Back Matter

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

article image
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.