indicated)

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Sources: Ministry of Statiatics and Analysis; and IMF Staff calculations.

Data for 1995 are based on a Laspeyres formula.

Based on average wage and inflation as measured by the Consumer price Index (base: 1991=100).

Table 19.

Belarus: Comparison of Price Indicators, 1992–95 (June)

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Source: Ministry of Statistics and Analysis.

The CPI uses 1991 household expenditure weights and retail price data for 1991; 1992 household expenditure weights for January 1992-March 1994; and from April 1994, 1993 weights are used.

Data based on a corrected index formula (Laspeyres).

CHART 3
CHART 3

BELARUS: Inflation

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

Sources: Ministry of Statistics and Analysis; and IMF staff estimates.
Table 20.

Belarus: Changes in Administered Prices of Food and Household Services, 1994-95 (April)

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Source: Ministry of Economy, Price Department.

Price of chicken was freed from March 1, 1992; price of white bread was freed from April 1994; and prices of other food items were liberalized from October 1994. From June 1993, no direct subsidies ware provided for beef, pork, and boiled sausage.

Price Statistics

Consumer and producer price indices (CPI and PPI) were developed with considerable technical assistance from the Fund. Both a weekly and a monthly CPI are reported. The monthly CPI is based on 293 commodities and the weekly CPI on a subset of 117 commodities. As a result, the cumulative monthly inflation rate derived from the weekly index in general does not equal the rate derived from the monthly index. At the beginning of 1995, a Laspeyres based producer price index (PPI) became the official price index, replacing the earlier used wholesale price index (WPI). Data for 1993 and 1994 were recalculated using this index. The weights for CPI and PPI are both updated annually. At present 1993 weights are used, which given the significant changes in relative prices of commodities over the last two years may distort somewhat inflation figures. New, 1994 weights are expected to be introduced in July 1995.

Consumer price inflation was broadly mirrored by movements of producer prices. While these prices rose faster for most of 1994 because of the large share of imported raw materials and energy in industrial production, for the same reason, with the stabilization of the exchange rate and no major changes in energy prices, producer prices rose at a slower pace in early 1995.

Following little progress in 1993 and the first half of 1994, significant strides were made in the area of price liberalization in the second half of 1994 and 1995, as described in Section VI.1. Administered prices now apply only to household services, utilities, public transportation, communications, and most energy products. The following discussion focuses mainly on the development of cost coverage for household services and utilities, and cross subsidization of energy prices. Issues related to household services are further discussed in Appendix IV.

During the first half of 1994, there were no major adjustments to the administratively set tariffs on household services and utilities, due to the desire not to increase tariffs ahead of the presidential election. Cost coverage, which was at the level of 8-10 percent in early 1994, kept declining due to increases in production cost. However, soon after the elections, during the period August-November 1994, measures were taken to increase the cost coverage for rents and other communal services. Tariffs paid by households for rent, water and sewage, and heating and hot water increased by a factor of 42, 24, and 9, respectively (Table 20). However, tariff increases were quickly eroded by higher domestic energy prices because of the sharp depreciation of the exchange rate (Table 21). 18/ By the end of 1994, cost coverage was still less than 10 percent.

Table 21.

Belarus: Changes in Administared Prices of Energy, 1994-95 (March)

(Change in percent)

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Sources: Ministry of Economy, price Department; and IMF staff estimates.

Domestic resale; the domestic tariff structure requires industry to cross-subsidise budget organisations, agriculture, and households.

For preferred users; in 1993 only Ministry of agriculture.

During the first half of 1995, a series of tariff adjustments were made in the context of the Government’s adjustment program, which envisages a gradual phasing out of subsidies for household services. To reach a level of 20 percent cost coverage in February, rent was raised by a factor of 7 and tariffs on heating and hot water and water and sewage were raised by a factor of 3. Household expenses on these services more than doubled as a result. On April 15, when the heating season ended, the authorities raised cost coverage to over 40 percent by increasing rent by a factor of 6, water and sewage by a factor of 8, hot water by a factor of 3, and gas by a factor of 5. There was also a notional increase in the tariff on heating by a factor of 3. 19/ The monthly household payment for rent and tariffs for a typical two-bedroom apartment rose from the equivalent of about US$6 in February to about US$10 as a result. To compensate for the tariff increase, minimum wages were doubled in March (see below). A further significant adjustment became effective on July 1, raising cost coverage to 60 percent. To safeguard the welfare of the poorest segments of the population, the authorities are planning to introduce a compensation mechanism in the near future.

As to urban transportation (metro, buses and trolley buses), despite significant increases in tariffs in the second half of 1994 and in early 1995, the level of subsidization remains substantial. These means of transportation are mostly operated by local governments. There are plans to eliminate or reduce subsidies in this area as well, although a firm timetable has not yet been developed, as the authorities want to take into account the effect of such moves on large segments of the population who heavily depend on these means of transportation.

Cross subsidization for energy prices continued into 1995, although the overall level has decreased and the Government intends to eliminate all cross subsidization in 1996. Regarding electricity, the wholesale tariff charged to industry during the first 3 months of 1995 remained at about 400 Rbl/kwh, while the tariff charged to households increased from 70 Rbl/kwh in January to 140 Rbl/kwh February and March, and 280 Rbl/kwh from April 15. While still at a high level, cross subsidization for gas has also been reduced recently. The average import price of natural gas was US$54.4 per thousand cubic meters in 1994 and US$53 in early 1995. The domestic resale price (including distribution costs) increased from the equivalent of US$67 in 1994 to US$82 in the first quarter of 1995, and has been maintained at that level. 20/ On the other hand, the tariff charged to households increased by 8 times in April and cost coverage has been maintained at a level of 50 percent since then.

b. Employment and wages

Official employment is still dominated by the state sector, although there has been a move to convert state owned enterprises into joint-stock companies and the number of employees in such companies increased sharply. 21/ In 1994, state owned enterprises employed 62 percent of the labor force (Table 22). Employment in joint-stock companies increased from 54,000 in 1993 to 195,000 workers in 1994, in line with the above. Industry employed approximately 31 percent of the labor force, agriculture 21 percent, and the public sector—communal, social, and health services, education, and administration—22 percent (Table 23). The relative shares of the various sectors in employment have been remarkably stable in recent years, although in terms of the number of employees, some developments in 1994 are noteworthy. In particular, the public sector (including communal services, health and education and administration) and the banking and insurance sectors experienced an increase in employment in 1994, while the other sectors, especially construction, saw the number of workers decline. This development continued in the first quarter of 1995. Employment in the banking and insurance sector increased fastest, although from a small base, and, in the first quarter of 1995, for the first time since 1990 accounted for more than 1 percent of total employment.

Table 22.

Belarus: Employment by Forms of Ownership, 1991-94

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Source: Ministry of Statistics and Analysis.

Share of employed in so-called “public enterprises” declined from 81 percent in 1985 to 68 percent in 1993.

Preliminary data for 1994.

Joint-stock companies.

Table 23.

Belarus: Average Employment by Branches, 1991-95(QI)

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Source: Ministry of Statistics and Analysis.

Based on comprehensive annual survey data that include small enterprises.

Based on monthly survey date, which accounted for approximately 91 percent of the employment covered by the annual survey in 1993.

Approximately two thirds from collective farms.

Data for 1993 through 1995 reflect reclassification from January 1993 on.

Labor force participation rate defined as employed and registered unemployed in percent of total population.

Excluding kolkhozes.

Overall employment in the economy decreased by 1.3 percent in 1993 and 4.1 percent in 1994. At the same time, the registered unemployment rate increased from 1.4 percent in 1993 to only 2.1 percent in 1994 (Table 24), suggesting withdrawals from the labor force (as also indicated by the drop in the labor force participation rate) and some increase in employment in the parallel economy and private activities not covered by official statistics. However, hidden unemployment has been assessed to be much higher than 2.1 percent. Enterprises have often shortened work hours, or even forced employees to take leave without pay. There has been labor hoarding rather than a massive increase in unemployment, in part because the social benefits provided by enterprises have acted as a disincentive to separations. Furthermore, the eligibility criteria for unemployment benefits are relatively stringent and only half of the registered unemployed receive benefits.

Table 24.

Belarus: Labor Market Indicators, 1992-95(QI)

(In thousands of persons)

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Sources: Data provided by the Belarussian authorities; and IMF staff calculations.

In 1993, quarterly employment covered approximately 91 percent of the annual employment survey.

The definition of unemployment was widened effective January 1993.

The unemployment rate is calculated as registered unemployed as a percentage of employed plus registered unemployed.

Belarus: Productivity, Real Wages and Unit Labor Cost

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Sources: Data provided by the authorities; and staff calculations.

Deflated by the consumer price index.

In 1994, consumer prices increased by more than 20 times while the average monthly wage increased about 14 times (Table 25). In real terms, wages dropped by over 38 percent, unlike the previous year, when wage adjustments outpaced inflation (see above and Chart 4). In the fourth quarter of 1994, real wages reached a low of 50 percent of the level in 1991. However, in tandem with the adjustment in the minimum wage, real wages increased slightly during the first quarter of 1995. At the same time, productivity continued to decline. Taking into account the decline in output since 1990 of about 36 percent, and the fall in employment by 10 percent during this period, productivity decreased by about 30 percent, most of it during 1992-94.

Table 25.

Belarus: Average Monthly Wages, 1991-95 (April)

(In rubels)

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Source: Ministry of Statistics and Analysis.

In 1993 the monthly surveys accounted for approximately 91 percent of the employment covered by the annual survey.

Excluding kolkboses.

CHART 4
CHART 4

BELARUS: Real Wage and Dollar Wage

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

Sources: Belarussian authorities; and IMF staff estimates.

The increase in average wages from 1993 to 1994 was less uniform among different sectors than a year before (Table 25). The industrial, information, and public sectors experienced the highest wage increases during 1994. Wage increases were the lowest in agriculture. The ratio of average wages in agriculture to the average of the economy was 82 percent in 1993, 61 percent in 1994, and 56 percent in April 1995, reflecting the precarious financial situation of the agricultural sector and the lack of reforms. 22/ The level of average wages in construction was the second highest by sector in 1993, but dropped to fourth in April 1995. Because wage data do not cover employees on forced leave, they are distorted to the extent that enterprises in financial distress force their employees to take leave without pay. They generally also do not cover payments in kind, to which many enterprises have resorted due to lack of working capital and the existence of large unsold inventories.

In principle, enterprises are free to determine the wages of their employees—although they have to observe the minimum wage. In practice, however, many enterprises follow the public sector wage scales. The latter consist of a grid of wages indexed to the first budgetary wage scale (set at Rbl 100,000 as of March 1, 1995). Adjustment of the lowest budgetary wage, which usually coincides with the change in the minimum wage, thus automatically pushes up the entire wage grid. However, at the time of the March increase in the minimum wage to Rbl 60,000 the lowest pay scale was increased by more; the number of wage groups in the pay scale was reduced from 28 to 23, and the coefficients were adjusted so that spreads between different groups were compressed. The ratio of the highest to the lowest budgetary wage fell from 13.7 at the beginning of 1994 to 6.6 in March 1995, although payments of bonuses (up to 50 percent of wages in Government) widen disparities. There is also a partial wage indexation mechanism, according to which a portion of up to 2 minimum wages is indexed to inflation by 100 percent and by 50 percent for the next 2 minimum wages; there is no indexation beyond that. Indexation takes place only if inflation exceeds 5 percent in the previous month. Indexation does not take place during the month in which there is a minimum or other general wage increase, nor in the month thereafter. Inflation indexation is mandatory only in the budgetary sector; other sectors follow their own policies. The policy designed to contain wage increases in enterprises effective in 1994, namely that enterprises could deduct a maximum of 8 minimum wages in the calculations for profit taxes, was abolished at the end of the year. There are indications that enterprises have been using profits for wage increases rather than investment following the cessation of that wage-containing mechanism.

III. Public Finances

1. Introduction

Compared to most other countries the fiscal position of the general government remained relatively strong in 1994, despite continued fiscal strains. In particular, the cash deficit of general government in 1994 is estimated at 1.7 percent of GDP, slightly lower than the estimated deficit of 1.8 percent of GDP in 1993. The fiscal stance was further tightened during the first quarter of 1995, as indicated by a cash surplus of 1 percent of GDP. Throughout 1994 and in early 1995, general government revenue collections remained high and relatively stable, around 48 percent of recorded GDP. 23/ On the expenditure side, the authorities undertook deep cuts in subsidies and kept growth of most other expenditure categories, including public sector wages and social benefits, under tight control. Steps have also been taken to streamline the structure of Government by eliminating two large extrabudgetary funds—the State Foreign Exchange Fund and the Price Regulation Fund—in 1994. However, a new extrabudgetary fund to support agricultural production—the Republican Fund for Support of Agricultural Producers—was introduced in early 1995. With the establishment of a Treasury unit in the Ministry of Finance and the partial computerization of tax administration, fiscal institution-building has recently made some progress, although at a slow pace.

While Belarus has established a track record of overall fiscal restraint, several challenges to fiscal policy have emerged. First, the maintenance of a relatively high and stable revenue ratio reflects continued administrative control of state enterprises and a distorted tax structure. Second, expenditure restraint has been achieved by cash rationing and prioritizing but also by accumulating spending arrears. At the same time, inadequate cash management procedures, reflected in the existence of a large number of decentralized spending accounts, have led to the build-up of significant unspent deposits in the banking system. Third, average pension replacement rates have increased drastically and threaten the financial sustainability of the pension fund, reflecting the sharp fall of inflation rates between April and June of 1995 and the practice of lagged adjustment of pensions to wages. Furthermore, foreign debt of Government has risen rapidly over the last two years, reaching almost US$1.6 billion or some 33 percent of GDP (in dollar terms) by the end of 1994.

2. Fiscal developments in 1994

The cash general government deficit of 1.7 percent of GDP in 1994 was the same as in 1993. On a commitments basis, the deficit declined by about one third from 4.2 percent of GDP in 1993 of GDP to 2.8 percent in 1994. (Tables 26 and 27). While the state budget operations (on a commitment basis) in 1994 recorded a deficit of almost 4 percent of GDP, social funds and the extrabudgetary funds registered a consolidated surplus of about 1 percent of GDP. By the end of 1994, the decentralized spending accounts of budgetary organizations had accumulated unspent deposits amounting to more than 1 percent of GDP. The deficit was contained despite a decline in revenues of about 3.5 percentage points of GDP as a result of a significant cutback of expenditure by 5 percentage points of GDP, mainly on account of reductions in subsidies. Financing of the general government deficit relied exclusively on domestic financing. In fact, foreign financing in 1994 constituted a net financing drain, as it amounted to about minus 1 percent of GDP on a net basis. At the same time, foreign-financed on-lending operations to enterprises, which are treated as a lending operation below the line, amounted to about 6.5 percent of GDP in 1994, reaching approximately the same level as in 1993.

Table 26.

Belarus: Summary of General Government Operations, 1992-95

(In billions of rubels)

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Sources: Data provided by authorities; and staff estimates.

As approved by the President on July 12, 1995.

State Foreign Exchange Fund (until 1994), Road Fund, and Agricultural Support Fund.

Adjustments include identified expenditure arrears, cash adjustments for charses in deposits of budgetary organisation, and financing discrepancies between above the line and below the line items.

Staff estimate of wage bill of budgetary organisations.

Table 27.

Belarus: summery of General Government Operations, 1992-95

(In percent of GDP)

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Sources: Data provided by authorities; and staff estimates.

Approved by the President on July 12, 1995.

State Foreign Exchange Fund (until 1994), Road Fund, and Agricultural Support Fund.

Adjustments include identified expenditure arrears, cash adjustments for charges in deposits of budgetary organisation, and financing discrepancies between above the line and below the line items.

Staff estimate of wage bill of budgetary organisations.

Belarus: General Government Balance

(In percent of GDP)

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Source: Table 27.

Including arrears and financing discrepancy.

Revenue of the state budget rose by 2 percentage points of GDP, but the state budget revenue gains were more than offset by declines of payroll tax collections of social funds and a sharp decline of revenue of extrabudgetary funds, the latter mainly owing to the phasing out, as mentioned before, of the Price Regulation Fund after the first quarter of 1994 (Table 27). As mentioned, revenues of the general government declined by about 3.5 percentage points of GDP compared to 1993. Nevertheless, revenue collections as a percent of GDP have been relatively stable since Belarus started the transition to a market economy in 1992. Moreover, tax arrears to the state budget remained low, amounting at the beginning of 1995 to about 2 percent of state revenue collections in 1994 (Table 35). Tax receipts in 1994 remained buoyant despite the precipitous decline of real GDP, reflecting the effectiveness of continued administrative control on state enterprises.

Table 28.

Belarus: State Budget, 1992-95

(In billions of rubels)

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Sources: Data provided by authorities; and staff estimates.

As approved by the President on July 12, 1995.

Includes only capital expenditure financed by national economy budget.

Difference between balance and financing.

Table 29.

Belarus: State Budget, 1992-95

(In percent of GDP)

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Sources: Data provided by authorities; and staff estimates.

As approved by the President on July 12, 1995.

Includes only capital expenditure financed by national economy budget.

Difference between balance and financing.

Table 30.

Belarus: Social Funds, 1992-95

(In billions of rubels)

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Sources: Data provided by authorities; and staff estimates.

Data for 1992 and 1993 include Social Insurance Fund.

Defined as ratio between average pension and average wage.

Table 31.

Belarus: Social Funds, 1992-95

(In percent of GDP)

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Sources: Data provided by authorities; and staff estimates.

Date for 1992 and 1993 include Social Insurance Fund.

Table 32.

Belarus: Extrabudgetary Funds, 1992–95

(In billions of rubels)

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Sources: Belaruseian authorities; and staff estimates.

Estimates based on banking account data.

Table 33.

Belarus: Extrabudgetary Funds, 1992–95

(In percent of GDP)

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Sources: Belarussian authorities; and staff estimates.

Estimates based on banking account data.

Table 34.

Belarus: Government Debt, 1992-95 (June)

(In billions of rubels, end of period unless otherwise indicated)

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Sources: Belarussian authorities and staff estimates.

Including social funds.

Cash balances end-period in budgetary organizations.

Table 35.

Belarus: Tax Arrears, 1994-95 (May)

(In millions of rubels)

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Source: Ministry of Finance.

Tax deferments may be granted by the Ministry of Finance (Republican taxes) or by oblasts and Minsk city (local taxes). Tax deferments carry a penalty of 50 percent of the refinancing rate of the National Bank of Belarus.

Regarding the development of individual tax categories, collections of profit taxes and VAT in 1994 were particularly strong. VAT revenue rose by about 0.5 percentage points of GDP, increasing to slightly above 10 percent of GDP. While the standard VAT rate was cut from 25 to 20 percent in the 1994 budget, revenue losses were more than compensated by the removal of VAT exemptions on barter trade and the start of collection of VAT on some imports. Profit tax collections in 1994 also edged up by one percentage point of GDP, reaching some 11.5 percent of GDP, partly reflecting the artificial boosting of profit tax bases through continued high inflation. Individual income tax remained stable at about 2.5 percent of GDP as the cut in the top marginal rate from 60 percent to 40 percent introduced in the 1994 budget reduced collections from only few individual income tax payers. Social security contributions fell by more than two percentage points to about 10 percent of GDP, reflecting cuts of the pension fund contribution rate from 41.8 percent to 36 percent and the Chernobyl payroll tax from 18 to 12 percent, partly offset by the introduction of a new health care tax collected at the rate of 3.6 percent. Excise and fuel tax collections remained broadly stable as some tax rate reductions were offset by extending excise collection to imported goods.

The ratio of general government expenditure to GDP in 1994 declined by 5 percentage points to about 51 percent (Chart 5). While, as a percent of GDP, subsidies declined sharply from 15.0 to 6.5 percent, most other expenditure categories remained close to their 1993 level. The sharp decrease of subsidies in 1994 mainly reflected the phasing out of the Price Regulation Fund, which subsidized the production of milk, dairy products, and agricultural inputs. To a lesser extent, subsidies for agricultural procurement and credit subsidies were also cut back in 1994 (Table 36). Expenditure on social protection, which accounts for more than 20 percent of total spending, was stable, partly reflecting the compression of the pension replacement rates owing to continued high inflation and lagged indexation of pension to wages. At a level of almost 3 percent of GDP, spending to relieve the effects of the Chernobyl disaster, which contains a large share of investment expenditure, remained a significant state budget expenditure item (Tables 30 and 31). Spending on health care exceeded 5 percent of GDP, up by about 1 percentage point of GDP compared to 1993. Health care spending focussed on hospitalization and medical care; inefficiencies regarding service deliveries, drug prescription, staffing and administration of hospitals remain to be addressed. Spending on education also rose in 1994 by about 0.5 percentage points, reaching almost 6 percent of GDP, although wage costs in budgetary organizations were stable compared to 1993. In fact, wage costs of government administration declined, reflecting a 30 percent cut of administrative personnel at the Republican level, implemented towards the end of 1994.

CHART 5
CHART 5

BELARUS: General Government Expenditures and Deficit

(In percent of GDP)

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

Sources: Belarussian authorities; and IMF staff estimates.1/ Figure for 1995 includes contingency reserve.
Table 36.

Belarus—General Government Subsidies, 1992–95

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Source: Belarussian authorities and staff estimates.

Not included in subsidies figure in Table 27.

3. Fiscal developments in 1995

The original 1995 state budget, which was approved by the Parliament in mid-January 1995, projected a deficit of 4 percent of GDP. On the revenue side, the budget contained several discretionary tax reductions: (i) the elimination of the 3.6 percent health care tax; (ii) a reduction of the first-bracket personal income tax rate from 12 to 9 percent; (iii) the elimination of all export duties and significant reductions in import duties; 24/ (iv) elimination of several excises on motoring as well as excises on refrigerators and freezers, and (v) the reduction of the property tax rate on fixed assets of state-owned enterprises from 3 to 1 percent. As an offset to the tax reductions, the budget introduced as revenue-enhancing measures: (i) a new presumptive profit tax in the form of a 5 percent turnover tax on sales of “luxury goods” including cars, computers, furs, and precious metals; (ii) a revaluation of fixed assets by a factor of 15; (iii) transit fees for foreign cars and trucks; and (iv) administrative measures to strengthen excise tax collection on alcohol and tobacco.

The net effect of revenue measures was estimated to be a decline of the revenue ratio by some 4 percentage points of GDP. At the same time, profit tax revenue was also expected to decline by some 3 percentage points of GDP, owing to a projected further decline of real GDP by 7 percent in 1995 and the effects of projected disinflation on the profit tax base. To compensate at least partly for the shortfall of revenue, the budget projected savings from spending on subsidies, education, and health care. In addition, the budget also envisaged that budgetary net lending operations in 1995 would be nil. Financing of the projected state budget of 4 percent of GDP was projected to rely on domestic bank financing (about 2.5 percent of GDP) but also on substantial foreign financing (about 1.5 percent of GDP). The authorities projected broadly balanced budgets for the social funds (Social Protection Fund, Employment Fund) and for the Road Fund.

In the context of the STF program, in early 1995 it was recognized that the amount of available foreign financing could be lower by some 0.8 percentage points of GDP, and the authorities planned to implement the 1995 budget, by containing expenditures, to limit the deficit of the general government to 3.2 percent of GDP.

The fiscal stance in the first quarter of 1995 remained tight, as indicated by a general government cash surplus equivalent to 1 percent of GDP. Besides strict expenditure controls, the cash surplus also reflected a build-up of arrears on foreign interest payments and a largely unplanned accumulation of unspent deposits in the accounts of budgetary organizations. On a commitment basis and before adjusting for accumulation of unspent deposits, the deficit of the general government in the first quarter of 1995 is estimated at about 0.5 percent of GDP. State budget revenues in the first quarter of 1995 were underpinned by buoyant profit tax and VAT collections. State budget cash outlays remained significantly below projections, reflecting lower-than-expected spending on subsidies, social transfers and investment spending. At the same time, unbudgeted net lending operations, which mainly benefitted agricultural enterprises, added to spending outlays equivalent to 3 percent of GDP. First fiscal strains emerged in the Social Protection Fund, although it managed to balance its budget in the first quarter of 1995. The extrabudgetary funds registered a surplus equivalent to almost 1 percent of GDP, reflecting a build-up of deposits in some extrabudgetary funds including the newly established Republican Fund for the Support of Agriculture.

In the course of the first quarter of 1995, it became clear that the price path for 1995, envisaged at the time of the preparation of the 1995 budget, was not attainable. Monthly inflation rates averaged roughly 30 percent during the first quarter and nominal wages almost doubled in March. As inflation began to decelerate sharply in April, significant fiscal stress began to emerge, first reflected in a sharp jump in tax arrears, which almost tripled, rising from about Rbl 275 billion at the beginning of April to Rbl 750 billion at the beginning of May (Table 34). While the authorities managed to keep a lid on cash expenditure by strict cash rationing, at the same time, expenditure arrears also rose significantly.

Given these adverse developments, the authorities at end-June prepared a revised budget for 1995. The revised state budget for 1995 projects a deficit of 3.2 percent of GDP for 1995 as a whole while the social funds and the extrabudgetary funds are projected to be broadly balanced (Tables 28-33). The revised state budget contains several discretionary measures designed to reduce the deficit: (i) the excise tax on alcohol will rise from 75 to 80 percent; (ii) the income tax exemption for military and security personnel will be abolished; (iii) registered victims of the Chernobyl disaster, who upon registration receive tax exemptions and benefits, will be re-registered, with the aim of eliminating duplication and false claims; (iv) and a range of privileges for employees in budgetary organizations will be eliminated.

4. Institutional developments

a. Extrabudgetary funds

Extrabudgetary funds tend to be detrimental to efficient allocation of expenditure and budgetary control. Two important extrabudgetary funds, the State Foreign Exchange Fund and the Price Regulation Fund, were abolished in 1994. The State Foreign Exchange Fund mainly functioned as a transit account for foreign currency transactions, and it is now integrated into the state budget. The Price Regulation Fund was used to finance subsidies for food items and agricultural inputs, and, as mentioned above, these subsidies have been eliminated. In 1995, the two most important remaining extrabudgetary funds are the Road Fund and the Republican Fund for Support of Agricultural Producers. The Road Fund, which is controlled by the Ministry of Architecture and Construction, uses earmarked revenue from the fuel tax and fees to finance the operation and maintenance of roads and highways. The Republican Support Fund for Agriculture, which is under the control of the Ministry of Finance, was set up by Parliament in February 1995 to provide subsidies to agriculture. There are numerous other, generally small, extrabudgetary funds which are controlled by sectoral ministries or operated at the local government level. Examples of the latter include housing construction funds and kindergarten maintenance funds.

b. Treasury

Since October 1994, the nucleus of a Treasury unit has been developed in the Ministry of Finance. Staff was appointed and a single bank account for state budget revenue was established. However, the objective of integrating all spending accounts into a single Treasury account is likely to be a drawn-out process. The present plan is to integrate in a first step the bank accounts of Ministries by the end of 1995, and afterwards pursue the integration of the main extrabudgetary accounts during the first half of 1996. As the final and most difficult step, the Treasury will seek to integrate the numerous spending accounts of budgetary institutions and organizations. The last step will be important to improve cash management and expenditure control. During the first half of 1995, the present system of decentralized spending accounts has led to the accumulation of large unspent deposits in the accounts of spending institutions and organizations while the budget, at the same time, incurred sizeable expenditure arrears due to cash shortages. As most of the decentralized spending accounts are beyond the control of the Ministry of Finance, the accumulated deposits of budgetary organizations also hamper the Ministry of Finance’s ability to manage general government net borrowing from the banking system.

c. Tax administration

In 1994, the State Tax Inspectorate completed the issuance of taxpayer identification numbers for active tax payers. Some progress has also been made in computerizing tax administration, although this process has often been pursued without changing the organizational design of tax collection activities. A first pilot project in Minsk on the reorganization of tax collection offices along functional lines has been completed. But the pilot project’s functional reorganization only covered tax return processing, record keeping, and tax collection. Tax audit as well as tax payer services remain to be developed as separate functions. As of December 1994, the State Tax Inspectorate has been established as a separate government agency outside the Ministry of Finance.

d. Government securities auctions

Domestic financing of government operations relies almost exclusively on credit extension by the NBB to the state budget. 25/ Since February 1994, the Ministry of Finance in cooperation with the NBB, has begun to develop government securities auctions as an alternative source of domestic financing. The NBB receives sealed bids from banks and financial institutions, which indicate prices and volumes. Based on the bids, the Ministry of Finance decides on the cut-off price of the auction. The NBB receives a 1.5 percent fee as compensation for administering the auction. Purchasers of securities are subject to 15 percent income tax on the interest return of the securities, which is withheld at source. Until now, issue volumes have been small and the maturity of securities has generally not exceeded one month. In the revised budget for 1995, the authorities envisage issuing a total net volume equivalent to 0.2 percent of GDP.

5. The social safety net

Belarus’s social safety net offers a variety of social benefits, including pensions, child allowances, disability and sickness benefits, unemployment benefits, and maternity and birth allowances. Total spending on social protection in 1994 amounted to about 11.5 percent of GDP, a share that has been relatively stable since 1992. Belarus also seeks to provide poverty relief to needy persons through the tax system. For example, families with many children and victims of the Chernobyl disaster receive personal income tax preferences, while enterprises employing certain categories of disadvantaged workers receive generous profit tax exemptions. Benefits are generally linked to the level of the minimum wage, although pensions are also adjusted, with lag, to growth in average wages. Most social benefits are administered by the Social Protection Fund and the Employment Fund, the latter being relatively small.

The Social Protection Fund disburses pensions to about 2.5 million persons. According to the Pension Law introduced in January 1993, regular pensions depend on earned income and the length of service. For persons with a full work history (25 years for men and 20 years for women), the best five consecutive years of monthly earnings are used to calculate the pension amount. Minimum pensions provide a lower floor for the pension amount paid to persons with a full work history. This option is mainly relevant for agricultural workers, whose wage income is generally low. Social pensions provide a lower floor for the pension amount paid to persons with less than a full work history.

Since the beginning of 1994, the legal framework regulating the payment of pensions has undergone several changes. First, to compensate for the elimination of food subsidies in mid-1994, pensioners were granted a “bread supplement”, which amounts to Rbl 50,000 since January 1995. Second, the minimum pension was raised from 100 to 150 percent of the minimum wage, effective March 1, 1995. Third, effective April 1, 1995, indexation of pensions to average wage growth was reduced from three to two months. Fourth, the ceiling for maximum pensions was raised from 6 to 7 times the minimum wage.

The time lag in indexing pensions to average wage growth involved a decrease of pensions in real terms when inflation accelerated. The lagged indexation of pensions to average wages had the effect of keeping pension replacement rates below 40 percent as inflation remained high in 1994 and early 1995. As a consequence, pensions payments as a percent of GDP also remained relatively low, never exceeding 6.5 percent of GDP during 1994 and early 1995. However, as inflation started to decelerate sharply beginning in April 1995, replacement rates rose sharply and, according to preliminary calculations provided by the authorities, probably exceeded 50 percent in June. At the same time, contemporaneous contribution rates also declined when inflation accelerated, although less rapidly than real pension outlays because of a shorter lag (one month). The above developments, coupled with rising difficulties in the collection of pension contributions, have led to a significant financial imbalance in the Social Protection Fund.

Recently, the authorities have taken measures to improve collection of contributions to the Social Fund, and reduce expenditures. In particular, they intend to eliminate the Rbl 50,000 supplemental pension payment, limit pensions of certain categories of pensioners that are still working and reduce certain other, nonpension related, expenditures, including health services.

Besides the financial difficulties caused by decelerating inflation, financing of pensions in Belarus also faces serious medium- to long-term sustainability problems. The support ratio, i.e. the number of contributing workers supporting one pensioner is already low (about 1.6) but is projected to decline further, reflecting the unfavorable age structure of the Belarussian population. At 36 percent, statutory pension contribution rates are already relatively high for a low per-capita wage economy, and it may be difficult to compress replacement rates much below 40 percent in order to restore financial viability of pension payments. As a consequence, discussion of pension reform in Belarus mostly focuses on options to increase the support ratio, by increasing disincentives for early retirement and/or by raising the statutory retirement ages. Of the roughly 2.5 million present retirees, 0.4 million retired before the statutory retirement ages (60 years for men and 55 years for women). From an international perspective, the statutory retirement ages are relatively low.

Unemployment benefits disbursed by the Employment Fund remained small in 1994. The largest part of Employment Fund expenditures was directed toward training and preferential lending to enterprises and local governments. These loans were intended to finance programs aimed at preserving employment and local job centers. The Employment Fund was broadly balanced in 1994.

New demands for establishing an additional component of the social safety net arose from the authorities’ objective to improve cost coverage for household services and utilities, as described in Section II.3.a and Appendix IV. The authorities’ social safety net deliberations have been guided by two basic considerations. The first is based on a law passed last year by Parliament, which guarantees each citizen compensation for that part of household services and utility costs that exceed 15 percent of household income. The second is to use categorical targeting as a main determinant for a compensation scheme. The latter will drastically reduce the administrative requirements implicit in the implementation of the Parliament’s directive and, because the number of beneficiaries will be smaller, save on costs. Several features of the proposed schemes are discussed in Appendix IV.

IV. Money and Credit

1. Highlights

Monetary policy was loosened in the first three quarters of 1994, resulting in rampant inflation and exchange rate depreciation. Subsequently, as the Government started attaching high priority to bringing inflation under control, monetary policy was tightened and monthly inflation dropped from 40 percent at the end of 1994 to 2.5 percent in June 1995.

The most notable developments of the past twelve months have been the declaration of the Belarussian ruble as sole legal tender in mid-1994; a sharp tightening of credit directly extended by the NBB; and the’ emergence of positive real interest rates and the phasing out of interest subsidies. These developments induced reversal of capital flight, enabled the authorities to stabilize the nominal exchange rate, and led to a leveling off of the decline in real money balances in late 1994 and their recovery in 1995. At the structural level, progress has been made in strengthening banking supervision, developing financial markets, and using indirect instruments of monetary control. Also, the NBB has enjoyed greater independence in the conduct of its day-to-day monetary operations. However, the financial position of several commercial banks remained weak, and the continuing laxity of financial discipline in enterprises has led to the soaring of interenterprise arrears.

2. The policy environment

a. Monetary standard

Until May 1994, Belarus had a rather complicated monetary system. Most cash payments were effected in banknotes of the NBB, colloquially referred to as rubels, although Russian banknotes could also be used as a parallel currency. Noncash transactions and the evaluation of claims and liabilities were in noncash Belarussian rubles, the parity being one rubel per ten noncash Belarussian rubles. 26/ To complicate things further, a more appreciated exchange rate than that prevailing in the market was used in evaluating a significant portion of claims and liabilities in Russian rubles. 27/

After the collapse of negotiations with Russia on monetary and economic unification, 28/ the authorities took three important decisions. First, on May 18, 1994 the banknotes of the NBB were declared sole legal tender and since January 1995 the circulation of other currencies has been prohibited. 29/ Second, the policy of using an appreciated exchange rate vis-a-vis the Russian ruble was abandoned and enterprises were instructed to evaluate their foreign claims and liabilities at the market exchange rate. Third, on August 20, 1994, the rubel became the unit of account and, as a result, prices, wages, and all claims and liabilities denominated in noncash Belarussian rubles were divided by a factor of ten.

These decisions enabled the NBB to de-link domestic monetary developments entirely from those in Russia and thus pursue an independent monetary policy. Previously its ability to do so was constrained because, with enterprises basing prices on the 1:1 exchange rate, the pass-through of the thrust of monetary policy on domestic conditions was only partial. The authorities pursued in 1994 a policy of managed floating, and since early 1995 they have maintained the level of the exchange rate to the U.S. dollar, which has led to a significant appreciation in real terms (Chart 6, Table 37). Intervention techniques in 1994 varied from restricting access to currency auctions, to relying on a combination of administrative measures aimed at cracking down on illegal capital flight, and to occasional interventions at the currency auctions to smooth the depreciation of the exchange rate. 30/ Interventions since early 1995 have been mainly in the form of massive purchases of foreign exchange by the NBB, both at and outside the auctions, in an attempt to prevent a nominal appreciation.

CHART 6
CHART 6

BELARUS: Exchange Rate Developments

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

Source: Belarussian authorities.1/ Calculated as the ratio of relative prices in Belarus and abroad, and corresponding exchange rate in Rubels. Decline indicates real depreciation.2/ Calculated at the ratio of the Bbl/$ auction rate in Minsk and the Rub/$ rate in Moscow Interbank Exchange.
Table 37.

Belarus: Monthly Exchange Rates, 1993-95 (June)

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Sources: National Bank of Belarus; and IMF staff calculations.

Pre-August 1994 figures in Belarussian rubels are expressed in the old denomination and can be converted to the new one by dividing by 10.

The pre-August 1993 figures are staff estimates based on the auction data. The post-July 1993 figures have been provided by the NBB.

From the end of September 1993 until its abolition at the end of 1993, the special exchange rate (surrender rate for the SFEF) was set at 60 percent of the official unified rate and applied only to the proceeds from exports contracted after June 1993.

The cross rate is calculated from the period averages of Rbl/US$ and Rub/US$.

This exchange rate is calculated as the ratio of weighted average prices in Belarus over prices in Russia on the basis of a basket of 90 commodities.

b. Institutional setting and the direction of monetary policy

Monetary policy in Belarus is subordinated to the general macroeconomic policy of the Government. 31/ The NBB is accountable to Parliament which appoints its Chairman, approves its Board of Directors, and ratifies the monetary policy guidelines, although the need for parliamentary ratification is debatable since article 145 of the Constitution empowers the NBB to regulate credit and monetary aggregates. 32/ In March 1994, the Charter of the NBB was amended to (i) give the Government and Parliament the right to appoint one representative each, with full voting powers, at the Board of Directors of the NBB, and (ii) declare that state organs shall not interfere in the activities of the NBB. In principle, this framework gives the NBB some independence in conducting its day-to-day operations and selecting instruments for achieving its monetary policy objectives.

Challenges to the Independence of the National Bank

The legal ambiguity regarding the role of Parliament was first put to test in early 1994 when Parliament refused to ratify the 1994 monetary policy guidelines drafted by the NBB. Apparently the main reason for the refusal was that because of the ongoing negotiations for monetary and economic unification with Russia, Parliament did not want to set targets for all of 1994 which then later might have to be rescinded. An important element of the negotiations was Russia’s insistence on having a prime role in the design of monetary policy. The Parliament proposed ceilings on NBB credit to banks and the Government only for the first two quarters of 1994—substantially higher than the ones in the original proposal of the NBB—and instructed the NBB to reduce its refinancing rate for lending to agriculture, and refinance specific projects at preferential interest rates.

To break the impasse in the adoption of the 1994 monetary policy guidelines, in May, the NBB invoked article 145 of the Constitution to announce unilaterally an amended version of the guidelines incorporating the parliamentary suggestions on credit expansion ceilings. The NBB adopted a similar approach later in the year when the Parliament refused to approve the monetary policy guidelines for 1994-5.

As a result of some challenges to its authority, the NBB became more assertive in setting monetary policy and the horizon of monetary policy was shortened as targets were no longer set for the entire year ahead but only for the next one or two quarters. The first development helped the NBB focus more on combating inflation, but the shortening of the time horizon imparted an inflationary bias because it tended to validate current inflation and provided no framework for reversing excessive money and credit expansion. Indeed, inflation accelerated significantly in 1994, becoming one of the highest among FSU countries.

The stance of monetary policy changed swiftly in the course of the year. In early 1994, financial policies were loosened in an attempt to counter the precipitous output decline and help agricultural enterprises which were affected by an intensification of price controls on agricultural products and thus experienced losses. The uncertainty regarding the outcome of the negotiations for economic and monetary unification with Russia and the election campaign contributed further to the loosening of monetary policy. In the summer of 1994, credit expansion soared again as part of measures to ameliorate the effects of a severe drought.

Following the adoption of the economic stabilization program, with its emphasis on inflation reduction, the subsequent tightening of policy was manifested in the containment of the budget deficit, hardening of budget constraints of enterprises, limiting of NBB refinancing, and raising interest rates to positive real levels. A key element of the stabilization strategy to reduce inflation was the stabilization of the nominal exchange rate.

c. Instruments of monetary policy

The arsenal of monetary policy instruments expanded in 1994-95, with interest rates starting to play a pivotal role in the conduct of monetary policy. The volume and cost of NBB lending to banks, reserve requirements, and interest rates were the main instruments, but there remained interference with credit allocation through directed credits, restrictions on the loan portfolio of banks, moral suasion, and government on-lending. In 1995, foreign exchange market interventions emerged as an important instrument influencing liquidity. 33/

Refinancing has been the main channel of NBB lending to banks, eclipsing the use of credit auctions and overdrafts on banks’ correspondent accounts. Overdrafts have been quite volatile, ranging from zero to 5.2 percent of NBB lending to banks; there have not been any overdrafts since April 1995.

Refinancing consists essentially of directed credits in rubels and in foreign exchange, the latter having increased steadily as a percent of total outstanding NBB lending to banks from 23 percent at end-September 1994 to 81 percent in end-June 1995, or from US$31 million to US$98 million. Breaking with the previous policy, in October 1994 the NBB started quoting its basic refinancing rate (basic rate) on rubel refinancing on a monthly basis and increased it to the rate of monthly anticipated inflation. Since then it has been adjusting the rate regularly with a view to keeping it above anticipated inflation. The average refinancing rate remained lower than the basic rate, but the wedge between the two shrunk significantly (Table 51, Chart 7). In June 1995, 75 percent of outstanding refinancing was either at the basic rate or very close to it, although there were also credits at as low as 0.5 percent per month. About 80 percent of refinancing in foreign currency had a maturity of less than six months, the remaining being long-term credits for enterprise restructuring. The annual interest rate on foreign currency loans was about 20 percent for the short-term credits and 10 percent for the long-term ones. Commercial banks, which select enterprises and bear the credit risk, were entitled to a 1-3 percentage points spread.

Table 38.

Belarus: Auctions of NBB Credits, 1994-95 (June)

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Sources: National Bank of Belarus; and IMF staff calculations.
Table 39.

Belarus: Minimum Reserve Requirements, 1992-95 (July)

(In Percent of eligible deposits: beginning of period)

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Source: National Bank of Bolarus.

Reserve requirements were introduced in June 1988 and initially applied only to ruble deposit liabilities with commercial banks. Required reserves are calculated on deposits outstanding on the first day of each month and are retained for one month. The necessary funds are transferred automatically from the correspondent account that commercial banks keep with the National Bank. Since 1991, commercial banks have been permitted to meet their reserve requirements with 3-year 5 percent U.S.S.R. bonds issued in 1990; but since March 1994 only 10 percent of bond holdings can be used towards meeting reserve requirements. Required reserves of commercial banks were non-remunerated until March 1995.

In the period January 1, 1991-July 1, 1992, Sberbank was required to deposit into an interest-bearing account with the National Bank of Belarus 70 percent of the increase of population deposits since January 1,1991. Prior to that data, all of its deposit liabilities were transferred to Gosbank and in July 1992, they became pert of the Internal public debt of Belarus. The part of population deposits that have become internal public debt is not subject to mandatory reserves. The required reserves of Sberbank have been remunerated since August 1994.

In July 1992, the decision was taken to reduce reserve requirements by 50 percent until December 1992 for a number of commercial banks facing liquidity difficulties.

The 50 percent surrender requirement applied to the increase of population deposits since July 1, 1992. In the November 1992-January 1993 period the surrender requirement was temporarily suspended for the increase in deposits.

The rate was set at 8 percent for Belegroprombank, 10 percent for Belpromstroibank and 15 percent for all other commercial banks.

Reserve requirements were suspended in the period by August 16, 1993-October 10, 1993.

10 percent for time deposits and 15 percent for demand deposits.

Since April 1994, Sberbank has been subject to the same reserve requirements as the other commercial banks.

The required reserves on foreign exchange deposits are not remunerated.

Table 40.

Belarus: Auctions of Securities, 1994-95 (June)

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Sources: National Bank of Belarus; and IMF staff calculations.
Table 41.

Belarus: Overview of the Banking System

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National Bank of Belarus: and staff calculations

Excluding headquarters

The bank is linked to SWIFT

Table 42.

Belarus: Structural Characteristics of the Banking Sector

(In percent of total: end of period)

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Sources: National Bank of Belarus; and IMF staff calculations.
Table 43.

Belarus: Regional Distribution of the Bank Network

(As of May 1, 1995)

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Sources: National Bank of Belarus; and IMF staff calculations.
Table 44.

Belarus: Main Prudential Regulations

(As of June 1, 1995)

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Source: National Bank of Belarus.
Table 45.

Belarus: Monetary Accounts, 1993–95 (June)

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Sources: National Bank of Belarus; and IMF staff calculations.
Table 46.

Belarus: Composition of Bank Landing by Type of Credit and Sector, 1991-94

(End of period balances)

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Source: National Bank of Belarus.
Table 47.

Belarus: Enterprise Indebtedness: 1993-95 (April)

(End of period balances in billions of rubels, unless otherwise indicated)

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Sources: Ministry of Statiatics and Analysis; Beltransgaz; and IMF staff estimates.

The number of reporting enterprices was substantially increased in August 1994. Since January 1995, figures on receivables and payable for dates other than the and of the quarter are estimated from a smaller number of enterprices.

Table 48.

Belarus: Sectoral Distribution of Interenterprise Receivables and Payables

(End of period stocks in billions of rubels, unless otherwise indicated)

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Sources: Ministry of Statistics and Analysis; and IMF staff calculations.
Table 49.

Belarus: Sectoral Distribution of Energy Debts of Enterprises as of January 1, 1995

(In billions of rubels)

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Source: Ministry of Statistics and Analysis.
Table 50.

Belarus: Distribution of External Interenterprise Debts by Country

(End-of-period stocks: in billions of rubels)

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Source: Ministry of Statistics and Analysis.
Table 51.

Belarus: Interest Rates of the National Bank of Belarus, 1994-95 (June)

(In percent per annum: beginning of period)

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Source: National Bank of Belarus.

Since September 1993 the penalty rate has been set at three times the basic refinance rate for the first three days and at five times the basic refinance rate for each additional day the NBB has the right to suspend payments through the correspondent account of banks falling to repay promptly.

Average interest rate at the first credit auction of the month.

NBB raised Its basic refinancing rate to 210 percent on November 10, 1993. Since October 10, 1994 the rate has been set on a monthly basis. It was set at 25 percent on October 10, 1994, 40 percent on December 20, 1994, 25 percent on February 21, 1995, 15 percent on March 21, 1995, 12 percent on May 23, 1995 and 6 percent on June 21, 1995. The annual interest rate is calculated without compounding.

Since January 1994, a single interest rate applies to all loans to the centrel government.

CBR reduced the basic refinancing rate to 195 percent on May 16, 1995 and to 180 percent on June 20, 1995.

CHART 7
CHART 7

BELARUS: Interest Rate and Inflation

(In percent per month)

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

1/ Based on new loan contracts.

In relation to total bank credit to enterprises and the population, NBB lending to banks declined steadily from 31 percent at the end of 1993 to 17 percent at end-June 1995. Another notable development in 1994-5 was the decline from 88 to 34 percent of the share of rubel refinancing of Agroprombank and the offsetting increase from 4 to 52 percent of the share of other banks (Table 46).

Auctions of NBB credits were resumed in August 1994, after having been suspended in December 1993. Volumes remained limited, however, for three reasons: (i) the rate of credit expansion decelerated rapidly; (ii) banks had sufficient liquidity; and (iii) the NBB continued the policy of providing refinancing at rates much lower than the basic rate, thus reducing the incentive to bid at the auctions. Nevertheless, credit auctions accounted for some 30 percent of gross NBB refinancing in the first quarter of 1995. 34/ Credit auctions played a marginal role in determining the overall level of interest rates, and their main function was to meet short-term liquidity needs of banks. However, commercial interest rates were generally in line with the basic rate (Tables 52 and 53), but tended to exceed it when the banking system faced liquidity shortages.

Table 52.

Belarus: interest rates on bank deposits, 1994-95 (June)

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Source: national bank of belarus.

Deposits with a maturity of at least one year. Interest rates on these deposits were unified in november 1993.

The minimum interest on deposits was introduced on october 10. 19944 and is linked to the basic refinancing rate. Initially the minimum applied to all term deposits. It is set on e monthly basic but in this table it is quoted as an annual rate without compounding. In January 1, |995 the minimum was extended to all deposit but with different rates applied to time and demand deposits; and since april’l995 demand deposits of enterprises have been exempted. On May 21, 1995, the annualized minimum interest rates on demand and time deposits were raised respectively to and 144 percent: end on june 21 1995 to 36 and 120 percent respectively.

The interest rate margin is defined as the difference between the average lending and average deposits rate, excluding operations refinanced by the NBB. Since january 1995 it le set on a monthly basis the annualized rate is calculated without compounding. On June 21, 1995, the annualized maximum margin was raised to 60 percent per month.

Deposits received between the twenty first of the preceding month and the twenty first of the current month, excluding sberbank.

New series including also interbank deposits.

Depoits received within the current month, excluding sberbank.

Table 53.

Belarus: Interest rates on bank credit, l994-95 (June)

(In percent per annual: period average)

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Source: national bank of Belarus.

Interest rates on credits granted between the twenty first of the preceding month and the twentieth of the current month.

The lower rate applies to households living in residances with up to 10 sq. meters per person.

Interest rates on credits granted within the month, excluding credits granted by Sberbank.

Overdrafts in the correspondent accounts of banks with the NBB were discouraged and small. The NBB has the right to suspend operations on the correspondent account of banks failing to repay their overdraft within seven days. Since September 1993, the penalty interest rate on overdrafts has been set at three times the basic rate and rises to five times the basic rate for overdrafts maintained between 4-7 days. However, no penalty is assessed on overdrafts deemed to have occurred for reasons beyond the control of the commercial bank. In July 1995, about 20 banks not meeting the minimum capital requirements were prohibited from running overdrafts in their correspondent account with the NBB.

Required reserves were the main instrument for withdrawing liquidity from the banking system. Additional liquidity was withdrawn in June 1995 by auctioning one-month NBB securities worth Rbl 36.2 billion (Table 40) and accepting from Sberbank Rbl 450 billion for three months at a monthly interest rate equal to the prevailing minimum rate on time deposits.

In April 1994 a three-level set of uniform reserve requirement ratios was introduced for all banks; separate ratios were introduced for demand deposits, time deposits (lower than demand deposits) and foreign exchange deposits (initially at zero) (Table 39). As the share of foreign exchange deposits in total deposits was expanding rapidly, the average required reserves ratio declined, increasing the money multiplier. This was corrected in October 1994 by extending the requirement to all deposit liabilities and introducing a uniform rate of 5.5 percent. Subsequently, the required reserve ratio was increased further, first for rubel and then for foreign exchange deposits, and a uniform ratio of 12 percent will be re-established on August 1, 1995. Sberbank’s required reserves became remunerated in August 1994 and those of commercial banks in April 1995, thereby reducing the implicit tax that required reserves impose on banks (Table 39). Prior to March 1994, banks could meet their reserve requirement by holding government securities. Since then, only 10 percent of their holdings of government securities may be used towards meeting the reserve requirement.

The NBB influences interest rates both directly and indirectly. Minimum interest rates on rubel deposits were formally introduced in October 1994 (Table 51) in an effort to overcome commercial banks’ resistance to raising deposit rates to a positive real level. The minimum rates are reviewed monthly in light of anticipated inflation, and rates on time deposits are set higher than those on demand deposits. These new minimum rates replace a system of recommending banks pay on deposits an interest rate at least equal to the one paid by Sberbank, and on time deposits an interest rate at least equal to 80 percent of the NBB’s basic refinancing rate prevailing at the time of the deposit.

On lending interest rates, there are two restrictions. First, the interest rate on loans refinanced by the NBB may not exceed the refinancing rate by more than a pre-set margin, typically equal to 1-3 percentage points, on a monthly basis. And, second, in setting their interest rates, banks must observe a ceiling on the spread between the average lending and deposit interest rate. The purpose of the ceiling is to limit the banks’ quasi-monopoly position in their dealings with corporate borrowers; its introduction was also prompted by the high profits reported by banks. The ceiling has made it difficult for banks to make adequate provisions for nonperforming loans, inducing them to engage more actively in foreign exchange operations and develop fee-based activities.

This ceiling was set at an annual rate of 7 percent until June 1993 when it was abolished; it was reintroduced at 20 percentage points (on an annual basis) in the period between February and September 1994; 35/ and again in January 1995, this time at a level of 3 percentage points on a monthly basis. It was further raised to 5 percentage points on a monthly basis in June to allow banks to more fully reflect the risk premium in their lending rates. The ceiling is not enforced strictly: several banks tried to circumvent it by introducing fees and almost half the banks exceeded it. In the first four months of 1995, the average spread on domestic currency operations was 1.7 percentage points on a monthly basis, but with a vast differentiation across banks. Twelve banks had a spread larger than 5 percentage points, in 11 banks it was between 3 and 5 percentage points, in 11 banks it was between 1 and 3 percentage points, and 13 banks reported margins of less than 1 percentage point. Agroprombank had a spread of 0.3 percentage points while in all other major banks it was between 1.5 and 2.5 percentage points.

There was both direct and indirect interference with credit allocation in three ways: (i) directed bank credits, as a rule channeled through the refinancing facility of the NBB at preferential interest rates; (ii) budgetary loans to enterprises at the same interest rate at which the Government borrows from the NBB; and (iii) moral suasion. In addition, commercial banks are required to earmark 15 percent of their resources for the financing of medium- and long-term investment projects at preferential interest rates, and Sberbank is required to allocate 40 percent of the increase of population deposits for the financing of cooperative and individual housing construction. Banks unable to find suitable projects have the option to either place any unused funds in a nonremunerated deposit with the NBB or lend them to other banks.

Despite their expansion in 1994, financial markets remained too small to make a difference on monetary developments. The interbank market was loosely organized with very few banks having the technical capacity for screen-based trading. Activity at the Bourse was virtually nonexistent, mainly because of prohibitive taxes and fees. Inter-bank interest rates differed greatly across banks and across transactions, reflecting risk premia but also nonmarket considerations such as bilateral relations between banks and personal relations between staffs. The government securities market was launched in February 1994, initially with the issue of three-month securities, and since 1995 with a mixture of three- and one-month securities. Altogether, ten auctions had been held by end-June 1995. 36/ The first issuance of NBB securities took place in June 1995 (Table 40). Trading in the secondary market was virtually nonexistent due to the very short-term maturity of these securities.

d. The structure of the banking system and banking supervision

Banks dominate the financial system of Belarus, which in April 1995 comprised the central bank (NBB), 50 commercial banks, 4 representative offices of foreign banks, 10 banks with limited activities, 69 insurance firms, 38 specialized investment funds, 37/ about 70 financial companies, 38/ 30 leasing companies, a stock exchange (Bourse), and a currency exchange. There were also 115 accounting and auditing firms. About 70 percent of banks are members of the National Banking Association.

The majority of banks (39) are incorporated as joint-stock companies, 8 are limited liability companies, Sberbank is entirely state owned, one bank is a personal enterprise, and one a cooperative. There is foreign participation in three banks while another two are affiliates of foreign banks. On average, 18 percent of the share capital of banks was held by state owned enterprises. The main difference in ownership between former specialized and commercial banks is that in the former the State and state-owned enterprises control a greater share of capital (33 versus 22 percent on average) and individuals (including the bank’s own employees) hold a greater stake. 39/ On the other hand, nonstate enterprises hold a smaller share (24 versus 34 percent). With the exception of Agroprombank and Promstroibank, the State has limited direct influence on bank management. On the other hand, major corporate shareholders exert a strong influence and often receive credits at favorable terms, which dilutes competition and distorts resource allocation. This feature is more pronounced in smaller banks, several of which operate essentially as the financial front-end of their corporate shareholders in an attempt to reduce the cost of financial intermediation.

Commercial banks generally operate as universal banks. Three of the formerly specialized banks (Agroprombank, Promstroibank, Sberbank) continue to have a more specialized loan portfolio (agriculture, industry, and housing respectively) despite efforts to diversify. They dominate the sector, accounting collectively for 60 percent of bank rubel loans and 50 percent of deposits (Table 42). Market shares have changed significantly in the past few years. On the deposit side, the share of Sberbank in total deposits fell from 82 percent at the end of 1992 to 5 percent in April 1995, reflecting the collapse of population deposits but also the mounting competition it faces from other commercial banks. On the credit side, the most notable change in 1994 was the decrease of Agroprombank’s share in total bank lending. The smaller banks focus more on low-risk short-term external trade financing and foreign exchange transactions. Of all the banks, 23 have a general license to trade in foreign currency, which entitles them to open accounts abroad, and 18 have a domestic license, entitling them to conduct foreign exchange operations through general license banks. The remaining banks are not allowed to conduct foreign exchange operations.

The bank network (excluding Sberbank) expanded by 19 percent in 1994 to reach 623 branches in April 1995 (Table 43), but its spatial distribution remained uneven, with the largest concentration in the capital, Minsk. The network of currency exchange offices increased fivefold in 1995 as the NBB encouraged their expansion following the prohibition, since January 1995, of the circulation of foreign currencies in the territory of Belarus. Overall, there are about 16,000 inhabitants per bank branch 40/ and 5,400 inhabitants per currency exchange office.

The prudential regulatory framework has undergone significant changes. First, new guidelines were introduced in 1994 for solvency, liquidity, large exposures, provisioning for bad loans, and open positions in foreign currency (Table 44). Second, in August 1994 the minimum capital of banks was indexed to the ECU, 41/ it was raised by 60 percent, and further increases were announced to bring it to ECU 2 million by end-1995, 42/ the intention being to bring about the consolidation of the banking system into fewer, larger and more robust banks. Third, licensing procedures were also tightened: Only two new licenses were granted in the first half of 1995, reversing the lax policy in the previous year which resulted in the opening of 21 new banks, several of them having capital well below the minimum requirement. In May 1995, only 12 banks had a capital in excess of ECU 2 million, while another 12 banks had a capital between ECU 0.6 and 2 million, leaving half of the banks with capital less than ECU 600 thousand. Banks not meeting the then minimum capital requirement (ECU 600 thousand) faced three options: request extension of the deadline for raising capital, merge with other banks, or be converted into banks with limited range of operations. The deadline was extended for two banks and another two were taken over by larger banks, while ten banks were converted into banks with a limited range of operations. 43/ Finally, liquidation procedures were initiated for two smaller insolvent banks (Shoz and European Bank).

3. Credit and interest rate developments

In the first three quarters of 1994, credit policy was loosened to accommodate the demands of the agro-industrial complex which came under particular stress due to the confluence of price controls, the build up of arrears, the erosion of its working capital, and the drought. The loosening of policies was also accompanied by increasing interference with credit allocation. Subsequently, credit expansion was tightened and interest rates were raised. Credit to enterprises increased in spurts, in the first and third quarter of 1994, while credit to Government was a main source of credit expansion in the last quarter of 1994. In real terms, credit plummeted in 1994, and continued to decline further in the first half of 1995 (Chart 8), the effects being particularly felt by nonagricultural enterprises. To a large extent, the plummeting of real credit was offset by the build up of interenterprise debts.

CHART 8
CHART 8

BELARUS: Money and Credit

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

Overall, the credit policy in the first three quarters of 1994 resulted in a seven-fold increase in net domestic assets (NDA) of the NBB as well as of the banking system and an eight-fold increase in broad money, which generated an almost nine-fold increase in prices. In real terms, bank credit to enterprises and the population was at almost half its 1993 level. The drop mirrors the precipitous decline of real money balances resulting from the highly negative real interest rates and the decline in income. A build up of inter-enterprise indebtedness substituted for the drop in real credits.

The above developments forged a broad consensus for the need to quickly reduce inflation and stabilize the economy. As mentioned earlier, the Government’s adjustment program, and subsequently the monetary policy guidelines that were adopted as a result, set the stage for the tightening of policies in the remainder of the year and in 1995. However, a surge in credit to enterprises (both in rubels and foreign exchange) by commercial banks made achievement of lower inflation in the fourth quarter of 1994 impossible. The NBB was also slow in adjusting the refinancing rate to anticipated inflation, especially when inflation accelerated in November; but managed to channel 20 percent of its gross rubel credits through auctions. The NBB also contributed to the credit expansion due to its decision in late September to provide refinancing in foreign currency.

Government interference in Credit Allocation in 1994

Government intervention with credit allocation was pervasive in the first three quarters of 1994, entrenching expectations of a bail-out and failing to instill financial discipline on enterprises. In January 1994, the Cabinet of Ministers issued a decree on “Urgent measures to support agriculture” instructing (i) the Ministry of Finance to transfer to agriculture Rbl 45 billion and, in addition, lend it Rbl 100 billion at 6.5 percent annual interest repayable by the end of the year, (ii) the NBB to refinance Agroprombank with Rbl 90 billion at an average interest rate of 47 percent, and (iii) commercial banks to lend Rbl 41 billion to agriculture. The budgetary loan was allocated by the Ministry of Agriculture among the state farms in proportion to the cultivated area. Enterprises refinanced by the NBB were selected by Agroprombank, which also carried the credit risk, on the basis of their ability to repay but also their commitment to supply state trade organizations. The low interest rate on these loans can possibly be construed as compensation for the low prices paid by state trade organizations.

In August, the Cabinet of Ministers issued a decree on “Urgent measures connected with the drought” inter alia instructing the NBB to refinance (i) Belkoopaoyuz with Rbl 40 billion for the procurement, processing, and storage; (ii) Ministry of Trade organizations with Rbl 35 billion for building up reserves at refrigeration plants, and (iii) agricultural enterprises with Rbl 160 billion for the purchase of petroleum products; and (iv) roll-over maturing loans for enterprises affected by the drought. Credit policy was further relaxed to accommodate the price increases generated by the price liberalization in August raising inflation to 53 percent.

Refinancing in foreign currency doubled in the fourth quarter, reaching US$70 million in December, and increased by another US$37 million in the first half of 1995.

In an effort to reduce inflation, tight credit targets for the first and second quarter were set in January 1995. While the NBB managed to contain credit to banks well below the original targets, there was an unexpectedly large inflow of US$146 million of foreign exchange into the banking system that was only partially sterilized. These foreign exchange inflows allowed commercial banks to continue their rapid credit expansion. Facing continuing high inflation the NBB tightened its policies substantially in the second quarter of 1995. The required reserve ratio was gradually raised, and in June the NBB withdrew additional liquidity by issuing securities and accepting from Sberbank Rbl 400 billion in a three month deposit.

The sectoral composition of bank credit (Table 46) reveals a notable increase in the share of short-term financing to private enterprises, a small increase in the share of investment financing, and a doubling in the share of agriculture. Short-term credits accounted for almost 90 percent of rubel credit and for all nondirected credits in foreign currency.

Enterprises relied more on foreign currency loans, which have increased by over five times since December 1993, reaching US$437 million in June 1995 and accounting for 47 percent of bank credit to enterprises. On the supply side, this initially reflected the declining share of rubel deposits in broad money and, on the demand side, more recently, a change in relative interest rates. With annual interest rates on foreign currency loans averaging about 22 percent (Table 54) and expectations, backed by strong official pronouncements, that the nominal exchange rate would remain unchanged, foreign currency loans were ex-post cheaper than rubel credits, which in the first half of 1995 carried monthly interest rates averaging about 27 percent. The short maturity of the loans mitigated the exchange rate risk.

Table 54.

Belarus: Interest Rates on New Foreign Exchange Deposits and Credits, 1994-95 (June)

(In percent per annum) 1/

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Source: National Bank of Belarus.

Rates on loans granted and deposits received between the twenty first of the preceding month and the twentieth of the current month.

Real interest rates were negative in 1994, albeit less so than in previous years (Chart 9) and until early 1995 the NBB kept the real refinancing rate systematically lower than in other FSU countries (Chart 10). Soon after the real refinance rate turned positive, the other rates followed suit. The minimum interest rates on deposits were instrumental in raising deposit interest rates. On the other hand, lending interest rates were constrained more by demand than by the ceiling on the spread between lending and deposit rates.

CHART 9
CHART 9

BELARUS: Inflation Adjusted Yield of Rubel Deposits and US Dollar Banknotes 1/

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

Sources: Belarussion authorities; and IMF staff estimates.1/ Refers to intiation odjusted value of US$ banknotes In Belarussion Rubets; and yield on term deposts at Sbarbank with a maturity of at least one year.
CHART 10
CHART 10

BELARUS: Inflation Adjusted Refinancing Rate

(Monthly rates in percent)

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

Sources: National Bank of Belarus; and IMF staff calculations.

Nevertheless, several important real interest rates remained highly negative, reflecting the authorities’ concern about the impact of higher interest rates on inflation, doubts about the effectiveness of interest rates in regulating credit demand in an environment of lax financial discipline, and their propensity to subsidize activities perceived to be socially important. Budgetary loans to enterprises and for housing were extended at the same rate at which the Government borrowed from the NBB, namely 0.5 percent monthly. Banks were instructed to finance investment projects at a monthly rate of about 6 percent, while agriculture was refinanced at a monthly rate of about 8 percent. As a result, the average refinancing rate of the NBB was substantially less than the basic rate, depressing the entire structure of market interest rates.

Rubel interest rates were disproportionately high relative to foreign currency interest rates (Tables 52-54). Market segmentation and the threat of administrative intervention seem to have accommodated these differentials and have resulted in credit rationing, with preferred clients obtaining credits in foreign currency, putting at a competitive disadvantage enterprises lacking strong link with banks.

4. Interenterprise debts

The reduction of real bank credit in 1994 was offset, with some lag, by the accumulation of interenterprise debts (Table 47, Chart 11). 44/ In relation to GDP, 45/ domestic payables rose from the equivalent of about 14 percent at and-1993 to about 43 percent at and-1994 and remained at that level in the beginning of 1995, while in relation to bank credit they rose from 115 percent at end-1993 to 303 percent at end-1994, and to 358 percent at end-March, 1995. 46/ A major surge in arrears occurred in the summer of 1994, at the same time as in other FSU countries. Industry, trade, and communal services were the sectors with the highest net domestic debts (Table 48) and energy related debts were the single most important source of both domestic and external indebtedness (Tables 48 and 49). Although Russian enterprises were net creditors overall, Russian enterprises in nonenergy sectors were net debtors (Table 50).

CHART 11
CHART 11

BELARUS: Domestic Debt of Enterprises

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

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

The NBB did not provide financing for the clearing of interenterprise arrears in 1994-95, although it organized clearings in March and June 1995. Some commercial banks took the initiative to clear arrears of their customers using their own resources. Overall, the amounts cleared were small.

It has become widely acknowledged that the explosion of arrears cannot be permanently addressed through multilateral clearings, and that at the root of the problem is the lack of financial discipline. In October 1994 several measures were taken to improve financial discipline, but these proved ineffective because of weaknesses in enforcement mechanisms. Banks were instructed to automatically make payments from enterprise accounts in the following order: first debts to the budget, then energy related debts, and last other payments, including wages. Only an amount up to 10 percent of the previous month’s daily receipts was excluded from this “temporary” order of settlements. Enterprises not having adequate rubel resources were advised to settle their debts with their foreign exchange deposits, and banks were instructed to automatically, execute payment orders from the foreign exchange deposits of those enterprises that refused or were slow to pay. Penalties were stipulated for enterprises failing to fulfill contractual obligations, such as failure to deliver on time goods for which advance payment was received. The penalty was set at one percent of the value of undelivered goods per day of delay. Enterprises were also instructed to settle in noncash all payments in excess of 50 minimum wages using cheques, payment orders, payment requests, and letters of credit. A one percent per day penalty was introduced for banks intentionally failing to transfer funds on time. In particular, funds received within the first half of the day ought to be transferred within the same day; those received in the second half of the day ought to be transferred before the second half of the next day.

5. Monetary aggregates

The negative real interest rates throughout most of 1994, and in 1995 the emergence of positive rates, the reversal of capital flight and the ensuing appreciation of the real exchange rate, shaped the evolution of monetary aggregates. The decline of real money balances leveled off in 1994 and was subsequently reversed, in the second quarter of 1995, while the shift towards foreign currency denominated assets ceased.

Reserve money 47/ increased sharply in 1994 because of a rapid credit expansion by the NBB, and in the first half of 1995 due to the fast increase of net foreign assets (NFA) of the NBB. In particular, the 1,642 percent increase in 1994 can be decomposed into a 101 percent increase due to the accumulation of NFA and 1,540 percent due to the NDA increase. 48/ On the other hand, the 180 percent increase in the first half of 1995 can be decomposed into 141 percent due to the accumulation of NFA and 39 percent due to NDA increase.

The money multiplier, defined as the ratio of broad money 49/ to reserve money, increased from 2.9 to 4.8 in the first ten months of 1994, but subsequently it declined to 3.2, mainly as a result of gyrations in the currency, required reserve, and excess reserve ratios. The currency ratio fell in August as people used rubels to obtain foreign exchange, and increased in 1995 when the parallel circulation of foreign currencies was banned and the opposite happened. The average reserve ratio declined between October 1994 and February 1995, but subsequently increased to 9 percent by June 1995; free reserves ratios fluctuated around 15 percent and were less variable than in the past.

The faster reserve money growth and the fluctuations of the money multiplier were translated in 1994 into a higher and more volatile growth of nominal broad money (Chart 8). In real terms, broad money declined by another 5.6 percent, bringing to 88 percent the cumulative decline since end-1991. In the second quarter of 1995 real money balances rebounded, despite a further output decline, in response to positive real interest rates and the stabilization of the exchange rate. Velocity 50/ fluctuated around 6 in 1994, but increased early in 1995 before declining again in the second quarter with the large increase in real money balances. The composition of broad money has shifted toward rubel assets, the share of which in broad money increased from 45 percent at end-1994 to 65 percent by June 1995. During the same period the share of household rubel deposits increased from less than 5 to 18 percent of broad money, while the share of enterprise rubel deposits dropped slightly from 29 to 26 percent.

Belarus is a cash-based economy with currency in circulation, the bulk of which is held by the population, amounting to about 30 percent of the average monthly wage per person in June 1995. After a 27 percent real decline in 1994, currency in circulation increased by 32 percent in real terms during the first half of 1995, despite an 11 percent output decline. Cash shortages were the main reason for the decline in 1994. This decline was primarily caused by the 70 percent increase of the minimum wage in July, which substantially raised the needs for cash to pay for salaries and wages, and the price liberalization of August, which pushed inflation to 53 percent in that month. As these increases were unanticipated, the NBB was insufficiently stocked with banknotes and it was not possible to satisfy on short notice a supplementary order for banknotes. 51/ In response to the cash shortage the following measures to increase velocity of currency were taken: (i) limits were imposed on withdrawals from deposits, households were advised to use checkbooks for large value transactions and to transfer funds to time deposits; (ii) banks were ordered to clear all domestic checks within five working days and for each day of delay a 1 percent penalty was to be paid; (iii) cashiers were instructed to accept checks and penalties were imposed in cases of noncompliance; (iv) banks were instructed to buy from households no more foreign banknotes than the ones sold during the previous day; and (v) limits were introduced on the agricultural goods that could be purchased for cash (banks were to monitor the authenticity of these transactions). Most of the restrictions of cash transactions, except those relating to processing by banks were removed in November 1994. In 1995, higher denomination banknotes were put in circulation. 52/

The increase of currency in circulation in 1995 was the result of a better supply of currency, combined with the banning of the use of foreign currencies for domestic transactions and the elimination of the separation between cash and noncash payments. This contributed to a massive substitution of rubels for foreign currencies, reflected in the influx into the banking system of US$146 million during the first six months of 1995. The elimination of the separation between cash and noncash payments enabled enterprises in particular to satisfy a pent-up demand for cash.

The substantially negative real interest rates throughout most of 1994 caused population deposits to decline by half in real terms, but with the emergence of positive real interest rates in late 1994 they rebounded, increasing by a factor of three in the first half of 1995. In relation to currency in circulation, population deposits increased from about 50 percent in 1994 to par in June 1995. Despite these increases, the financial assets that the population kept in domestic currency were only about 60 percent of the average monthly wage. The profile of enterprise deposits was different, mirroring the swing in the stance of credit policy. In the first half of 1994 they increased by 10 percent in real terms, while in the next twelve months they declined by 56 percent.

Foreign exchange deposits in convertible currencies, which are held in domestic banks primarily by enterprises, increased by US$151 million in 1994 and by another US$75 million in the first half of 1995, reaching US$430 million by end-June. This continuing increase, despite the high interest rates on rubel deposits, might reflect uncertainty about the sustainability of the exchange rate. Other contributing factors would include the phasing out of the surrender requirement as well as measures to improve enterprise governance and crack down on illicit capital flight. In October 1994, a financial amnesty was announced for enterprises that would repatriate within six months deposits illegally transferred abroad; and the requirement for households to declare the source of foreign exchange was eliminated.

V. External Sector Developments

1. Overview

The economy of Belarus remains highly dependent on trade with other FSU states, particularly Russia. The transformation of raw materials, imported from other states of the FSU, into finished products for export remains a major economic activity. However, the process of diversifying Belarussian exports away from the countries of the FSU toward other countries, particularly in Europe, gained ground in 1994 (Table 55). Exports to non-FSU countries comprised 34 percent of Belarus’s total exports in 1994, compared to 28 percent in 1993. On the other hand, imports came increasingly from FSU countries, largely reflecting the higher prices for energy imports from Russia. Thus imports from non-FSU countries made up only 19 percent of the value of total imports in 1994, down from 28 percent in 1993.

Table 55.

Belarus: Balance of Payments, 1992-94

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Sources: Data provided by the Ministry of Statistics and Analysis, the National Bank of Belarus; and IMF staff estimates.

Includes interstate arrears.

The FSU figure for 1993 covers the conversion by Russia of CBR technical credits outstanding at end-1992 (Rub 115 billion) and additional credits in early 1993 (Rub 62 billion) into a long-term state loan.

Excluding debt to the IMF. Includes in 1994 debt resulting from consolidation of gas arrears.

In percent of exports of goods and nonfactor services.

Exports to and imports from the FSU accounted for about 42 and 62 percent of GDP in 1994, compared to 55 and 60 percent, respectively, in 1993 (Table 55). Russia remained Belarus’s major trading partner in 1994, accounting for over 80 percent of FSU imports and exports, and about 65 and 50 percent, respectively, of overall imports and exports. Ukraine is Belarus’s only other significant trading partner within the FSU, accounting for about 9 percent of FSU imports and 14 percent of FSU exports. Each of the other FSU countries represent 2 percent or less of Belarus’s total FSU imports and exports (Table 57).

Table 56.

Belarus: Balance of Payments, 1994 (Quarterly)

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Sources: Data provided by the Ministry of Statistics and Analysis, the National Bank of Belarus; and IMF staff estimates.

Includes accumulation of interenterprise arrears and the fourth quarter roll-over of gas arrears.

Table 57.

Belarus: Trade with Other FSU States, 1/ 1992-94

(In billions of Russian rubles)

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Source: Ministry of Statistics and Analysis.

Totals differ from Table 49 due to different sources. The data here may include some services.

Starting in 1994, Estonia, Latvia and Lithuania are no longer classified as FSU countries.

Includes oil, gas, coal, electricity and other fuel.

Includes glass and porcelain.

Exports and imports with countries outside the FSU in 1994 amounted to 22 and 14 percent of GDP, respectively, compared to 22 and 23 percent in 1993. Germany, Turkey and Poland have been Belarus’s major non-FSU trading partners (Table 62).

Table 58.

Belarus: Selected Exports to Other States of the Former Soviet Union, 1992-94

(In millions of Russian rubles and units as specified)

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Source: Ministry of Statistics and Analysis.
Table 59.

Belarus: Selected Imports from Other States of the Former Soviet Union, 1992-94

(In millions of Russian Rubles and Units as Specified)

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Source: Ministry of Statistics and Analysis.
Table 60.

Belarus: Selected Exports to Countries Outside the Former Soviet Union, 1992-94

(In millions of Russian rubles and units as specified)

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Source: Ministry of Statistics and Analysis.
Table 61.

Belarus: Selected Imports from Countries Outside the Former Soviet Union, 1992-94

(In millions of Russian Rubles and Units as indicated)

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Source: Ministry of Statistics and Analysis.
Table 62.

Belarus: Direction of Trade: Exports and Imports from Countries Outside the Former Soviet Union, 1992-94 1/

(In millions of U.S. dollars)

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Sources: Ministry of Statistics and Analysis.

Totals differ from Table 55 due to different sources.

Included in totals.

During 1994, Belarus continued its progress toward a market-based exchange system, further reducing barriers to imports and exports. The share of trade conducted by state foreign trade organizations continued to decline (Table 63). While still dominated by state owned enterprises, foreign trade continues to attract new enterprises. In addition, the importance of barter trade in total trade continues to decline. However, moves in early 1995—including aborted attempts to impose minimum and maximum export and import prices and attempts to control financing terms for imports and exports—were in the direction of tighter regulations. The recent customs union agreement with Russia has also resulted in Belarus reintroducing certain trade barriers it had previously eliminated, including some export taxes and higher import duties protecting the Russian market, as it harmonizes its trade system with that country. As part of the customs union agreement, Belarus has abolished customs posts on its border with Russia. Uncertainties regarding trade policy continue, however, not least in relation to Belarussian desires to negotiate exemptions from the common tariffs and nontariff barriers of the customs union.

Table 63.

Belarus: Trade by State Foreign Trade Organizations (FTOs) in 1993-94

(In millions of U.S. dollars)

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Source: Ministry of Statistics and Analysis.

Belarus made substantial progress in liberalizing its foreign exchange markets in 1994 and early 1995, including by determining the official exchange rate in daily auctions, reducing surrender requirements, eliminating distinctions between cash and noncash foreign exchange and domestic currency, allowing banks to participate in the foreign exchange auctions on their own account, and expanding opportunities for interbank trade in foreign exchange. On July 1, 1995, Belarus eliminated all remaining surrender requirements, and allowed interbank trading to take place in all foreign currencies.

Belarus continues to experience balance of payments difficulties, resulting in particular from falling demand from other FSU states and deteriorating terms of trade, due primarily to rising energy prices. These factors led to a further deterioration in both the trade and current account balances in 1994. Lower medium- and long-term capital flows were more than offset by accumulation of interstate arrears, primarily for gas imports. The positive errors and omissions in 1994 apparently reflects unrecorded exports. A significant increase in gross foreign exchange reserves of the NBB was largely offset by declining reserves in the State Foreign Exchange Fund, so that, on balance, official reserves increased only modestly in 1994, remaining at a very low level relative to imports. The exchange rate depreciated rapidly in 1994, reflecting continuing high inflation. However, the nominal exchange rate has been quite stable for the first six months of 1995, varying only modestly between Rbl 11,300 and Rbl 11,700 per dollar between January and March and having remained at a level of Rbl 11,500 per dollar since April.

Notwithstanding remaining difficulties, the balance of payments situation changed substantially for the better in early 1995. Due primarily to a significant increase in exports relative to the first quarter of 1994, the current account and trade balances in the first quarter of 1995 were significantly less negative than a year earlier. In addition, substantial capital inflows—motivated, at least in part, by high domestic interest rates—combined with a purchase from the Fund under the STF of around US$100 million, have enabled the NBB to rapidly increase its gross foreign assets, while maintaining a stable nominal exchange rate. Gross reserves have more than tripled relative to imports in the first half of 1995.

2. Exchange and payments system

a. Exchange rate developments and policy

Throughout 1994, the official exchange rate was based on the rate in the Interbank Currency Auction. 53/ Early in the year such auctions were held twice a week, allowing for the possibility of a divergence between the official exchange rate and rates set in the interbank market. However, by late 1994 the Interbank Currency Auctions were held daily; combined with the fact that banks could participate in both the Interbank Currency Auction and the interbank market, this eliminated the possibility for divergence between the official and market exchange rates.

For much of 1994, there was a distinction between cash and noncash exchange rates. This was a result of restrictions on the conversion of noncash rubels into cash rubels (prompted by a shortage of the latter), as well as a prohibition on the sale of cash foreign exchange at the Interbank Currency Auction. This essentially split the foreign exchange market into two markets—one in which cash foreign exchange traded for cash rubels, and one in which noncash foreign exchange traded for noncash rubels. Due to the shortage of cash rubels throughout much of 1994, the noncash rubel was generally significantly more depreciated than the cash rubel. With the removal of restrictions on the operations of commercial banks in cash foreign exchange, including at the Auction Market (on October 5, 1994), and the removal of restrictions on the conversion of noncash rubels into cash rubels (on January 1, 1995), these two markets have essentially been unified, and there is now one exchange rate for rubels.

In the unfavorable policy environment prevailing for most of 1994, and in view of the mostly failed attempts to reduce inflation towards the end of the year, the exchange rate depreciated rapidly from its levels in late 1993. Between end-1993 and end-1994 the rubel depreciated by over 1,100 percent in nominal terms against the U.S. dollar. At the same time, for the year as a whole, however, the high inflation more than compensated for this depreciation and in real terms the rubel actually appreciated by over 50 percent. 54/ With the stabilization of the exchange rate from the beginning of 1995 and, at least initially, continued double digit monthly inflation, the rubel appreciated in real terms by over 100 percent against the U.S. dollar between January and June. Against the Russian ruble, the picture is slightly different, given the fluctuations in the value of that currency. Between end-1993 and end-1994, the rubel actually remained more or less constant in real terms in relation to the Russian ruble, despite a 600 percent depreciation in nominal terms. For the first 5 months of 1995, the rubel also appreciated by nearly 100 percent against the Russian ruble in real terms, but this was partly reversed by a real depreciation of about 10 percent in June, when the Russian ruble started to recover.

b. Foreign exchange markets

Belarus continued its progress toward increasing the role of market forces in foreign exchange markets in 1994 and early 1995. The 15 percent surrender requirement to the State Foreign Exchange Fund, applied to hard currency exports, was eliminated, the surrender requirement for Russian ruble export earnings was reduced from 65 percent to 50 percent, and export earnings in other currencies of the former Soviet Union were exempted from surrender requirements in October 1994. Surrender requirements were gradually reduced further, with those for Russian rubles abolished effective May 1, 1995, and surrender requirements for U.S. dollars and other hard currencies—the last remaining surrender requirements—reduced to 30 percent effective May 15, 1995 and abolished effective July 1, 1995, as mentioned above. The opening in domestic banks of foreign exchange deposits, including in Russian rubles as well as other currencies, was approved in October 1994.

In addition, the regulations pertaining to the Interbank Currency Auction were liberalized. Banks were allowed to access the auctions for their own account, within prudential regulations, beginning in November 1994. In addition, the requirement for declaration of the source of foreign exchange sold in the auctions (or deposited in banks) was eliminated in October 1994. Finally, restrictions on direct foreign exchange transactions between banks were gradually eliminated, allowing the development of a full-fledged interbank market. In June 1995, banks received authorization to trade in U.S. dollars and Russian rubles, as well as other currencies, on the interbank market (to become effective July 1).

c. Payments system

Belarus has increasingly moved away from settlements via official correspondent accounts and clearing agreements. 55/ Recently, about 10 percent of settlements of FSU trade have taken place through central bank correspondent accounts, with the balance being settled through commercial bank correspondent accounts. Since January 1, 1995, no trade other than portions of trade with Russia, has gone through official correspondent accounts. Belarus currently has in place only two clearing agreements—the “Roscontract” agreement for the import of oil from Russia, and a new agreement with Uzbekistan for the import of cotton under a clearing arrangement (see below).

Interstate, interenterprise arrears became an increasing problem in 1994, with arrears on gas imports from Russia alone totalling some US$405 million by end-December. The accumulation of gas arrears largely reflected the failure to fully pass through the cost of gas to enterprises, as well as the failure on the part of domestic enterprises to pay, in full and on time, for gas deliveries. Following an effort to improve payments discipline, as well as a decision to ensure that domestic gas and oil prices fully reflect import costs, gas arrears stabilized from September 1994 through March 1995, with Belarus paying roughly in full for current gas deliveries. However, beginning in April 1995, gas arrears began growing rapidly, with an estimated accumulation of arrears on gas debt during the second quarter of 1995 of US$55 million. These arrears were apparently caused by liquidity problems on the part of enterprises, and a set-back in payment compliance of households for communal services. Net nongas arrears to Russia were quite small as of March 1995. Belarus was, at that time, a modest net creditor to Ukraine, while its net position with other countries of the former Soviet Union was negligible.

3. Trade system

a. Organization of trade

Trade with non-FSU countries is handled in part by state-owned foreign trade organizations, but increasingly by private trading firms. 56/ The share of trade handled by the foreign trade organizations is steadily declining; from roughly 13 percent of total non-FSU trade in 1993, these organizations’ share of such trade declined to only about 3 percent in 1994 (Table 63).

Trade with FSU countries is conducted both through bilateral trading agreements and interenterprise deals. The bilateral trade agreements Belarus maintains with other countries include appendices—often only indicative—which list the goods to be delivered by each party. The guarantee of the delivery of goods under these agreements used to be in the form of state orders. State orders have, however, been reduced, and for most products constitute less than 30 percent of total bilateral trade under the agreements. Thus, trade under these agreements is increasingly conducted by enterprises directly. Trade in products that exceed the volumes specified in the appendices to the trade agreements, and trade in products not included in the appendices to the trade agreements, are mainly conducted through interenterprise deals.

b. Trade policies

(1) Exports

The process of liberalization of the export system continued in 1994, culminating in the decision on December 2, 1994 to abolish all export taxes, and all export quotas with the exception of those mandated by international and bilateral agreements, as well as those for certain types of unprocessed wood. 57/ However, under the customs union agreement with Russia, Belarus adopted Russian export taxes. 58/

All export proceeds must be deposited in a “transit” account in a bank in Belarus within 60 days of the goods leaving the country, unless special permission for a longer period of repatriation has been approved by the Ministry of Foreign Economic Relations. 59/

As a result of the customs union agreement between Belarus and Russia, signed January 6, 1995, and the protocol on free trade between Belarus and Russia, signed on January 5, 1995, there are now no customs barriers on trade between the two countries, and the countries have adopted a common trade policy toward third countries.

(2) Imports

A new import tariff structure 60/ whereby Belarus adopted Russian import duties, was introduced on April 19, 1995. These duties will be introduced in three phases (on May 1, June 10 and August 1, 1995). The importing of radioactive or toxic wastes, and publications or videos which are against state morals, health or security, are prohibited, while import licenses are required for importing certain pesticides, herbicides and industrial wastes.

Residents do not need a license or approval from the NBB to conduct foreign exchange operations related to trade, except for (i) down-payments for imports or services exceeding US$10,000 or the equivalent that represent more than 30 percent of the value of the goods or services imported; (ii) interest payments to nonresidents on returned down-payments when an original contract is not fulfilled; and (iii) payments for imports more than 60 days in advance of receipt of the goods in Belarus, which requires the advance permission of the Ministry of Foreign Economic Relations. 61/

4. Balance of payments

a. Overall developments

The current account continued to deteriorate in 1994, with the deficit increasing from US$338 million, or about 9 percent of GDP, in 1993 to US$545 million, or 11 percent of GDP in 1994 (Table 55). This reflected a significant worsening of the current account balance with FSU countries, due in large part to rising energy prices, which rose about 37 percent, comparing the average 1993 price to the average 1994 price. By the end of 1994, Belarus was paying roughly 80 percent of world market prices for crude oil, and about world market prices for gas. 62/ The current account balance with non-FSU countries, however, improved sharply, turning from a deficit of US$95 million in 1993 to a surplus of US$321 million in 1994. This reflected both a substantial increase in exports to non-FSU countries (increasing by 26 percent in value terms relative to 1993), and a significant decline (33 percent) in the value of imports from these countries. This decline in imports from non-FSU countries was attributable to a number of factors, including the need to use dollars generated on exports to non-FSU countries to pay for energy imports from Russia, a significant decline in net disbursements of medium- and long-term capital, and the fact that declining domestic output reduced the need for imported inputs. On average, Belarus’s terms of trade deteriorated by over 11 percent in 1994.

Balance of Payments Statistics

Balance of payments statistics for Belarus continue to suffer from severe data problems relating to coverage, valuation, applicable exchange rates, data inconsistencies, and limited and questionable volume and price information. As to trade data in particular, despite some improvements these data remain unreliable and trade data for 1993 and 1994 are in the process of being revised.

For trade with FSU states, the only source of data is the Ministry of Statistics (although Customs does gather volume data on some goods, such as crude oil). Monthly trade data for FSU states are based on reports to the Ministry of Statistics by state owned enterprises. These data are supplemented quarterly by surveys of joint ventures, foreign-owned firms, and private Belarussian-owned firms. Serious problems have existed with regard to the treatment of goods imported into Belarus by foreigners, for processing in Belarus and ultimate re-exporting, with the result that the National Bank has at times reported data on trade with CIS countries in the official balances of payments, that differed from the official trade data reported by the Ministry of Statistics.

There are two sources of data on trade with the rest of the world—Customs and the Ministry of Statistics. The two sources differ significantiy in the reported levels of imports, exports and the trade balance. Each source suffers from problems which make it unreliable. Trade data reported by the IMF staff rely on the Ministry of Statistics trade data, adjusted for known or estimated errors and omissions. The authorities are in the process of devising a system to reconcile the discrepancies in the two sources of trade data; it is hoped this effort will yield results by the end of 1995.

Information available on nonfactor services is incomplete, and of questionable accuracy. The National Bank relies mainly on the International Transactions Reporting (TTRS) survey for information on services, supplemented by other sources, to derive the services account. The Ministry of Statistics also publishes data on imports and exports of services, but it acknowledges that these data are far from comprehensive, and that the NBB data are more accurate.

The deficit in the services account narrowed further in 1994, reflecting substantial earnings from transportation of goods to and from Russia across Belarussian territory. Recorded capital inflows (including a consolidation of arrears to Russia for gas imports), declined in 1994, largely due to a large increase (from US$2 million to US$90 million 63/) in principal payments due on outstanding loans. Interstate, interenterprise arrears grew substantially in 1994, largely in the form of gas arrears to Russia. Significant positive errors and omissions presumably reflect unrecorded private exports. The increase in gross official reserves, inclusive of the State Foreign Exchange Fund, was very modest during 1994.

The situation appears to have improved in early 1995. Provisional data for the first quarter show a decline in the current account deficit by roughly US$50 million compared to the same period in 1994, due to a significant increase in exports to non-FSU countries. Belarus reduced its net interstate, interenterprise arrears in the first quarter of 1995, while remaining current on gas payments. This changed in the second quarter, as Belarus accumulated an estimated US$55 million in new gas arrears to Russia during that quarter. Substantial capital inflows, apparently prompted by high interest rates and domestic credit constraints, at the same time that Belarus received about US$100 million from the IMF, have allowed the NBB to accumulate some US$175 million in gross reserves in the first six months of 1995, bringing gross reserves to 1.3 months of imports by end-June (up from 0.4 months of imports at end-1994).

b. FSU trade

Belarussian imports from other countries of the FSU consist primarily of energy products and other raw materials. Belarussian exports to these countries consist primarily of trucks, tractors, chemical and petrochemical products, and refined petroleum products (Tables 58 and 59). Trade with FSU countries is increasingly based on enterprise agreements, the bilateral trade agreements being phased out. While bilateral clearing accounts have been established with all states of the FSU, there was only one intergovernmental clearing agreement in 1994; the “Roscontract” agreement with Russia which specified the intergovernmental exchange of crude oil from Russia for strategic products from Belarus, on a balanced basis. A successor agreement has been signed for 1995; oil imports under this clearing agreement in 1995 are currently projected to be roughly two million tons, or less than half of the level in 1994 (and only about 20 percent of total oil imports). In addition, a new clearing agreement has been established with Uzbekistan, calling for the exchange of cotton from Uzbekistan for strategic goods from Belarus on a balanced basis.

The volume of exports to the FSU is estimated to have declined by almost 20 percent in 1994, in part reflecting a redirection of exports from FSU to non-FSU countries. Import volumes from FSU countries declined by just over 8 percent, although nonenergy import volumes declined by over 16 percent, due in part to the impact of worsening terms of trade and in part to declining GDP.

c. Non-FSU trade

Tractors, trucks, fertilizers and light industrial goods remain Belarus’s primary export products to non-FSU countries. Belarussian imports from these countries consist primarily of intermediate inputs (e.g. rolled metal, rubber, paints) and consumer goods (e.g. shoes) (Tables 60 and 61).

Exports to non-FSU countries reversed the trend of recent years, growing rapidly (some 26 percent) in volume terms in 1994. Particularly large increases occurred in exports of tractors, fertilizers and machine tools; for all these products, exports to FSU countries declined significantly in 1994, confirming the redirection of exports from FSU to non-FSU markets. As indicated, import volumes from non-FSU countries declined sharply (some 33 percent) in 1994. Exports of textiles to the European Union remain subject to voluntary trade restrictions, while exports of potassium fertilizers from Belarus have been affected by anti-dumping actions in the European Union.

d. Other accounts

In 1994, and so far in 1995, Belarus has provided pipeline services for the transit of Russian gas and oil exported to western Europe, free of charge. In exchange for free transit of gas, Belarus has received Russian gas imports for an explicit price which is below the world market price. The authorities estimate that, taking into account the cost of providing these transit services, the effective cost to Belarus of gas imports is about US$16 per 1000 cubic meters higher than the official price of US$53, bringing the total price to rough parity with world market prices. 64/

Transfer receipts mainly comprise humanitarian assistance and assistance related to the Chernobyl disaster, including from Russia. Transfer outflows include mainly the payment of pensions to former Belarussian residents.

Foreign direct investment remains quite low in Belarus. The Ministry of Foreign Economic Relations estimates such investment in 1994 at only some US$9 million. In recent months, the number of registered foreign investors in Belarus has actually declined; thus, the Ministry of Foreign Economic Relations does not expect an increase in the value of foreign direct investment in 1995.

5. External debt and debt service

Data on medium- and long-term debt are provided by the debt management unit of the Ministry of Finance. Disbursements in 1994 totalled some US$283 million, almost exclusively from non-FSU creditors, down from US$322 million in 1993. Payments on such debt increased significantly in 1994, as large payments fell due on loans from Germany and the European Union. Similar amounts are falling due in 1995.

Belarus temporarily accumulated debt service arrears to Germany and the European Union during 1994. These arrears stemmed from the inability of enterprises, who had received these loans, to generate sufficient rubels to service the loans. Eventually, the Government, as guarantor of the loans, used the majority of the balances in the State Foreign Exchange Fund to service these loans, clearing the arrears in late 1994.

The stock of Belarussian external debt is estimated to have been roughly US$1.5 billion at end-1994, or about 33 percent of 1994 GDP, excluding amounts drawn under the STF but including US$405 million in outstanding arrears on gas to Russia (Table 64). Of this, roughly 21 percent owed to non-FSU bilateral creditors (primarily Germany), another 12 percent was owed to multilateral creditors (primarily the World Bank and the European Union), and the remaining 67 percent was owed to Russia. Non-FSU credits have been tied to immediate import needs (primarily grains and medicines), investment or infrastructure rehabilitation projects. The debt to Russia consists predominantly of gas arrears (US$405 million), a portion of a grain credit to the former USSR which was on-lent by Russia to Belarus (US$135 million) and technical credits (US$385 million) which were the result of the conversion of outstanding balance on National Bank correspondent accounts with the Central Bank of Russia into a government loan in 1994.

Table 64.

Belarus: External Debt Outstanding, 1992-94

(In millions of U.S. dollars: end of period) 1/

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Sources: Ministry of Finance and Fund staff estimates.

Stocks are valued at end-of period exchange rates.

Includes in 1994 debt resulting from consolidation of gas arrears.

VI. Systemic Policies

After a period of modest and at times erratic progress in implementing systemic reforms, 65/ the restructuring of the economy gained momentum in the second half of 1994 when the Government of the newly-elected president realized the importance of reforms (which had basically been put on hold for more than six months) to the recovery of the rapidly declining economy. As mentioned earlier, a comprehensive stabilization and reform program was developed and approved by the Parliament in October 1994. The main objectives in the structural areas are to achieve a substantial liberalization of the economy through greater reliance on market mechanisms for price determination and the allocation of goods, to make progress with privatization, and to remove obstacles to and promote development of the private sector.

1. Deregulation

While prices of a large number of commodities had already been liberalized and enterprise transactions were conducted at “free contract prices” by the second half of 1994, many continued to be regulated by trade and profit margins and others continued to be set on an administrative basis. As a first step, with a view to sharply reducing the burden of subsidies on the budget, prices of a number of commodities, including bread and milk, were increased by 10 to 20 times in August, while tariffs for the provision of utilities and communal services were also increased substantially. Prices for meat, bread and bakery products, milk and dairy products, and children’s food and clothes were subsequently deregulated in October, while household tariffs were increased on several occasions, reaching cost coverage level of about 60 percent on average by July 1, 1995. 66/ In addition, all fixed trade margins were eliminated in November 1994. While temporary controls were reintroduced subsequently on food and essential consumer goods in response to sharp price increases for these commodities, prices were basically free by end-1994, except for those still subject to monopoly regulations and agricultural procurement prices, which were not liberalized until February 1995. Nevertheless, at the same time, some controls have continued to be applied at the local level, as the Government had, in December 1994, authorized local authorities to intervene in the pricing of socially important commodities. This practice was formally repealed in late June 1995. Administered prices now apply only to household services, utilities, public transportation and communications and most energy products.

In conjunction with the above liberalization of prices, the number of so-called monopolistic enterprises for which price regulations were maintained (mostly in the form of maximum profit margins) was gradually reduced from close to 300 in mid-1994 to about 70 by the beginning of 1995 and zero from July 1, 1995. Price regulations are now limited to natural monopolies, consisting of just over 50 individual enterprises, mostly in the areas of transportation, provision of energy and communications. The number of enterprises still considered monopolistic producers or providers of services, however, is substantially larger (close to 1,000 in mid-1995). Preventing abuse of their monopolistic powers is to take place within the context of the Anti-Monopoly Law of December 1992, which gives the Ministry of Anti-Monopoly the responsibility for supervising and regulating natural monopolies and enterprises that have no domestic competitors. The Ministry investigates claims of abuse of power and imposes sanctions if the claims are proven correct.

The Ministry also has a mandate to create an environment in which economic entities, both existing and newly established ones, have a level playing field. To this end, it is actively involved in the process of de-monopolizing large enterprises, although progress to date has been limited. A pilot project in Gomel was initiated with the help of the World Bank in 1993 to split a trade amalgamation of four wholesale organizations into 33 separate units with their own balance sheets; 12 units were created by mid-1995. An additional 3 trading companies are slated for breakup.

The reduction of the role of state orders in production and procurement, which was evident in 1993, continued in 1994 as the Government slowly withdrew from its position as sole procurement agent, partly as a result of lack of financial resources to continue to do so. The reduction was evident both in orders for centralized exports—which were halved in percent of production for industrial goods and fell by one third for consumer goods—and in orders for republican needs, where it was even more pronounced. Overall, state orders accounted for less than 8 percent of industrial goods production and 30 percent of consumer goods production in 1994 (Table 65). In agriculture, state orders continued to play an important role in 1994, partly in response to the economic deterioration in the beginning of the year, leading the Government to provide agriculture with fertilizers and energy for spring sowing. Similarly, the Government had to intervene later in the year by buying crops, due to the lack of available financing for agriculture from the banking system and the reluctance of farmers to sell at the artificially low prices. State procurement agencies continued to buy significant shares of agricultural production of some main food items, although for milk, meat and eggs the share declined somewhat compared to the previous year. State orders were formally abolished on January 1, 1995, except for state reserves and the own procurement needs of the Government.

Table 65.

Belarus: State Orders in Industrial Production, 1993-94

(In percent of total industrial production)

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Source: Ministry of Economy.

2. Enterprise reform and private sector development

Faced by continuing high inflation, lack of working capital, loss of markets, high costs of imported energy and materials, and increasing interenterprise arrears, profitability of enterprises declined for the second year in a row in 1994 (Table 9). 67/ This trend continued into the first quarter of 1995. At the same time, the number of loss making enterprises increased, although according to official data the number is still low.

The authorities have recognized that the inherited production structure and the management environment in enterprises need to change in order to be able to successfully compete in the international market place. This inevitably will have to include closure of some nonviable enterprises. Nevertheless, there have been no enterprise bankruptcies yet in Belarus. The major obstacle is the fact that existing bankruptcy legislation does not provide for a clear mechanism to declare enterprises insolvent. In addition, there continues to be a perception that for many enterprises the problems that are being encountered are only of a temporary nature and that unemployment resulting from actually closing enterprises would have severe social consequences. Nevertheless, a new bankruptcy law has been prepared in cooperation with the Supreme Economic Court of the country, and it is expected that it will be approved as soon as a new Parliament is in session.

In the meantime, the Government has taken actions in June/July 1995 to identify a number of insolvent enterprises, with the idea to prevent them from getting further financial resources from the banking system. A list of 30 such enterprises was adopted by the Cabinet of Ministers on June 30. Steps have also been taken to improve enterprise governance. Contracts with enterprise managers were reviewed in late 1994 and enterprises were instructed to develop comprehensive business plans for approval by the Government.

Measures were also introduced in recent months to improve payment discipline and prevent a further accumulation of arrears. No significant netting operations of arrears have taken place. Some clearing has been carried out through the bank accounts of the enterprises, but the amounts have been very modest in comparison with the overall level of arrears. At the most recent of such exercises in June 1995, arrears of only Rbl 400 billion were cleared out of a total of more than Rbl 15 trillion.

While the share of the private sector in the economy remains low, its importance is expected to increase over time with further progress in privatization (see below). During 1994 and in the first half of 1995, several steps were taken to create more favorable conditions and to encourage entrepreneurial activity, including in the areas of removing bureaucratic barriers and discriminatory practices, further simplifying registration procedures and limiting license requirements for new business activities. The Ministry of Anti-Monopoly is assisting through a small program providing advisory services for new businesses, and the European Bank for Reconstruction and Development (EBRD) has made available a credit line for small and medium enterprises to be channelled through selected banks. The World Bank is expected to approve a similar credit line in the near future, and the International Finance Corporation (IFC) has been active for some time promoting small enterprise development and assisting local authorities with privatization. Other donors, including the EU and the United States, are also providing technical assistance to small scale private enterprises in order to promote private sector development.

3. Privatization of enterprises

A Law on Denationalization and Privatization of State Property, setting out the general principles for enterprise privatization and transformation, was adopted in January 1993. 68/ The objective is to privatize two thirds of state enterprises during the period 1993-2000. 69/ Within this general framework, the Parliament has to approve each year a detailed annual privatization program identifying the specific enterprises to be transformed and the methods by which the transformation is to take place. While there are no set guidelines, defense related industries and natural monopolies, such as utilities, as well as enterprises in other sensitive sectors (e.g. electronics) have generally been excluded from privatization. Privatization plans for state owned enterprises are drawn up by the Ministry of Management of State Property and Privatization, in cooperation with branch ministries and local governments (oblasts) which submit privatization plans for enterprises under their control. The Ministry also supervises the overall privatization process. The Parliament initially determined the allocation of revenues from privatization between the central government and local governments, but since 1994 receipts mainly benefit the authority that owned the enterprise.

Compared to most other FSU countries and countries in Eastern Europe, privatization has been slow in Belarus. Even though the legal framework was established already in early 1993, privatization initially did not receive much support from local governments and branch ministries and the 1993 annual program was not approved until the middle of the year. The process gained speed in the beginning of 1994, particularly at the local level, as better financial incentives were put in place, but virtually stopped in the second half of the year when the President announced that the privatization program should be reconsidered in view of irregularities in the process so far. It was not until early 1995 that the President issued a decree supporting continuation of the privatization process and a program for 1995 was formally approved in June. Under the 1995 program privatization of enterprises with assessed value amounting to 10,000 minimum wages 70/ and enterprises in the defense sector can only take place with approval of the President. The program envisages transformation of about 700 republican and 1,000 local enterprises during 1995, or about 15 and 25 percent, respectively, of total republican and local enterprises to be privatized.

Reflecting the above obstacles, the number of republican enterprises that had been privatized reached only about 400 at the end of March 1995, or 9 percent of the total number of republican owned enterprises to be transformed (Table 66). In terms of assessed value of these enterprises, they accounted for less than 6 percent of the total value of enterprises to be transformed. The number of enterprises privatized in 1994 fell far short of that projected under the 1994 program. At the local level the number of enterprises that were privatized nearly quadrupled in 1994 compared to 1993 and at end-March 1995 stood at about 21 percent of the total of locally owned enterprises to be transformed. While insufficient data are available to assess the extent of true privatization (i.e. cases where the Government owns less than 50 percent of shares) it is estimated that at end-1994 about 75 percent of the privatized enterprises met this criteria. 71/ Successful implementation of the 1995 privatization program could increase the share of privatized enterprises substantially. As a first step, the privatization of most large and medium-size enterprises will take the form of transformation into 100 percent state owned enterprises, while small trade, food service and other consumer service enterprises are to be sold through auctions or competitive bidding.

Table 66.

Belarus: Transformation of State Property, 1991-95(QI) 1/

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Source: Ministry of Management of State Property and Privatization.

The authorities define transformation to include enterprises converted to joint stock companies where the Government owns all or most of the shares.

As of January 1, 1994, 4,423 Republican enterprises and 4,114 communal enterprises (a total of 8,537 enterprises) were planned to be transformed.

In billions of Belarussian rubles before currency reform to rubels. Figures for 1991-93 were increased by a factor of 4.105 to account for the general revaluation of property in 1994.

The total fixed assets value (gross) of state property to be transformed (in 1993 prices, balance sheet data) was Brub 4,538.9 billion as of January 1994.

As in 1993, in 1994 and early 1995 the majority of state enterprises were transformed by converting them into joint-stock companies with the state in most cases retaining 100 percent ownership. In fact, since the start of the privatization process this approach was applied to about 70 percent of republican owned enterprises. The second most common form of privatization of republican enterprises has been buy-outs of leased enterprises by the labor collectives, mostly for small service and trade oriented enterprises. At the local level, since 1993 privatization has mostly taken the form of auctions and competitive bidding (52 percent) and buy-outs of leased property (20 percent). Since many of the enterprises owned by local governments are stores and small service companies (such as barber shops) these methods have proven easier to implement at this level. Enterprises in these sectors accounted for more than 75 percent of the enterprises privatized since 1991. At the republican level about two thirds of the privatized enterprises were in the industrial and construction sectors.

In order to promote participation by the population in the privatization process, and because of the limited financial resources of households, in 1994 a Voucher Law was adopted. From April 1, 1994, each Belarussian citizen can apply for privatization vouchers and open a special voucher account at Sberbank. This voucher account will then be converted into voucher certificates. The face value of property vouchers issued from April 1, 1994 is Rbl 2,500, but this value will be adjusted for revaluations of the state property. Each citizen is entitled to 20 vouchers, plus an additional allocation based on the number of years a person has worked, age, and number of children. There are also additional allocations for orphans, the disabled, and veterans. 72/ The deadline by which citizens have to apply for vouchers was recently extended to January 1, 1996. Vouchers can be used until 1999, after which the state will repurchase all those unused. By May 1995 about 47 percent of eligible citizens had applied for vouchers and about 28 percent had received voucher certificates from Sberbank, although only a fraction (about 1 percent) of these certificates had actually been used.

The privatization program specifies that 50 percent of the shares of all enterprises to be privatized will be sold in exchange for privatization vouchers. 73/ This can take place either by citizens directly exchanging their vouchers for shares through one of 150 branches of Sberbank, or indirectly through investment funds. In the latter case citizens can exchange their vouchers for shares of investment funds which in turn use the vouchers to purchase shares of enterprises. A number of restrictions apply to investment of resources by investment funds, mostly to diversify the risk. Given the slow progress of privatization process in 1994 and early 1995 and the fact that most shares of privatized enterprises are still state owned the activities of investment funds have been limited. A first auction of shares of 41 enterprises was held on only March 30, 1995. As of March 1995, 38 investment funds were legally registered. However, at that time their licenses were suspended pending investigations of their activities. The results of that auction were voided following the suspension of the investment funds’ licenses. It is expected that most funds will be reinstated by mid-August 1995 and that auctions of shares will be resumed at that time.

4. Privatization of housing

Traditionally, the housing situation in Belarus, like in most countries of the former Soviet Union, has been difficult, with average living space per person around 18 m2 in the early 1990s and before. 74/,75/ More than half of the housing was provided by the state, through ministries and enterprises related to the ministries, by local government, by housing cooperatives organized through factories with state financial support, by collective farms, and by other semi-public organizations, e.g. trade unions (Tables 70 and 71). Private housing, consisted mostly of small houses, which were built by individuals in the rural areas; by 1990 it accounted, however, for more than 40 percent of the housing stock.

Table 67.

Belarus: Employment in Transformed Enterprises, 1991-95(QI)

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Sources: Ministry of Management of State Property and Privatization.
Table 68.

Belarus: Number of Transformed Enterprises by Activity, 1991-95(QI)

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Sources: Ministry of Management of State Property and Privatization.
Table 69.

Belarus: Number of Transformed Enterprises Distributed by Privatization Method, 1991-95(QI)

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Sources: Ministry of Management of State Property and Privatization.

Mainly conversion to joint-stock companies of Republican enterprises, where the shares later are sold (to be sold).

A tender, unlike an auction, involves conditions on the purchase of enterprise.

Table 70.

Belarus: Distribution of Ownership of Housing Stock, 1990-94

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Source: Ministry of Statistics and Analysis.

Including State Committees. Since Ministries own most enterprises this refers mainly to the latter.

For instance trade unions.

Table 71.

Belarus: Housing Privatization, 1989-95(QI)

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Source: Ministry of Statistics and Analysis.

The total number of dwelling units that had been privatized at end-March 1995 corresponds to about 31.5 percent of the total stock of government and and public owned housing. Adding annual percentages will give a different result due to the expansion of the housing stock during this period.

Early attempts to privatize state owned housing in Belarus started as early as 1989. However, progress was slow in the absence of clear rules and a clear legal framework. A Law on Privatization of Housing was passed in July 1992, which was expected to give a significant boost to the privatization process. While the number of apartments privatized in 1992 exceeded the amounts achieved in 1989-91, it was not until 1993 that the number of people interested in buying their apartments showed a significant increase. (Table 71). The reasons for the initial slow pace include the existing low rents, resistance by local authorities and branch ministries to privatizing their housing stocks, and the prohibition on resale of privatized housing within three years. During 1993 and 1994, purchase procedures were speeded up and can now be completed in about three days (owing to considerable computerization), although in some cases it may take a little longer due to notary requirements. 76/ Recently, the prohibition on resale of privatized housing within three years was eliminated and the housing market is now fully free. However, the unsettled economic situation and deterioration of living standards have had a negative effect on the housing market. As a result, the flow of dwelling units privatized declined from a high level of over 68,000 units in the first quarter of 1994 to just over 35,000 in the same period in 1995.

In order to help the privatization of housing, a system of vouchers was introduced at the same time as, but separately from, privatization vouchers. All citizens of Belarus (as registered on July 1, 1992) are eligible to receive such vouchers. The total value of the vouchers is based on the estimated value of the housing stock. The value of individual vouchers consists of a base allowance (derived from the value of the housing stock built before 1992) and an allowance based on the number of years a person has worked. 77/ As purchasers of newer housing would be at a disadvantage with rising costs, the value of their vouchers is adjusted at the time of purchase by a factor representing the increase in value of the unit between 1992 and the date of purchase.

Mostly as the result of the privatization of state property, the share of private housing in the total housing stock (based on size) increased from 40 percent in 1990 to nearly 54 percent in 1994. Other new types of private housing include apartments owned by private enterprises that are rented, or apartments that are specifically built for employees. The state further encourages private housing by making available subsidized credit (low interest rates and longer repayment periods) through Sberbank. For this purpose a special Fund for Financing of Housing Construction Cooperatives was established in November 1994. At the same time, construction of new state owned housing continues and the housing stock increased by about 10 percent between 1990 and 1994, with the average living space per person increasing to 20 m2.

5. Agricultural reforms

Agricultural reforms have been slow, mainly because of concerns that excessively rapid structural change in the rural sector would destroy social harmony by forcing workers off the land and by reducing rural incomes. Reforms have also been hampered by a desire to keep prices of the major food items consumed by the population at low levels during most of 1993 and 1994. In addition, as mentioned earlier, agriculture and food processing industries have absorbed huge amounts of budgetary support, and productivity has been low, a situation which needs to be addressed. In the second half of 1994 the Government became increasingly convinced that some steps would be needed to tackle the problems of agriculture, and in early 1995 several measures were taken. The major component of these measures was the full liberalization of agricultural procurement prices in early 1995, as also mentioned before. In addition, a decision was taken to reduce direct state purchases, traditionally financed by directed NBB credits, in the forthcoming procurement season, including by decentralizing these activities among more enterprises (including nonstate ones) and extending their time frame. Furthermore, plans were drawn up to convert agro-processing enterprises into joint-stock companies, with shares to be sold to agricultural producers. Procedures were established to hold agricultural enterprise managers accountable for mismanagement, and contracts are to be signed with individual managers. Another important obstacle to reforms in the sector was addressed by giving state farms the same property rights as collective farms. This should facilitate future decisions on converting farms into joint-stock companies or other forms of ownership.

However, while progress is being made, another major obstacle to agricultural reforms—the establishment of ownership rights for land—remains. Life-time inheritable leases of land for private farming are permitted, with private farmers allowed to lease up to 50 hectares, but these leases cannot be sold or mortgaged nor can the land be bought. Private ownership of land is currently allowed for three purposes, namely as a building plot to construct housing, for use as agricultural land with a maximum of one hectare and for use as gardens. In addition, recently legislation was introduced to allow industrial land to be privatized together with the enterprises located on it. There are plans to make lease rights transferable, although in the absence of a sitting parliament it is not clear when a decision on this issue could be made.

Despite the limited progress with agricultural reforms, the share of the private sector in total agricultural production continued to increase in 1994, although at a much slower pace than before, to almost 40 percent. Remarkable in this respect is the fact that private farms and land plots owned by individuals (private gardens and orchards) accounted for less than 15 percent of the total land used for agriculture, which shows the potential for productivity increases in collective and state farms once restructured and privatized.

APPENDIX I: Belarus: Tax Summary

(As of June 1, 1995)

Since the beginning of 1994, Belarus has made a number of changes in its tax system. The 3.6 percent payroll tax to finance health care and several excises were eliminated. The first-bracket income tax rate was reduced from 12 to 9 percent. The property tax on fixed assets of state-owned enterprises was reduced from 3 to 1 percent. A presumptive profit tax levied in the form of a 5 percent turnover tax was introduced for sales of selected goods including cars and computers. At the end of May 1995, Belarus signed a customs union agreement with the Russian Federation. As a consequence of the agreement, customs borders with the Russian Federation were abolished and Belarus adopted the import and export duty system of the Russian Federation. Starting from June 1995, Belarus also adopted most of the excise taxes on imports and exports presently levied by the Russian Federation. 78/ The customs union agreement is likely to lead to further harmonization between the Russian and Belarussian tax system. This annex describes the status of the Belarussian tax system as of June 1, 1995.

1. Individual income tax

The system of personal income taxation in Belarus is progressive, with rates starting at 9 percent and a top marginal rate of 40 percent. Taxable income includes in-kind payments and incomes earned abroad or paid in foreign currencies. The following are exempt from personal income taxation:

  • social security benefits and allowances;

  • the monthly minimum wage, set on March 1, 1995 at Rbl 60,000;

  • student allowances;

  • pensions;

  • receipts from the sale of personal properties;

  • income derived from the sale of auxiliary farming; and

  • interest on bank deposits and treasury bonds.

There are three kinds of tax exemptions: progressive, proportional, and total. The progressive tax exemption consists of a taxable income deduction up to five times the minimum wage and it is allowed to the following categories of taxpayers: 79/

  • veterans of the World War II;

  • victims of (or persons involved in mitigating) the Chernobyl nuclear disaster;

  • disabled persons; and

  • parents with more than six children under the age of 18.

The proportional tax exemption consists of a tax credit. Income taxes are reduced by:

(1) 70 percent for parents with 5 children under 18;

(2) 50 percent for parents or wives of persons who died because of military service during World War II; for persons who were in active duty in Afghanistan; and for parents with 3 or 4 children under 18; and

(3) by 30 percent for workers or entrepreneurs with 3 or more dependents, for single mothers with two or more children under 18; for widows and widowers with two or more children under 18 that do not receive any pensions; parents with disabled children;

Finally, certain categories of the population are completely exempt from income taxation:

  • pensioners, housewives, students, teachers, persons sent by enterprises to work on farms during harvest;

  • military personnel (this exemption was partially eliminated in the context of the revised 1995 budget);

  • victims of repression between the 1920s and 1980s subsequently rehabilitated; and

  • persons growing medicinal plants and various wild flowers.

Additional privileges may be granted by local Councils of People’s Deputies. Exemptions can not be accumulated. The tax on annual income is paid in advance in quarterly installments equal to 25 percent of the income assessed for the previous year. An income declaration has to be submitted before January 15 of the following year and the remaining tax has to be paid by March 15.

Effective January 1, 1995, the personal income tax schedule in terms of the monthly minimum wage (MMW) is as follows:

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2. Enterprise profit and income tax

The enterprise profit and income tax is levied on enterprises, associations, organizations, and institutions, in principle at a standard rate of 30 percent. Taxable income includes capital and financial incomes. Taxable profit is defined as the difference between total proceedings from the sale of goods and services and the associated costs of production. The real estate tax is deductible from the profit tax base. Depreciation allowances for the replacement of fixed capital and interests on short-term bank loans are included in production costs. Capital expenditures aimed at expanding production and expenditures related to the Chernobyl disaster or with environmental protection are deductible up to 50 percent of total profits. On the other hand, bonuses and fringe benefits paid to employees are not included in production costs for tax purposes.

Despite the standard rate, in fact, six different tax rates are included in the Law on Taxation of Enterprises. Incomes of enterprises providing entertainment activities (excluding sport events) are taxed at 60 percent. Income from holding lotteries is taxed at 40 percent. Rates of taxation of agriculture are set by local authorities but may not exceed the standard rate (30 percent). Capital incomes and profits of small enterprises are subject to a lower 15 percent rate. Profits of engineering and transportation enterprises of the agro-industrial complex are taxed at a rate of 10 percent. Profits of construction enterprises of the agro-industrial complex are taxed at a rate of 7 percent. Since the beginning of 1995, profits from sales of a selected list of “luxury goods” including cars, computers, furs, and precious metals is exempt from profit tax but instead subject to a presumptive 5 percent turnover tax.

The exemptions and preferences under the present law on taxes on profits and income of enterprises include:

  • collective, state, private, and auxiliary farms (except when growing flowers and producing furs);

  • profits used to clean up Chernobyl after-effects or to provide environmental protection and fire safety;

  • re-invested profits (up to 50 percent of total profits);

  • enterprises creating additional jobs in 1995 have their profit tax decreased by the percentage of the increase in jobs compared to previous period;

  • contributions to educational and health care institutions, homes for elderly and disabled, cultural and sports institutions maintained or shared by the enterprise;

  • charitable contributions (up to 5 percent of profits);

  • profits of self-supporting workshops of special hospitals and clinics and producers of orthopedic devices and rehabilitation devices;

  • profits from sale of publications in the Belarussian language; enterprises owned by “creative associations”; profits earned by cultural enterprises supported by budget subsidies;

  • profits from production of goods used at public education institutions; enterprises operated by educational organizations to provide practical training for students; enterprises offering apprenticeship training, if students account for at least 80 percent of number of employees;

  • profit from the production of baby food;

  • profits used to create jobs for disabled; enterprises where at least 50 percent of employees are disabled; if the number of disabled employees accounts for between 30 and 50 percent, taxable profit is reduced by 50 percent;

  • profits of enterprises where employees who have reached retirement age (60 years for men and 55 years for women) account for at least 70 percent of employees;

  • profit tax exemptions are provided for three years starting from the year when first taxable profit is declared; a reduction of profit tax by 50 percent for an additional three years may be granted by Cabinet of Ministers.

3. Value-added tax

Since January 1994, the VAT standard rate has been established at 20 percent (it was 25 percent in 1993). The tax rate is reduced to 10 percent for certain consumer services (production and repair of clothing, footwear, watches, appliances, radio-electronic appliances, bathing and laundry services). The sale of agricultural products has been exempted with the provision that the exemption will be rescinded once monetary unification with the Russian Federation (no longer under consideration) takes place, whereupon agricultural sales are to be taxed at the preferential rate of 10 percent. VAT is levied on legal entities and other entities whose monthly turnover exceeds 250 times the monthly minimum wage. Over 30 items are exempt. Goods and services currently not subject to the VAT include children’s articles, medical services, training, services of lawyers, fuel sold at the retail level, medical equipment and medicines. The President and the Cabinet of Ministers—on recommendation by the “Working Commission for Analyzing Financial Performance of Enterprises”—may temporarily reduce the rate of VAT for goods produced by state enterprises “which do not find a domestic market”.

Belarus presently operates on a cash system of settlements. Shipments of goods are recorded as revenue only after payment is made by the buyer, but not later than 60 days from shipment. This gives rise to collection problems in times of payments difficulties. The VAT is calculated using the subtractive method. VAT is assessed on the difference between the value of sales and eligible “cost of production and acquisition.” The latter are estimated by the taxpayers themselves, resulting in obvious abuses. 80/ The concept of “cost of production and acquisition” does not include purchases of capital goods or depreciation. Barter trade is also taxed. Importantly, under the present system, VAT liabilities are included in the eligible costs of production, resulting in further loss of VAT base and a lower effective VAT rate.

Regarding VAT taxation of international trade, the generally accepted approach in the CIS is to apply the so-called origin principle to trade within the common area and the destination principle to trade with the rest of the world. According to the origin (destination) principle, VAT revenues are collected by the government of the country where the goods are produced (consumed). In the case of Belarus, exported goods sold for freely convertible currency or sold to countries which exempt their exports to Belarus from VAT are exempted from VAT. But the exemption does not imply zero-rating as only the value added of the last production stage before export is free of VAT. Exports based on barter transactions related to the acquisition of raw or intermediate materials and fixed assets are also exempt from VAT. Accordingly, VAT treatment of these two types of exports is based on a modified version of the destination principle that allows only partial zero-rating. Exported goods sold for nonconvertible currency or exported goods going to countries which do not exempt their exports to Belarus from VAT are subject to VAT. As regards imports, goods sold by the importer are subject to VAT, irrespective of the country of origin. However, if the good is on the list of “imported goods in short supply” (about 75 items), its sale is exempt from VAT, again irrespective of the country of origin. Imported goods used by the importer as inputs in the production process are not subject to VAT and the full value (including import tax) of inputs can be deducted as material outlays. Thus, these imports are treated according to the origin principle, independent of whether they originate in CIS or non-CIS countries.

4. Excise taxes

The excise tax law applies to a list of 18 items, including various types of alcohol, tobacco, automotive gasoline, natural and synthetic fibers, porcelain, domestically produced oil, and carpets. The rates of excise taxation listed in Table 72 are on the basis of price inclusive of the excise. 81/ In 1994, excise duties were extended to imported goods, which were previously exempt. Goods sold abroad were exempted. Starting in June 1995, Belarus adopted for imports and exports the present excise tax system of the Russian Federation.

Table 72.

Belarus: Excise Tax Rates, 1992-95

(In percent)

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Source: Ministry of Finance.

5. Other taxes

a. Property tax

This tax is imposed on the value of fixed production and nonproduction assets, together with new and uncompleted structures that are the property of juridical persons, as well as the value of buildings and structures owned by natural persons. Exempt from this tax are social, cultural, general and residential facilities, as well as enterprises and organizations owned by local councils; production assets owned by organizations of disabled people; fixed production assets of communications enterprises; structures and facilities designed to protect the environment; residential homes and outbuildings owned by old-age pensioners, certain disabled persons, and parents or spouses of military personnel killed in the line of duty; and certain new construction. The tax is not imposed on suspended construction projects. The tax rate is set at 1 percent.

b. Natural resource tax (environmental tax)

The law on natural resource taxation became effective on January 1, 1992, and states that the amounts of resources extracted from the natural environment and the amounts of pollutants discharged (emitted) into the environment within prescribed limits are subject to the tax. The tax is not assessed on water used for certain purposes, and sand and gravel mixtures used for highway and road construction. In 1992, this tax was imposed on an ad rem rather than ad valorem basis. Therefore, the high inflation rapidly eroded the real tax base. In 1993 and 1994, specific rates were increased to reflect price increases. The pollution tax is the main component of this tax. The law stipulates that the tax will be assessed at five times the normal rate if pollutants are over and above the established limits. Also, if natural resource extraction is above the established ceiling the tax is assessed at three times the normal rate.

c. Land tax

This tax is assessed on plots of land owned and used by juridical and natural persons. Tax rates vary by type of land and location, being lower outside urban areas and for agricultural lands. Certain categories of citizens are exempt (including veterans, pensioners, victims of Chernobyl). The tax varies from Rbl 609 per hectare on poor soils to 3,550 per hectare on rich soils. Local governments can raise the rates to up to twice these amounts.

d. Import duties

In mid-May 1995, Belarus abolished customs borders with the Russian Federation and adopted the Russian import duty system. Import duty rates for goods subject to minimum rates (plants, seeds, individual foodstuffs, raw materials, ores, petroleum, spare parts) range from 1 to 5 percent. Import duty rates for goods subject to maximum rates (weapons, ammunition, precious metal products, carpets, motor vehicles) from 40 to 100 percent. There are numerous exemptions. Regular import duty rates apply to countries that have been accorded most favored nation treatment. Import duty rates are doubled if goods are imported from a country that has not been accorded most favored nation treatment. There are halved or zero-rates for developing countries covered by Russia’s provisional system of preferences.

e. Export taxes

Also in mid-May 1995, Belarus adopted the export duty system of the Russian Federation. A wide range of exported goods including pharmaceuticals, fish, meat, weapons, crude petroleum, natural gas, gasoline, fertilizers is subject to ad valorem or specific rates.

6. Social security contributions

There are two extrabudgetary social funds, the Social Protection Fund and the Employment Fund. Employers are to pay 35 percent and employees 1 percent of the wage bill to the Pension Fund. Entrepreneurs that do not form a legal entity are to pay 15 percent of their income. Agricultural enterprises are to pay 30 percent of their wage bill. Employers are to pay 1 percent of the wage bill to the Employment Fund.

7. Chernobyl payroll surcharge

This tax is called the Emergency Tax for Eliminating the After-Effects of the Catastrophe at the Chernobyl Nuclear Power Plant. Revenues are earmarked for the Chernobyl Fund (GoscomChernobyl) and used to pay for the costs associated with the Chernobyl accident. All enterprises pay this tax, except collective and state farms, peasant farms, and bars of law. This tax was levied in 1992 and 1993 at a rate of 18 percent on the labor remuneration fund. In 1994, it was reduced to 12 percent.

8. Road Fund

The republican and local extrabudgetary road funds were created February 1, 1992 in order to finance the construction and maintenance of roadways (via the Ministry of Road Construction). These funds are financed by fuel taxes, sales taxes on motor vehicles, transit taxes (not in effect to-date), road user fees and duties, the revenues of specialized road cleaning enterprises, and a special “road fund contribution” of up to 1 percent of the turnover of enterprises. The most important source of revenue of the Road Fund is the fuel tax, which in 1994 was fixed at 10 percent ad valorem (down from 20 percent in 1993). At the same time, its collection has been extended from the producer to the retail level.

9. Republican Fund for the support of agricultural producers

In February 1995, the Supreme Soviet introduced a new extrabudgetary fund for the support of agriculture. The revenue of the fund consists of a general 1 percent turnover tax and collections of the tax started in mid-March 1995.

APPENDIX II: Belarus: Main Features of Exchange and Trade System

(As of end-June 1995)

1. Exchange arrangements

The currency of Belarus is the Belarussian rubel (Rbl), which was formally recognized on May 18, 1994. The cash rubel was originally introduced on May 18, 1992 as a supplementary form of currency with the Russian ruble (Rub). At that time, the conversion rate was fixed at 10 Rub (Belarussian or Russian) = 1 rubel. The rubel circulated as legal tender in parallel with the Russian ruble until August 1, 1994, at which time the Belarussian rubel was made the sole legal tender of Belarus. On August 20, 1994, noncash Belarussian rubles were converted to noncash rubels, at a fixed conversion factor of 10 Belarussian rubles = 1 rubel. Restrictions on conversion of noncash rubels into cash (and vice versa) have been abolished effective December 31, 1994. This has eliminated the differentiation that existed between cash and noncash rubels against foreign currencies. The official exchange rates of the rubel against the U.S. dollar, the deutsche mark, the Russian ruble and the Ukrainian karbovanets are established daily, at the Minsk Currency Exchange. On June 30, 1995, the exchange rate was Rbl 11,500 = US$1.

By resolution of the NBB Board on November 23, 1994, banks can buy at the auction on their own account, as well as for confirmed import orders, while by resolution of the NBB Board on October 5, 1994, restrictions on conducting cash transactions at the auction have been lifted. The authorities have refrained from interference in the exchange auctions in recent months, except for ensuring that foreign exchange bought in the auction is used for bona fide import transactions. Authorized banks are also free to trade currencies other than the U.S. dollar and Russian ruble on the interbank market. 82/

Repatriation of profits in convertible currency is subject to a 15 percent tax, payable in convertible currency.

There is a small forward market in foreign exchange.

2. Administration of control

The authority to amend exchange control regulations lies with the Parliament, which determines general principles and adopts laws on foreign exchange regulations and control. Foreign exchange regulations are based on provisional regulations issued by the Parliament in March 1992 and amended on various subsequent occasions. The NBB manages the majority of the Government’s official currency reserves, except for a small amount of government deposits which is controlled by the Cabinet of Ministers through the Ministry of Finance. Local governments control the local foreign exchange funds.

Only commercial banks may obtain licenses to engage in foreign exchange transactions. Of the 50 commercial banks operating in Belarus, 23 hold a general license which enables them to open correspondent accounts outside the country, while 18 hold a domestic license, enabling them to conduct foreign exchange operations through general license banks. The remaining banks are not allowed to conduct foreign exchange operations. There are also almost 2,000 foreign exchange offices, some of which are run by nonbanks.

3. Prescription of currency

Payments with currencies of countries of the former Soviet Union (FSU) are made in accordance with the rules specified in an agreement signed on October 21, 1994. The agreements with the states of the FSU provide for settlement through bilateral clearing accounts held at the central banks or authorized commercial banks. Recently, about 10 percent of such settlements have taken place through central bank correspondent accounts, with the balance being settled through commercial bank correspondent accounts. Since January 1, 1995, no trade other than portions of trade with Russia goes through official correspondent accounts. Settlement may take place in convertible currencies, national currencies or Russian rubles.

Bilateral clearing accounts have been established with all states of the FSU. However, there was only one intergovernmental clearing agreement in 1994; the “Roscontract” agreement with Russia which specified the intergovernmental exchange of crude oil from Russia for strategic products from Belarus, on a balanced basis. A successor agreement has been signed for 1995, as has a new clearing agreement with Uzbekistan, calling for the exchange of cotton from Uzbekistan for strategic goods from Belarus on a balanced basis.

Foreign trade payments outside the FSU are made in convertible currency. A still significant share of trade is conducted in the framework of barter agreements. Payment imbalances related to these barter agreements are settled with deliveries of goods or in convertible currency.

Payment in foreign currency for goods and services (including wage payments) in respect of transactions among residents are prohibited.

4. Nonresident and foreign currency accounts

Without declaring the sources of their foreign exchange, residents may open foreign currency accounts at commercial banks in Belarus authorized to transact in foreign exchange. They may maintain bank accounts abroad only with the approval of the NBB. Foreign exchange earnings by resident legal persons must be repatriated, within 60 days of the exports leaving the country, to transit accounts in authorized banks in Belarus, unless the Ministry of Foreign Economic Relations approves a delay in this repatriation. 83/

Nonresident legal persons can maintain foreign exchange accounts with authorized banks in Belarus. The sources of the funds can be receipts from abroad, proceeds from the sale of goods and services in the territory of Belarus including sales to residents, debt-service payments, interest earned on balances in the accounts, funds from other foreign exchange accounts of nonresidents in Belarus and earnings from investment in the states of the FSU. These accounts may be debited for purchases of goods and services and for investments in the states of the FSU, as well as for payments to residents and nonresidents. Funds from these accounts may be freely repatriated or exchanged for rubels at the market exchange rate through authorized banks.

Nonresident legal persons can also open two types of accounts in rubels in authorized Belarussian banks. These are designated as “L” accounts and “N” accounts. “L” accounts can be credited with the rubel counterpart of foreign exchange sold to the NBB or authorized banks; dividends from foreign-owned enterprises or joint ventures; returns on securities; and from sales of such securities within Belarus. Funds from these accounts are freely usable in the territory of the Republic of Belarus and may be converted into foreign currency at the market exchange rate. “N” accounts can be funded by the proceeds from the sale of goods produced in Belarus or from the sale of goods directly imported from abroad. Balances in these accounts may be used only for business travel expenses; to purchase inputs used for production of export items in Belarus; to purchase foreign exchange at the market exchange rate at the auctions (up to the limit of the nonresidents’ initial investment plus proceeds from sales of their output in Belarus); for payment of wages; and for investment purposes as determined by the Government with permission from the Ministry of Foreign Economic Relations.

5. Imports and exports

a. Within the FSU

Trade with the Baltic states, Russia, and the other countries of the FSU is conducted primarily through intergovernmental agreements or interenterprise deals.

The bilateral trade agreements Belarus maintains with other countries include appendices which list the goods to be delivered by each party. 84/ In some cases these lists include volumes and/or prices. Increasingly, these lists are merely indicative. The guarantee of the delivery of goods under these agreements used to be in the form of state orders. State orders have, however, been reduced, and for most products constitute less than 30 percent of total bilateral trade under the agreements (except for oil and certain chemical products, where state orders may exceed 50 percent of the total). 85/ Thus, trade under these agreements is increasingly conducted by enterprises directly, with the assistance of such organizations as Belkontract. Defense-related goods are excluded from trade agreements.

Bilateral trade agreements are used primarily for two reasons. First, goods traded under such agreements are generally subject to zero or reduced tax rates; second, for key goods from some countries, access to these goods is possible only via a quota, issued by that country’s government, as part of a bilateral trade agreement.

Trade in these products that exceed the volumes specified in the appendices, and trade in products not included in the appendices of the trade agreements, are mainly conducted through interenterprise deals. Settlement difficulties, primarily due to lack of foreign exchange on the part of one or both enterprises, have caused most such deals to be conducted on a barter basis.

As a result of the customs union agreement between Belarus and Russia, signed January 6, 1995, and the protocol on free trade between Belarus and Russia, signed on January 5, 1995, there are now no customs barriers on trade between the two countries, and the countries have adopted a common trade policy toward third countries.

Since May 1, 1995, export earnings in Russian rubles, and since October 1994, export earnings in other currencies of the former Soviet Union, are exempt from surrender requirements. By Presidential Decree 52 of 1995, all export proceeds must be deposited in a “transit” account in a bank in Belarus within 60 days of the goods leaving the country, unless special permission for a longer period of repatriation has been approved by the Ministry of Foreign Economic Relations. 86/ By NBB Board Resolution of October 5, 1994, enterprises and individuals are permitted to open bank accounts in Russian rubles.

b. Outside the states of the FSU

Surrender requirements on foreign exchange proceeds were fully eliminated as of July 1, 1995. 87/ Prior to the elimination of the surrender requirement, these proceeds were sold in the interbank currency auction, at the rate prevailing as of the date of sale. In addition, the previous requirement to surrender 15 percent of export proceeds to the State Foreign Exchange Fund was abolished on October 19, 1994. Export proceeds in hard currencies are subject to the same repatriation requirements as those of exports to countries of the FSU.

The previous requirement that resident natural and juridical persons must obtain a license from the Ministry of Foreign Economic Relations to engage in foreign trading activities has been abolished.

Residents do not need a license or approval from the NBB to conduct foreign exchange operations related to trade, except for (1) down-payments for imports or services exceeding US$10,000, or the equivalent, that represent more than 30 percent of the value of the goods or services imported; (2) interest payments to nonresidents on returned down-payments when an original contract is not fulfilled; (3) payments for imports more than 60 days in advance of receipt of the goods in Belarus, which requires the advance permission of the Ministry of Foreign Economic Relations. 88/

Export bans exist for some medicinal herbs, arts and antique collections, certain wild animals, goods imported to Belarus on a humanitarian basis, and certain types of leather. The list of items under export quotas and licensing requirements includes only crude oil and some refined oil products, 89/ mineral fertilizers, 90/ and certain types of nonprocessed timber. 91/ Belarus had abolished all export taxes on December 2, 1994. However, under the customs union agreement with Russia, Belarus adopted Russian export taxes by Decree 218 of the Cabinet of Ministers, approved April 19, 1995.

A new import tariff structure was similarly introduced by Cabinet of Ministers Decree 219, approved on April 19, 1995, whereby Belarus adopted Russian import duties. As a result of changes in Russian Customs duties, Belarus adopted a new amended schedule by Decree 340 of June 29, 1995. These duties are being implemented in three phases (on May 1, June 10 and August 1, 1995). The importing of radioactive or toxic wastes, as well as publications or videos which are against state morals, health or security, are prohibited, while import licenses are required for importing certain pesticides, herbicides and industrial wastes.

6. Payments for and receipts from invisibles

Resident individuals are permitted to purchase up to US$500 a year at the market exchange rate for tourist travel. Larger amounts may be taken out with customs declaration proof that they were brought into Belarus or with a certificate from an authorized bank that they were exchanged legally. However, persons with international credit cards, who use such cards for tourist travel expenses, can purchase foreign exchange to settle the obligations on those cards. There are no restrictions on the purchase of foreign exchange for bona fide expenses related to business travel. By NBB Resolution 292 of March 23, 1994, restrictions on the purchase of foreign exchange for bona fide invisible transactions—education, medical treatment, family maintenance, repatriation of salaries and wages, payments of insurance premiums, profit remittances and purchases exceeding US$10,000 were abolished.

Post-1992 Russian banknotes up to Rub 500 may be taken abroad or brought into the country when travelling to CIS countries; for travel to the Baltic states and other countries the limit is Rub 100,000. Residents of the Baltic states, Russian and other countries of the Former Soviet Union may pay for air and train tickets as well as hotel expenses in Russian rubles; nonresidents may be required to pay for these expenses in convertible currency.

7. Capital

The properties owned by foreign investors in Belarus are protected from expropriation. 92/ Foreign investors are guaranteed the right to repatriate their initial investment capital and profits earned in Belarus. Foreign investment must be registered at the Ministry of Foreign Economic Relations and, in the case of financial institutions, at the NBB. At the time of registration, the enterprise obtains a license to engage in activities in a particular area of specialization and may not pursue other activities. The proportion of equity capital share by nonresidents in direct investment is not restricted, except in the financial sector, where it cannot exceed 49 percent. They can participate in foreign exchange auctions through authorized banks. As of March 29, 1995, imports of securities issued by non-Belarussian companies is prohibited, except with the approval of the Ministry of Finance.

Enterprises with more than 30 percent foreign capital ownership are permitted to export their products and import inputs necessary for their production without restriction. These enterprises are exempted from the income tax for three years from the first year the enterprise reports a profit. If the enterprise is deemed to be essential for the economy of Belarus by the Cabinet of Ministers, the income tax rate may be reduced by 50 percent for an additional three years.

External borrowing by residents must be registered with the Ministry of Finance, and the opening of bank accounts abroad requires approval from the NBB.

8. Gold

A license is required for the exportation of gold, which is on the short list of products (together with arms, radioactive materials, and narcotics) under the strictest licensing requirements.

APPENDIX III: Exchange Measures Subject to Fund Jurisdiction

The following measures in Belarus are subject to the jurisdiction of the Fund: 93/

1. An exchange restriction arising from the approval requirement for payments for certain categories of imports. This restriction is maintained under Article XIV, Section 2.

2. The multiple currency practice arising from the tax on the repatriation of profits in convertible currencies. This multiple currency practice is maintained under Article XIV, Section 2.

3. An exchange restriction arising from the nonconvertability of interest earned by nonresidents on balances in their “N” accounts. This restriction is maintained under Article VIII, Sections 2, 3 and 4.

APPENDIX IV: Belarus: Household Services

Historically, payments for housing services by the population, including rents, heating, gas, and electricity have been low in Belarus, as in other countries of the former Soviet Union, and accounted for only a small fraction of household income. In fact, rents did not change from 1926 until recent years. Because payments were generally below production costs, budgetary subsidies to the providers of household services were required. Some periodic—albeit infrequent—adjustments in rents and tariffs were made in the period 1992-94, partially reflecting the jump in costs, mostly associated with higher prices for energy and the high level of inflation. Nevertheless, these adjustments were insufficient to prevent growing needs for budget subsidies, which crowded out other expenditures. Beginning in 1995, the authorities are implementing a timetable to substantially increase the share of costs covered by rents and tariffs.

Subsidies are provided at two levels, namely, by the Government (local and central) and by the enterprises, depending on the ownership of the dwellings. There are indications that the Government and enterprises have been transferring housing ownership (through privatization and commercialization) to individuals and housing cooperatives to reduce the burden of subsidization. 94/ With the planned acceleration of adjustments in rents and tariffs, the authorities recognized the need for a compensation mechanism to protect the poorest segments of the population from the effects of such increases, as household services and utilities are to account for a significantly larger share of household expenditures. This appendix briefly discusses several aspects of the housing issue, namely: (1) household services and utilities; (2) housing ownership and burden sharing of subsidies between Government and enterprises; (3) rent and tariff adjustments, and finally; (4) compensation schemes.

1. Household services and utilities

Households living in a typical house or apartment, especially in urban areas, are provided with the following: heating, water, sewage, hot water, radio, telephone, TV antenna, gas, and electricity. The Belarussian heating system is characterized by a large central heating network (district heating), which provides heat not only to urban areas, but to some rural areas as well. District heating supply dramatically differs between urban and rural areas: 78 percent of urban households are district heating consumers, while this ratio is only 13 percent for rural households (Table 73). In contrast, 88 percent of rural households use firewood to generate heating. Natural gas is almost exclusively available only in urban areas, as only 1 percent of households in rural area have access to natural gas. There is a strong direct relationship between income level and natural gas use: as income rises, so does natural gas use. Electricity is supplied to all households in urban areas as well as in rural areas. Practically all consumers are metered, either by means of an individual meter (98 percent), or collective meters, for example, in work dormitories. The few households that are not metered (2 percent) obtain electricity free of charge from the enterprise where they work.

Table 73.

Belarus: Percentage of Households Using Each Type of Energy

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Source: World Bank.

Households pay rents and tariffs for services at unified rates set by the housing authorities. Households living in private houses do not pay rent, but do pay tariffs at the same unified rates. Rent and tariffs for heating are based on the size of the apartment, while tariffs for hot water, gas, water, and sewage are linked to the number of persons in the household. Each household pays a flat rate for the availability of radio, telephone, 95/ and TV antenna. Payments for electricity are based on actual consumption.

There are no effective means nor incentives for conservation because consumption of services except for electricity is not individually metered. Since control units for heating are not available, households are unable to control the flow of district heat to their homes. According to a World Bank study 96/, there is a strong perception among households that, while improving energy efficiency would reduce the utility bill, the financing of higher efficiency would be too costly for the family, i.e., the savings on the utility bill would not compensate for expenses. However, since the study was conducted at a time when tariffs were still very low, this perception may have reflected to a large extent the heavily subsidized utility prices.

2. Ownership and burden sharing

The ownership of housing stock in Belarus can be classified into 5 main categories: local governments, enterprises and institutions, social entities (including mainly kolkhozes), housing cooperatives, and individuals. 97/ At the end of 1993, the share of these forms of ownership were 24, 17, 4, 6, and 49 percent, respectively. The difference between tariffs and the cost of providing the services and utilities is covered by the Government, with the main exception of housing owned by enterprises. Enterprises that own and provide housing to their employees pay industrial tariff rates for the utility services consumed by the residents, while the residents pay only the unified rate. As the industrial rate for energy services, such as gas and electricity, is higher than the cost of providing the services, the enterprises cross subsidize households. As the need for subsidies increased considerably with higher cost and maintenance of low tariffs, these subsidies became an increasingly heavy burden on the Government and the enterprises (including kolkhozes and sovkhozes).

3. Tariff adjustment

As indicated above, significant increases in rent and tariffs for household services and utilities did not take place until the first half of 1995. Average cost coverage for housing and utility services increased from about 9 percent at end-1994 to over 60 percent by July 1, 1995 (Table 74). 98/ By July 1, tariffs for radio, telephone, and TV antenna had reached full cost coverage; electricity 84 percent; heating, hot water, rent, and gas were all above 50 percent. Cost coverage for energy related services (including, heating, hot water, electricity, and gas) reached 66 percent. Cost coverage is to be further raised to 80 percent at the beginning of 1996. Rent and tariffs will be reviewed every month and have been indexed to inflation. Procedures to ensure prompt payments of utility bills, including when possible cut-off of supply, have been strengthened, including for electricity.

Table 74.

Belarus: Adjustment of Tariffs and Cost Coverage During January-July of 1995

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Source: Ministry of Housing and Communal Services.

Per square motor for rent and heating; par cubic meter for water and sewage; per person for hot water and gas; par kwh for electricity; and par household for radio, telephone, and TV antenna.

The following assumptions are made to calculate rent and tariffs:

1) the area of the two-bedroom apartment is 30 square meters; 2) each person consumes 9 cube meters of water and 50 kwh of electricity per month.

Including all services.

Excluding heating.

Including heating, hot water, electricity, and gas.

In the course of adjusting tariffs, the Government took several measures to encourage energy savings and reduce seasonal fluctuation of household expenses on housing services. For instance, taking into account the fact that meters for electricity had been installed in almost all households, the Government raised the tariff for electricity to cover over 70 percent of cost in February 1995 when the cost coverage for the other utility services was still quite low. To reduce seasonal fluctuation of household expenses, the Government recalculated costs of providing heating, hot water, and electricity to correctly reflect respective production and distribution costs. 99/ Before cost recalculation, heating, which is provided only in winter, 100/ accounted for an artificially high 60 percent of household expenses on services and utilities, resulting in a large variation in household payments between winter and summer. After the proper reallocation of costs from heating and hot water to electricity, this variation was narrowed substantially. Moreover, the “notional” tariff for heating during the summer was set in such a way that its was close to the average cost coverage, so that the latter would be maintained when the notional tariff on heating becomes effective in the winter.

4. Compensation schemer

The authorities see the need for a targeted and fiscally sustainable compensation scheme to protect the poorest segments of the population from the impact of tariff increases. As indicated earlier, the authorities have been guided by two considerations. The first is a law passed in late 1994 by the Parliament, which guarantees each citizen full compensation for that part of household service and utility costs that exceeds 15 percent of household income. Based on this law the Ministry of Labor, the Ministry of Housing and Communal Services, and the Ministry of Social Protection formulated a specific proposal (Cabinet of Ministers’ Resolution No. 226, of December 5, 1994). The proposal had the following main provisions: (i) all citizens would be able to apply for compensation, and granting of the compensation would be based on means-testing; (ii) means testing would be based on an application and a certified income declaration; (iii) the compensation would amount to the difference between the cost of household services and utilities based on norms reflecting household size (e.g., in the case of heating the costs of providing heating for 8-9 m2 per person), and 15 percent of declared household income; (iv) the compensation would not be paid out in cash but would be reflected in the so-called bill-books; and (v) the administration of the compensation scheme would be at the local level through the offices of the Ministry of Housing and Communal Services. Based on official income data, under such a scheme, a large part of the population would be eligible to receive compensation and the resultant budgetary cost would be high. 101/ Moreover, the authorities felt that it is impossible to identify all sources of household income (both cash and in-kind), and that the present administrative capacity of the housing offices would not be sufficient to conduct a universal means-testing. Many sources of income, growing in importance during economic transition, could not be confirmed by income declarations from employers, which could result in large amounts of under-reporting among certain wealthier segments of the population. Thus this scheme, under the present conditions, would likely be inefficient and inequitable.

The second consideration is to use categorical targeting—covering needy nonworking pensioners, the unemployed, and families with many children, in particular. Such a scheme would be expected to drastically reduce the administrative requirements associated with implementation of universal means-testing, and because the number of beneficiaries is smaller would be also expected to save on costs. Specific proposals building on this approach were recently put forward by the World Bank and the authorities are currently studying their implications.

Selected Elements of World Bank Proposal

Principles of selection

The problem in providing income-tested compensation is a lack of accurate information about those families in need. Without knowing the income of a household, it is not possible to effectively target assistance to those households which are actually poor. The proposed scheme, therefore, uses a different approach to assess well-being. It is based on the principle that all adults in a household are capable of earning a living and will be better able to adapt to the price increases Only if there is reason to believe that an adult is not capable of working, or has family responsibilities, is compensation awarded. The following groups of the population are identified to be eligible for receiving compensation:

  • groups of people incapable of work due to age;

  • groups of people incapable of work due to physical disability;

  • groups of people incapable of work due to household responsibilities, such as caring for young children; and

  • those registered as unemployed.

Those groups that are excluded from receiving compensation are:

  • healthy people of working age; and

  • students living at home.

Calculation of compensation

The compensation under the scheme takes the form of a discount for the increase of the household utility bill. The rate of discount is negatively related to the number of adults in the household and positively related to the number of adults incapable of work. A two-dimmensionel table is constructed to determine the rates of discount for various combinations of the two variables This discount rate is applied to the increase of the household utility bill. Suppose a household’s bill increases by Rbl 10,000 and one of the two adults of the household is incapable of work. The table determines that the discount rate will be 50 percent for the household, and therefore the compensation will be Rbl 5,000.

APPENDIX V: Belarus—Customs Union Agreement with Russia

History of the agreement

Efforts to reestablish closer ties with other countries in the former Soviet Union (FSU), following its disintegration, have a long history in Belarus and other newly independent countries. In fact, this was one of the main reasons the Commonwealth of Independent States (CIS) was established in 1991. The drive to achieve closer economic integration with Russia has been particularly strong in Belarus, partly as a result of the historically close ties between the two countries. As a small open economy, depending to a large extent on Russian inputs for its production, and with a large share of its exports directed toward Russia, Belarus would benefit from removal of trade barriers, elimination of Russian export taxes and perhaps be able to purchase raw materials at below world market prices, thus considerably improving the country’s competitive position vis-a-vis the rest of the world.

Over the last few years Belarus and Russia have made several attempts, both bilaterally and in the context of the CIS, to achieve closer economic integration, and going even further, toward monetary union. On the bilateral level, an elaborate Treaty on Establishing an Economic Union between Belarus and Russia was signed on April 12, 1994. This treaty stipulated the establishment of an Economic Union by means of transition to the phased formation of a customs union. The treaty also provided that the parties elaborate for each form of integration specific measures in separate agreements. In the event, however, implementation of the agreement in 1994 stalled. 102/

Nevertheless, the desire to reach closer integration with Russia was kept alive and resulted in the signing on January 6, 1995 of a specific agreement on the establishment of a customs union between the two countries. 103/ This agreement specified the concrete steps that would have to be taken for the customs union to become effective and during the following months intensive discussions took place between the two governments to work out the details and implement the necessary steps. The work culminated in the signing on May 12 of a protocol between the parties indicating that the first stage of the creation of the customs union between the two countries had been completed. The customs union came in effect on May 26, when export taxes on trade as well as other barriers between the two countries were completely eliminated. 104/

Steps taken under the customs union agreement

During the first stage of implementing the Customs agreement the following actions were taken:

  • Tariffs and quotas on mutual trade between Belarus and Russia were eliminated.

  • Uniform trade regulations on trade with third parties were established.

  • Belarus adopted a new schedules for export tariffs, as well as import tariffs, to conform with the schedule in place in Russia. 105/

  • New excise tax rates on goods imported into Belarus were adopted, to conform with the rates in use in Russia.

  • A treaty between belarus and Russia was signed on the procedures for the distribution and reimbursement of customs duties on goods manufactured by Belarussian enterprises using Russian raw materials.

  • Customs inspection for rail and air passenger transport between Belarus and Russia was eliminated.

All customs borders between the two countries were formally abolished on May 26, and Russia has currently stationed Russian Customs agents in Belarus to help at the main border stations.

Proposals for a specific actions to be approved by both sides in the second stage of the formation of the customs union were to be prepared by July 1, for discussion between the two parties. Issues to be tackled during the second stage of implementation include the distribution of customs revenues based on origin and destination of imports and exports, the establishment of a coordinating agency to promote the functioning of the economies of Belarus and Russia under the customs union, regulations and procedures of control as well as of measures on technical assistance in strengthening customs control on the external borders of Belarus, unifying legislation on foreign exchange arrangements, revising treatment of exports, agreeing on nontariffs barriers, and a decision on pricing policy, including in regard to energy prices to establish equal conditions for economic entities of Belarus and Russia.

Some implications for Belarus

The elimination of borders between Belarus and Russia as well as the internal tariffs should help economic entities on both sides to reduce costs and thus increase their competitiveness vis-a-vis third country competitors. However, for some Belarussian enterprises the effect may not be very significant because for some commodities (such as energy) Belarussian importers, since mid-1994, were exempted from export duties by their Russian partners. Furthermore, under their adjustment program, the Belarussian authorities had substantially liberalized the trade system, including by abolishing virtually all export tariffs and introducing a relatively uniform and low-rated import tariff regime. With the adoption of the Russian rate schedules, new export tariffs were introduced 106/ and a broader, higher-rated import tariffs regime was adopted. This could contribute to a significant increase over the next few months of import costs for Belarussian traders and enterprises depending on trade with other countries than Russia. Recently, complaints in this regard have started to emerge and there have been calls to perhaps try to negotiate exemptions on the common tariff structure with Russia during the second stage. However, no formal approach has been adopted.

APPENDIX VI: Belarus: Portfolio Shift and Capital Inflows

Belarus—and several other FSU countries—have since early 1995 experienced unexpectedly large inflows of foreign exchange deposited with the banking system, which have been associated with a rapid increase in net foreign assets (NFA), broad money, and base money. This appendix investigates the nature and sources of these inflows in Belarus, the reaction of the monetary authorities, and the implications for the exchange rate and inflation. 107/

In the first half of 1995, the landscape of monetary policy in Belarus changed in three important ways. First, the accumulation of NFA of the banking system accelerated. NFA (excluding liabilities to the Fund) increased by 46 percent, reaching US$403 million by the end of June. Second, the increase was related entirely to the National Bank of Belarus (NBB), whose NFA increased by US$189 million—the NFA of commercial banks declined by US$62 million during this period. This represents a change from the past when commercial banks were the principal holders of NFA. Third, the increase in NFA of the NBB reflects mainly purchases of foreign banknotes either directly by the NBB itself or through commercial banks, in a radical reversal of the increasing use of foreign currencies as a store of wealth and for domestic transactions.

The sources of the NFA increase are documented in Table 75. First, commercial banks, with their extensive network of branches and exchange offices, in the first half of 1995 purchased US$91 million from the population, the bulk of which (US$85 million) was subsequently sold to the NBB after having been converted into noncash. Second, the NBB purchased US$41 million directly from residents, in addition to US$134 million in noncash. Of the latter, US$49 million was raised outside the currency exchange and originated from enterprises, while the remaining US$85 million were purchased from commercial banks as noted above. Thus, ultimately the NBB purchased banknotes worth of US$126 million mainly from households.

Table 75.

Belarus: Net Purchases of Foreign Exchange by the NBB and Commercial Banks (October 1994-June 1993)

(in thousands of U.S. dollars)

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Source: Data provided by the Rational Bank of Belarus (NBB).

ICE stands for Interbank Currency Exchange.

The surrendering of foreign banknotes reflects significant changes in the policy environment in Belarus. First, ex-post real interest rates on rubel deposits became positive in early 1995, the real return on foreign currency became negative, and the spread in favor of rubel deposits reached about 20 percentage points per month (see Chart 9 of the main text). Rubel deposits thus became an attractive store of value, which must have induced residents to convert foreign currency holdings into rubels. There is extensive circumstantial evidence of this happening, including the threefold increase of population deposits in real terms in the first half of 1995. However, an accurate evaluation of the extent of the portfolio shift is hampered by (i) the lack of reliable data on the holdings of foreign currency outside the banking system either in Belarus or abroad, and (ii) the premium for the risk of a reversal in the real exchange rate appreciation which tends to overstate the spread in the yield between rubel and foreign currency assets and therefore the attractiveness of rubel deposits.

The high interest rate differential between rubel and foreign exchange deposits generated a very strong incentive for capital inflows for arbitrage purposes. At the same time, the motive for capital flight was reduced and likely reversed, contributing to the supply of foreign exchange.

The second reason was the tightness of the credit policy pursued by the NBB, which apparently forced enterprises to liquidate part of their foreign exchange deposits to pay for wages and other production costs. The circumstantial evidence of this happening is, however, blurred by the impact of other factors which tended to boost foreign exchange deposits, namely, the recovery of export performance in the first half of 1995, the phasing out of the surrender requirement, a tighter enforcement of the repatriation requirement, and the financial amnesty whereby enterprises would not have to surrender the illegally exported foreign currency provided they repatriated it by April 1995.

The third reason, which may have had a pronounced one-off effect during January-February, was the ban on the use of foreign currencies for domestic transactions.

Overall, the Rbl 1,633 billion of liquidity that the NBB injected into the system in the first six months of 1995 in connection with the purchase of foreign banknotes accounts for the bulk of the increase of currency in circulation (Rbl 1,897 billion) and for a large part of the increase in reserve money (Rbl 2,796 billion). Through the money multiplier, it also contributed to the large expansion of broad money beyond that part which directly resulted from the foreign exchange inflows into the banking system.

The authorities chose to sterilize the liquidity impact of the inflows only partially, by containing NDA of the NBB. Their assessment was that the unsterilized portion of the liquidity injection was matched by an increase in money demand and thus noninflationary; they were also concerned that additional sterilization would in fact lead to further pressure for appreciation of the exchange rate and worsen the already dire economic conditions of enterprises.

A Taxonomy for Foreign exchange Inflows

In general, to assess the impact of foreign exchange inflows on macroeconomic indicators and design the appropriate policy response it is necessary to identify whether the source of these capital inflows is the current or the capital account.

In the first case, the counterpart to the liquidity inflow is to be found in the improvement of the current account and could be related either to external factors, such as a terms of trade gain or an increase in foreign demand, or to internal factors such as a decrease of domestic demand. In both instances the liquidity inflow would be related to a money demand increase associated with a rise in the total financial savings of residents. External factors have an inflationary impact and the part of the inflow which is not matched by a money demand increase should be sterilized to eliminate inflationary pressures. On the other hand, internal factors of the kind indicated above tend to be deflationary but their impact would still need to be sterilized to the extent that the increase in money demand is smaller than the foreign exchange inflows.

Foreign exchange inflows related to the capital account of the balance of payments may stem either from nonresidents or from residents. Inflows from nonresidents do not increase money demand, which is defined exclusively in terms of domestic currency and domestic bank deposits of residents only. Instead, they raise the foreign liabilities of banks. On the other hand, inflows from residents would reflect a portfolio reallocation whereby foreign exchange holdings outside the domestic banking system (held either abroad or domestically, possibly in the form of foreign banknotes) flow into the banking system. It corresponds to an increase in money demand without changing the total financial savings, and the resulting larger base money need not be sterilized unlike in the case of nonresident inflows. This notwithstanding, both types of foreign exchange inflow expand domestic bank liquidity and could have an inflationary impact to the extent that banks do not accumulate additional foreign assets, and therefore, the money multiplier effect of the expanded liquidity would need to be sterilized in the case of inflows from residents.

Part of the capital inflow may not come through the banking system as it is the case for example when enterprises receive foreign direct investment or trade credit from abroad. To prevent inflationary pressures, the effect of this inflow on excess domestic demand would need to be sterilized.
1/

Henceforth the “Anti-Crisis Program” will simply be referred to as the adjustment program.

2/

The official name of the Belarussian Parliament is the Supreme Soviet, but this text will refer to it as Parliament.

3/

To be elected a candidate had to receive more than 50 percent of the votes cast, with a minimum required turnout of 50 percent of eligible voters per district for the election to be valid.

4/

In addition, citizens voted for the return to the pre-independence flag, minus sickle and hammer, the reinstatement of Russian as a state language, and the President’s right to dissolve the Parliament.

5/

For more information on the customs union agreement see Appendix V.

6/

GDP has a pronounced seasonality, the average seasonal factors, calculated as the ratio of actual over seasonally adjusted GDP, being 0.87, 0.92, 1.15 and 1.07 in the four quarters. In 1991-94 real GDP in the second semester was 24 percent higher, on average, than in the first semester. Seasonality is most pronounced for agriculture.

7/

Arrears to Gazprom of Russia increased by 68 percent in U.S. dollar terms in the first two months of 1994 (Table 47).

8/

A bolder policy of enterprise restructuring could have caused a temporarily sharper GDP decline but at the same time it would have set the stage for an earlier, healthier and speedier recovery.

9/

Changes of shares in Table 2 reflect the combined effect of changes in relative volumes and prices. Calculating the 1994 shares on the basis of 1993 prices, thereby eliminating the price effect and making them comparable to the 1993 shares, brings the share of industry to 32 percent, agriculture to 20 percent, construction to 7 percent and banks and insurance to 12 percent. The abolition of wholesale margins explains the sharp increase of industry’s share and, by the same token, restrictions on agricultural prices account for the decline of agriculture’s share, despite its better than average output performance.

10/

The decline in agriculture and services could be overstated because of a relatively less comprehensive coverage compared to that in other sectors dominated by large enterprises which are monitored systematically by the Ministry of Statistics and Analysis.

11/

Transportation includes also fees for pipeline use.

12/

Except in 1994, but this was related to the drought which more severely effected crops.

13/

Modalities of price regulation in this area included administrative price setting by central or local authorities; announcing recommended prices; setting below market clearing prices for purchases by state procurement organizations, which still account for a significant market share, creating disincentives to sell outside these organizations; and limiting exports from a region or the country.

14/

There are serious problems measuring profitability due to lack of proper accounting procedures. In most cases cost relate mainly to current operating cost only, and a number of expenditures—such as on social benefits provided by enterprises—are paid out of profits.

15/

The latter appears to be contradictory to the fact that many enterprises were unable to sell their production and inventories jumped.

16/

The drive to create financial-industrial groups began in 1994 in Russia and initially involved mainly banks and enterprises in the energy sector. Several forms have developed, including the purchase by banks of controlling blocks of stocks, the formation of holding companies controlling banks and industrial enterprises, and the formation of trans-national enterprises within the FSU. These financial-industrial groups formalize the close links that have existed for quite some time between banks and enterprises in the form of participations or of large exposures.

17/

In November 1994, only shortly after prices had been liberalized, the President decreed that recent price increases should be reversed. As a result inflation temporarily dropped. Concern about the impact of this measure on confidence in the reforms (both domestically and abroad) quickly led to a reaffirmation of the Government’s policy of full commitment to price reforms.

18/

Since August 1994 retail prices for gas, oil and oil products are adjusted regularly in line with movements in import cost.

19/

The increase was notional because the heating season ended on April 15 and as a result consumers no longer pay for heating. However, the increase was published and was expected to prepare customers for considerably higher heating tariffs once the heat is turned back on in mid-October.

20/

Domestic costs for gas exceed import costs due to the fact that under agreements with Russia, Belarus does not receive payment for gas shipment in transit to Western Europe, in exchange for a lower import price. However, cost associated with the gas pipeline and the operation of compressor stations still need to be recovered.

21/

Since the state in many cases owns 100 percent of the shares of these enterprises, in fact most people continue to work for the state.

22/

There are 2,502 farms in Belarus, of which 51 are in fact bankrupt and only 30 are truly profit making, according to information from the Ministry of Agriculture.

23/

As noted in the statistical annex to the staff report, the size of nominal GDP in Belarus is likely to be underestimated. As a consequence, the size of government revenue and expenditure ratios has to be interpreted cautiously.

24/

Following the signing of the customs union agreement with Russia, export taxes were re-introduced, largely applicable, however, to goods not produced in Belarus, and the import tariff schedule was adjusted to match that of Russia.

25/

According to the 1995 budget law, credit from the National Bank of Belarus to the state budget during the year cannot exceed 2 percent of GDP. The nominal interest rate on National Bank credit to the budget is fixed at 6.5 percent per annum.

26/

The non-cash Belarussian ruble was introduced in July 1992. Initially it was at par with the Russian ruble but since November 1992 its exchange rate has been de-linked and, because of sizeable inflation differentials, it depreciated precipitously. More details on the pre-1994 monetary arrangements and the distinction between the cash and non-cash Belarussian ruble are provided in SM/94/163.

27/

Enterprises and banks were instructed to evaluate most of their foreign claims and liabilities at the exchange rate of 1:1 even in April 1994 when the nominal exchange rate had depreciated to Rbl 10-1 Rub. There were three motivations for this: First, in their negotiations with Russia the authorities insisted that rubles be converted at 1:1 in Russian rubles, thus increasing significantly the purchasing power of the population and increasing popular support for the monetary unification. Second, the appreciated exchange rate helped contain, albeit artificially, domestic inflation. And third, it boosted budgetary revenue as net liabilities of enterprises and banks were underestimated and profits were overestimated but at the cost of decapitalizing enterprises.

28/

Details on these negotiations can be found in Appendix VI of SM/94/163. The drive for closer relations with Russia did not diminish, but emphasis shifted towards the creation of a customs union with Russia (see Appendix V) and the coordination on a wide range of other issues of common interest.

29/

In November 1994 the Parliament eliminated from article 16 of the Law of the NBB the provision allowing the Russian ruble to circulate as parallel currency.

30/

According to prevailing regulations, the results of the currency auction are annulled if the exchange rate changes by more than 15 percent from the preceding auction.

31/

Article 2 of the Law on the NBB, last amended in March 1994, states that “the main objective of the policies and activities of the NBB is to ensure the internal and external value of the official monetary unit” while article 5 states that the NBB, together with the Government, prepares a proposal for the monetary policy in the year ahead for approval by Parliament. Finally, article 4.1 circumscribes the independence of the NBB within the limits of the authority granted to it by laws and by resolutions of the Parliament. Government refers to the Cabinet of Ministers and the President. Since mid-1994 the latter has assumed a more active role in directing interest and exchange rate policy and supporting the NBB’s credit policy.

32/

In November 1994 Parliament rejected a proposed amendment to the law of the NBB that would empower the NBB to set credit and monetary targets without prior parliamentary approval.

33/

Additional information on instruments of monetary policy can be found in SM/94/163.

34/

However, the maturity of auctioned credits was gradually shortened from 2-3 months to seven days.

35/

The abolition in September 1994 was preceded in August by a resolution of the National Banking Association urging its members to pay interest of not less than 140 percent on their deposits and charge an interest of not more than 155 percent on their new credits in the last quarter of 1994; thus replacing the mandatory margin of 20 percentage points with a voluntary one of 15 percentage points.

36/

Government and NBB securities are in non-material form (book-entry system) and are issued at a discount at closed (sealed bid) auctions. Competitive and non-competitive bids are accepted, the latter paying the average price of the successful competitive bids. Auctions are open only to banks and a select group of about 20 reputable financial companies as of May 1995. The NBB runs a depository for primary dealers who in turn run their own depositories. Promstroibank and VEB are the main primary dealers. Their operations in government securities are supervised by the Securities Inspectorate at the Ministry of Finance. Earnings on both government and NBB securities are subject to a 15 percent withholding tax, although a 10 percent rate applies to non-residents.

37/

Twenty of the funds had commercial banks among their founding members, 11 had private and leased enterprises, eight joint ventures, and eleven had individuals. Sixteen investment funds had a capital of less than Rbl 10 million rubels (US$870). The operation of investment funds was suspended in March 1995 and the licenses of four funds were revoked because of alleged management irregularities and infringement of regulations.

38/

About 20 financial companies attracted deposits, although they were prohibited from doing so, and acted as intermediaries in the payments system, especially in the international area. They were subject to little systematic supervision, the only requirement being to register with local authorities and have a minimum capital of Rbl 200,000 which in June 1995 corresponded to about US$17.

39/

The NBB held shares in Sberbank, Belvneshekonombank and the Investment Bank.

40/

Including Sberbank, which has nearly 3,000 offices, there are about 3,000 inhabitants per branch office.

41/

In November 1994 the NBB prohibited banks to pay dividends in foreign currency and in June 1995 instructed banks to abandon the previous practice of expressing part of their capital in foreign exchange and automatically revalue it for changes in the exchange rate.

42/

As of July 1, the minimum capital requirement was raised to ECU 1.1 million.

43/

Banks with a limited range of operations are not permitted to accept deposits; collect payments and transport valuables; trade in precious metals; borrow at the interbank market in excess of their statutory capital; lend to their shareholders more than 50 percent of their capital; invest in enterprise shares; or open branches. They may receive only a domestic foreign exchange license and are subject to a solvency ratio of 16 percent, double the one applied to banks.

44/

The coverage of the inter-enterprise debt statistics was expanded in September 1994 to include transportation, gas (Beltransgas), agriculture, retail trade, communications and housing services. Previously, only industry, construction, catering and procurement organizations were covered. The number of reporting firms was increased by six times as all registered firms were required to submit the reporting form whereas previously only state enterprises were surveyed. The previous sample underestimated domestic payables by about 25-30 percent. Since January 1995 the full survey is conducted on a quarterly basis while a smaller sample reports on a monthly basis. This smaller sample comprise enterprises in industry and construction with at least 50 employees, enterprises in other sectors with at least 20 employees, and trading enterprises with at least 5 employees.

45/

Based on quarterly annualized GDP.

46/

Based on the full survey, which to a certain extent overstates the increase between the end of 1993 and 1994. Using the restricted survey would result in domestic payables at the end of 1994 equivalent to 33 percent of GDP and 222 percent relative to bank credit.

47/

Reserve money is defined as the sum of required reserves, banks’ correspondent accounts with the NBB, vault cash, demand deposits of nonbanks with the NBB, and currency in circulation.

48/

Percentages are calculated relative to the preceding period’s reserve money.

49/

Broad money is defined as currency in circulation plus total deposit liabilities of banks, excluding deposits that remained frozen at Vneshekonombank in Moscow.

50/

Velocity is calculated as the ratio of annualized seasonally adjusted quarterly GDP over end-of-period money stock.

51/

Once every year the NBB places an order with Goznak for monthly banknote deliveries based on projected inflation and the expected withdrawal of worn banknotes from circulation. The order for 1994 was based on a monthly inflation of 10 percent, as envisaged in the original monetary policy guidelines, but as the average monthly inflation in the first seven months of 1994 was 21 percent, the cash shortage became inevitable.

52/

Small denomination bills were withdrawn and banknotes of one, five and twenty thousand rubels were introduced. However, the pace of introducing higher denominations did not keep up with inflation. In June 1995, the highest denomination banknote of 20,000 rubels corresponded only to the 10 ruble banknote at the end of 1991.

53/

See SM/94/163 (July 1, 1994) for details of the exchange system prevailing up to early 1994, and Appendix II of this report for a detailed description of the system as of June 1995.

54/

During the year the pattern fluctuated. After a steep appreciation in January and February, the ruble depreciated in real terms for some months, appreciated again in summer, when inflation jumped and ended the year at about the same level as in January 1994.

55/

See Appendix II for a more detailed discussion of Belarus’s payments system.

56/

Greater detail on Belarus’s trade system and trade policies is contained in Appendix II.

57/

Export bans continue to exist for some medicinal herbs, arts and antique collections, certain wild animals, goods imported to Belarus on a humanitarian basis, and certain types of leather.

58/

Further details on the customs union agreement can be found in Appendix V.

59/

The period is 180 days for goods exported under a barter or clearing contract, and 30 days for service exports. With special permission of the NBB, the transit account may be held in a bank outside the NBB.

60/

In line with changes in import tariffs in Russia, those in Belarus were amended by Decree 340 effective July 1, 1995.

61/

For goods imported under barter or clearing arrangements, the period is 180 days, while for service imports, the period is 30 days.

62/

After adjusting the explicit price of $50 per 1000 cubic meters for the cost of gas transportation services which Belarus provides Russia for free, in exchange for this below-market explicit gas price, the effective cost of gas to Belarus at the end of 1994 was roughly US$66 per 1,000 cubic meters.

63/

Excluding US$88 million in payments to Russia on outstanding grain loans (on-lending of loans by the European Union (EU)) which technically fell due during 1994, but which were not serviced. Russia did not press for payment because the corresponding EU loans were rescheduled under the Paris Club.

64/

An alternative way of presenting Belarus’s balance of payments would be to add to the value of gas imports some US$16 per 1,000 cubic meters, and show an offsetting receipt for pipeline transit services. This would result in a 1994 trade deficit which was some US$235 million higher, with a corresponding improvement in the services account.

65/

The slow progress to a large extent reflected considerable resistance to reforms, especially on the part of local governments, and the authorities’ desire to achieve social consensus on the modalities of restructuring and reforms. For more details on reforms implemented in 1993 and the first half of 1994, see SM/94/163, 07/01/94, pages 48-57.

66/

For more details see section II.2 of this report.

67/

The level of profitability is probably substantially overstated for the reasons indicated earlier.

68/

A first step to privatize segments of the economy was taken in October 1990 with the Law on Leasing Arrangements, but this was followed by a moratorium on privatization in February 1992.

69/

The term “privatization” as used throughout this section, unless otherwise specified, includes transformation of enterprises into joint-stock companies in which the state still owns all or the majority of shares.

70/

The equivalent of Rbl 600 million (approximately US$52,000) at end-June 1995.

71/

Calculated by adding up the number of enterprises sold to individuals, legal entities, in auctions and tenders, and leased enterprises sold. At the republican level the figure is about 40 percent and at the local level more than 90 percent.

72/

For a more detailed description of voucher allocation see the 1994 Recent Economic Developments report (SM/94/163, July 1, 1994).

73/

The value of vouchers was derived from the decision to sell 50 percent of shares (and thus of the value) of enterprises to be privatized for voucher certificates.

74/

The average dwelling unit is about 60-65 m2, somewhat smaller for the two-thirds of the population living in urban areas, where also the family size is slightly higher than in rural areas.

75/

The situation became even more difficult when it became necessary to resettle a large part of the population living in areas that were affected by the Chernobyl nuclear accident.

76/

According to the Law on Privatization of Housing, the time lag from application to transfer should be no longer than two months. Until mid-1993 it frequently reached up to six months.

77/

The Law specifies that dwelling units constructed before July 1, 1992 were assessed at fixed 1991 prices, and newer housing was to be assessed at current cost.

78/

In line with changes in import tariffs in Russia, as of July 1, 1995 Belarus amended its import duty rates correspondingly.

79/

The exemption is progressive because, given the progressivity of the income tax, it increases with the level of taxable income.

80/

In the alternative method of calculation, known as the invoice credit method, enterprises compute their VAT liability directly from invoice documents by subtracting VAT payments to their suppliers from VAT payments received from their customers. The main advantages of the invoice credit method are: ease of administration, and facilitation of cross checking of enterprise VAT returns which discourages tax evasion.

81/

Excise taxes on alcohol were raised from 75 to 80 percent effective July 1, 1995.

82/

From July 1, 1995, banks are authorized to trade Russian rubles and U.S. dollars on the interbank market as well.

83/

The time allowed for repatriation of export proceeds is 180 days for barter transactions, and 30 days for service transactions. With the approval of the NBB, the transit account may be held in a bank abroad.

84/

Belarus has long term bilateral trade agreements with Kazakhstan, Kyrgyz Republic, Ukraine and Uzbekistan. Annual protocols are signed under these agreements each year. It regularly signs annual agreements with Latvia, Lithuania, Moldova, Russia and Tajikistan. Negotiations are under way on a protocol for a bilateral trade agreement with Armenia.

85/

Enterprises that produce for state orders have priority access to products imported under trade agreements.

86/

The period is 180 days for goods exported under a barter or clearing contract, and 30 days for service exports. With special permission of the NBB, the transit account may be held in a bank outside the NBB.

87/

Surrender requirements for export earnings in Russian Rubles were eliminated effective May 1, 1995. Surrender requirements for U.S. dollars and other hard currencies were reduced from 50 to 30 percent effective May 15, 1995, before being eliminated altogether on July 1, 1995.

88/

For goods imported under barter or clearing arrangements, the period is 180 days, while for service imports, the period is 30 days.

89/

This restriction is required according to agreements with Russia.

90/

These controls are in response to European Union anti-dumping controls.

91/

The Former Soviet Union’s overall quota on exports of textiles to the members of the European Union was distributed among the states of the Former Soviet Union.

92/

The law on Foreign Investment of the Supreme Soviet, dated November 14, 1991, guarantees that terms offered to foreign investors would remain unchanged for at least five years.

93/

The staff is still assessing the jurisdictional implications of procedures for the settlement of balances on official clearing accounts.

94/

More details on the housing privatization program are provided in Section VI.4 of the main text.

95/

For telephone, actual usage is billed separately.

96/

Belarus: Energy Sector Review, Report No. 12804-BY, April 21, 1995, World Bank.

97/

For more details see section VI.5 and Table 70 of the main text.

98/

A detailed discussion of recent tariff adjustments is provided in Section II.2 of the main text.

99/

A large amount of heating, hot water, and electricity are jointly produced by the same enterprise.

100/

Heating is normally provided from October 15 through April 15 of the next year.

101/

However, according to a study conducted by the World Bank, in a three-member household usually two persons contribute to family earnings. Also, most households supplement their income with some self-subsistence activities, even in urban areas. For example, the dacha serves more as an additional source of income than as a place for recreation. About half of these households are able to provide 25 percent of their food needs. In rural areas, self-subsistence activities contribute an even larger share to total food needs, with 25 percent of households producing half of their food. Taking into account such other sources of “income”, it was estimated that only a small percentage of households (perhaps as low as 2 percent) would spend more than 15 percent of their income on housing services and utilities at a level of cost recovery of 60 percent, although these figures were not confirmed by the authorities.

102/

For more details on past efforts toward integration see Appendix VI in the 1994 Recent Economic Development report (SM/94/163, 7/1/95). The Treaty of April 12, 1994 also stipulated steps toward establishing a monetary union. However, no agreement could be reached in the subsequent months on specific measures relating to budget management and procedures for merging the monetary systems of the two countries and the matter was dropped.

103/

On January 20, 1995, Kazakhstan signed an agreement with Russia stating that it plans to join the customs union. Other countries have also expressed an interest in joining.

104/

The protocol of May 12 stipulates that the customs union agreement will continue to be in effect for a period of 6 months after one of the two countries sends the other country a written notice of its intention to discontinue to union.

105/

Belarus, will, however, adopt Russian tariffs in three steps, on May 1, June 1, and August 1, 1995.

106/

The effect on exports may not be significant as it was indicated that only two or three of the products now subject to export taxes were produced in Belarus.

107/

See the accompanying text box for a taxonomy for foreign exchange inflows as they relate to macroeconomic developments and sterilization needs.

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Cover IMF Staff Country Reports
Belarus: Recent Economic Developments
Author:
International Monetary Fund
Volume/Issue:
Volume 1995: Issue 099
Publisher:
International Monetary Fund
ISBN:
9781451805000
ISSN:
1934-7685
Pages:
192
DOI:
https://doi.org/10.5089/9781451805000.002
CHART 1

BELARUS: Economic Activity
CHART 2

BELARUS: Industrial Production

(1990 average = 100)
CHART 3

BELARUS: Inflation
CHART 4

BELARUS: Real Wage and Dollar Wage
CHART 5

BELARUS: General Government Expenditures and Deficit

(In percent of GDP)
CHART 6

BELARUS: Exchange Rate Developments
CHART 7

BELARUS: Interest Rate and Inflation

(In percent per month)
CHART 8

BELARUS: Money and Credit
CHART 9

BELARUS: Inflation Adjusted Yield of Rubel Deposits and US Dollar Banknotes 1/
CHART 10

BELARUS: Inflation Adjusted Refinancing Rate

(Monthly rates in percent)
CHART 11

BELARUS: Domestic Debt of Enterprises