Belarus
Recent Economic Developments

This paper reviews economic developments in the Republic of Belarus during 1994–96. After several years of efforts at structural reform and stabilization during which little progress was made, following presidential elections in mid-1994, the authorities adopted a wide-ranging adjustment program aimed at reducing inflation, increasing the market orientation of the economy, and creating the conditions for a resumption of economic growth. The reform program was reinforced in the first half of 1995, and key macroeconomic data for 1995 show that the program has had some success.

Abstract

This paper reviews economic developments in the Republic of Belarus during 1994–96. After several years of efforts at structural reform and stabilization during which little progress was made, following presidential elections in mid-1994, the authorities adopted a wide-ranging adjustment program aimed at reducing inflation, increasing the market orientation of the economy, and creating the conditions for a resumption of economic growth. The reform program was reinforced in the first half of 1995, and key macroeconomic data for 1995 show that the program has had some success.

I. Overview

After several years of efforts at structural reform and stabilization during which little progress was made, following Presidential elections in mid-1994 the authorities adopted a wide-ranging adjustment program aimed at reducing inflation, increasing the market orientation of the economy, and creating the conditions for a resumption of economic growth. Prices of most commodities were liberalized, the external trade system was freed of controls and restrictions, the state order system was abolished, and the operational capacity of the National Bank of Belarus (NBB) was strengthened. Monetary and fiscal policies were tightened to achieve the goals of reducing inflation and stopping the continuous depreciation of the national currency, the rubel. 1/

The reform program was reinforced in the first half of 1995, and key macroeconomic data for 1995 show that the program has had some success. 2/ 3/ After three years of double-digit monthly price increases, inflation slowed down dramatically and the dangers of hyperinflation receded, capital started to flow into the country, foreign reserves strengthened, and the exchange rate remained stable. However, the authorities did not build on the gains achieved, and policies were not always implemented consistently. In the second half of 1995 and in early 1996 when pressures emerged in many areas, policies started to diverge from those in the Government’s program, and the authorities reverted to direct administrative controls and intervention, moving further away from a market economy. As a result, overall economic performance in 1995 was mixed.

The political environment for reforms was difficult during 1995. Elections for a new Parliament in June 1995 were unsuccessful, and several rounds of voting had to be held to achieve a quorum. 4/ As the new Parliament did not start functioning until January 1996, many important pieces of legislation that were vital to speed up structural reforms were delayed. Concerns also arose that the speed of reforms would have a negative impact on the standard of living of the population and employment, and pressures intensified for the state to reassert itself through direct controls and to slow the reform process. Decision-making was also influenced by developments in relations with Russia and continuing efforts to achieve closer integration and cooperation between the two countries. A customs union between the two countries became effective in May 1995, and a referendum was held, coinciding with the first round of Parliamentary elections, in which the majority of the population voted for closer integration. This was followed in early 1996 by an agreement between the two countries to settle mutual financial obligations, and on April 2 by a potentially far-reaching agreement to establish a “community of sovereign states”.

The economy continued to be affected by the disappearance of most traditional markets following the break up of the U.S.S.R. and the initial large terms of trade shocks as prices of imported raw materials and energy adjusted toward world market levels. 1/ Real GDP declined by about 10 percent in 1995, slightly less than in 1994 when a severe drought affected the agricultural sector. Weak domestic demand, associated with the decline in living standards of the population, reinforced the effect of the disruption of old trading patterns. The emerging private sector remained relatively small, thus not being able to compensate for declines in the state sector. In 1995 real GDP was about 36 percent lower than in 1991. This output decline was relatively small compared to other CIS countries, most of which faced broadly similar problems during this period (Chart 1). This outcome was in part attributable to continued strong government support for industrial enterprises and agriculture, and to prices for imported gas that rose less than in other countries. Other important factors were relatively favorable new markets for some industrial products--Belarus was able to diversify its exports away from its CIS trading partners (especially in the first half of 1995)--and the slow speed of reforms. Despite the further decline in GDP, official unemployment remained low as enterprises continued to hoard labor, a reflection of the slow pace of enterprise reform. However, it is estimated that hidden unemployment may have reached 15 percent. Interenterprise arrears continued to grow, although they declined in real terms.

CHART 1
CHART 1

BELARUS GDP in States of the Former U.S.S.R.

Citation: IMF Staff Country Reports 1996, 099; 10.5089/9781451805017.002.A001

Sources: National authorities; and Fund staff estimates.

After several years of double-digit figures, during 1995 monthly inflation declined rapidly to under 3 percent by June. It picked up to over 5 percent in July, partly because of adjustments in administered prices, but then remained around 3-4 percent for most of the rest of the year and in early 1996. By April-May 1996 monthly inflation dropped to below 2 percent. The relatively tight monetary policy in the first half of 1995, combined with a stable exchange rate, contributed significantly to this development. With the removal of most remaining profit margins in the first half of 1995, the liberalization of the price system was mostly completed. Only a small number of natural monopolies are still subject to formal price controls. However, there are still some controls at local levels, imposed for social reasons, mostly on food items.

Monetary policy was uneven during 1995 and early 1996, and subject to significant swings. Following relatively tight money and credit policies in the first half of the year, in June-July 1995 monetary expansion was very large as the NBB provided credits both to banks and the Government, while at the same time lowering interest rates. Measures were taken subsequently to reduce the resulting excess liquidity and until the end of the year credit expansion was curbed. However, in December credit again expanded rapidly. This rise in credit was partly reversed in February-March 1996, but with the upcoming agricultural planting season and large demands resulting from a government housing program credit expansion was again very large in April-May. The latter increase in credit was mostly in the form of directed credits from the NBB, a practice which had been virtually discontinued by late 1995 when all new lending to banks was channeled through auctions.

After a steady depreciation since 1991, the nominal exchange rate remained fixed at Rbl 11,500 per U.S. dollar for most of 1995 and until April 1996. Helped by the tightening of monetary policies in early 1995, real interest rates became significantly positive since February and induced capital inflows. As the Government had decided that a fixed exchange rate would be important to help solve the problems in the enterprise sector, the NBB purchased large amounts of foreign exchange to prevent the rubel from appreciating. However, when capital inflows reversed in the second half of the year, following the loosening of monetary policy, the NBB had to sell much of the foreign exchange it had earlier purchased in order to prevent a depreciation. As the pressures on the foreign exchange market increased, by November the authorities reintroduced numerous exchange restrictions and controls. Additional restrictions were introduced in January 1996, at which time the authorities also announced the introduction of an exchange rate band. 1/ In practice, however, the fixed exchange rate was maintained until end-March. Starting in April, the rate was allowed to adjust slowly, but reserves continued to fall. Between January 1995 and end-March 1996, this exchange rate policy led to a sizable real appreciation of the rubel against the U.S. dollar (by about 220 percent).

The real appreciation started to affect exporters in the second half of 1995. Export growth to non-CIS countries slowed and enterprise profitability declined. By the fourth quarter of 1995 and in the first quarter of 1996 exports were declining in volume terms. At the same time, imports from non-CIS countries surged, and the current account deficit, which had fallen in 1995, widened significantly in the first quarter of 1996. External loan disbursements dropped in 1995, especially in the second half of the year as the economic situation started to deteriorate and expected foreign financing commitments did not materialize. Direct foreign investment remained negligible. The balance of payments deficit in 1995 was financed to a large extent through an accumulation of arrears, mainly on payments for gas imports from Russia. These arrears were cleared in February 1996, in the context of the debt agreement with Russia, but soon thereafter new gas arrears emerged, and have continued to accumulate.

In the fiscal area, the authorities, like in earlier years, were able to contain the fiscal deficit, limiting it to under 2 percent of GDP--considerably lower than the budgeted level of 3.2 percent of GDP--despite shortfalls in revenues of about 3 percent of GDP. This was achieved largely through sequestration and cuts in nonpriority expenditures, and resulted in an increase in budgetary arrears. This policy was continued in the first quarter of 1996 when revenues dropped by 24 percent in real terms compared with a year earlier. The weak revenue performance was mostly linked to the declining profitability of enterprises, but it also reflected the increasing use of tax exemptions to provide financial support to enterprises.

After a promising start in the first half of 1995, which witnessed the virtual completion of price liberalization, trade liberalization, and the introduction of a number of other measures, subsequent structural reforms stalled. The 1995 privatization program was not implemented and only a small number of enterprises owned by the central government changed hands. At the local level progress was somewhat faster, but as most of these enterprises are small, they only account for a small share of economic activity. A privatization program for 1996 was put in place early in the year, but as of mid-May actual implementation had not started. Enterprise restructuring was further delayed as the authorities chose to provide tax exemptions and other temporary relief, rather than tackle the fundamental problems of the enterprises. Important legislation such as a revised bankruptcy law was delayed.

Belarus-Russia: Closer Integration 1995-96

During 1995 and 1996 a number of agreements were signed between Belarus and Russia, aimed at closer integration and coordination of policies. These agreements have already had or can potentially have a significant impact on the Belarussian economy.

1. An agreement to form a customs union was signed on January 6, 1995. The customs union became effective on May 12, 1995 with the completion of the first phase of the union. This phase included (although in practice some of the aspects are not fully implemented): (i) the lifting of tariffs and quotas on trade between Belarus and Russia; (ii) the establishment of uniform trade regulations and import and export duty schedules; (iii) harmonization of excise tax rates on imported goods; (iv) the elimination of internal borders between Russia and Belarus; and (v) agreement on revenue sharing. The second phase of the customs union envisages the formalization of the customs union arrangements and the harmonization of nontariff regulations. This stage has not yet been completed. Kazakstan became a member of the customs union on January 20, 1995 and the Kyrgyz Republic on March 29, 1996.

2. On February 27, 1996 an agreement was signed between Russia and Belarus to settle mutual financial claims and obligations, referred to as the “zero option.” Under the agreement, Russia gave up claims on Belarus for technical credits granted during 1992-93 (totaling US$471 million) and on gas arrears of Belarus to RAO Gazprom as of February 1, 1996 (amounting to US$916 million, including penalties). At the same time, Belarus gave up claims related to Belarussian frozen deposits at Russian branches of Vnesheconombank, arrears for nuclear materials extracted from weapons, and various expenditures connected with the presence of Russian military troops in Belarus from 1992-95. While there are some provisions for the domestic counterpart of the gas arrears to be rescheduled, this agreement has provided a significant amount of debt relief to Belarussian enterprises.

3. The April 2, 1996 agreement to form a commonwealth of independent states envisages the pursuit of common economic and social policies, the carrying out of measures to unify monetary, tax and budgetary systems, the establishment of conditions for the introduction of a common currency, and the establishment of unified standards of social protection and common energy, transportation and communication systems. To implement the treaty, a “Supreme Council” as well as an “Executive Committee” were established. While most of the details of the agreement still need to be worked out, it could have major implications for the conduct of economic policy in Belarus.

II. Real Sector

The decline of the economy that started in 1992 continued in 1995. The fall in output was widespread, although some service enterprises and the oil and petrochemical industries performed relatively better. Real GDP contracted by about 10 percent, slightly less than in 1994; but this rate of decline slowed sharply in the first quarter of 1996.

The liberalization of most consumer prices was completed in late 1994 and the first half of 1995, and agricultural procurement prices were freed in early 1995. 1/ Significant progress was made during 1995 in reducing inflation. After a peak in January 1995, restrained monetary, fiscal, and wage policies contributed to lowering inflation sharply to moderate levels and in May monthly inflation dropped to under 4 percent. Inflation remained in the 3-5 percent rate range through end-1995 and declined to about 1-2 percent by April 1996.

Faced by further declines in demand and deteriorating competitiveness, the financial position of enterprises came under increasing stress during 1995. Exchange rate policy, which led to a significant real appreciation of the rubel, also played a role. At the same time, registered unemployment remained low (2 to 3 percent), as enterprises continued to hoard labor and placed workers on unpaid leave.

1. Economic activity

Output developments in 1995 continued to be influenced by the factors that started the downward trend in economic activity in 1991-92. These factors were: the loss of external markets and the declining demand for Belarussian products, higher prices for imported raw materials and other inputs, as prices of these commodities adjusted to world market levels in partner trading countries, the reduction of state orders, the further decline in real household incomes (which depressed consumer demand), the lack of reforms in the industrial and agricultural sectors, and regulations that delayed the emergence of a dynamic private sector. 2/ In addition, since 1991 capital investment has suffered as a result of the weak financial position of enterprises and the virtual absence of direct foreign investment. As a result, real GDP declined by 10 percent (Tables 1-4). After concerted efforts by the Government to stem the decline in output in late 1995 and early 1996 (see below), the decline in GDP slowed to 3 percent in the first quarter of 1996 and some sectors reported positive growth.

Table 1.

Belarus: Gross Domestic Product by Sector, 1992-95

(At current prices)

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Source: Ministry of Statistics and Analysis.

Provisional estimates currently under revision.

Undistributed imputed payments to financial intermediaries.

Table 2.

Belarus: Gross Domestic Product by Expenditure, 1992-95

(At current prices)

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Source: Ministry of Statistics and Analysis.

Provisional estimates currently under revision. Data on gross capital formation are subject to great uncertainty.

Includes residential investment and business fixed investment.

Table 3.

Belarus: Gross Domestic Product, 1992-95

(Percentage change at comparable prices)

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

Provisional estimates currently under revision.

Undistributed imputed payments to financial intermediaries.

Includes residential investment and business fixed investment.

Table 4.

Belarus: Capital Investment in Comparable Prices by Sectors, 1992-95 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.

The continuing deterioration of the economy is reflected in the financial position of enterprises. While data are unreliable, they indicate that an increasing number of enterprises at the national economy level are operating with losses. 3/ According to these figures, between November 1995 and March 1996, the number of loss-making enterprises almost doubled to over 2,800 (20 percent of all enterprises). Many enterprises were unable to meet their cash flow requirements and incurred wage arrears.

Due to problems with the coverage and compilation of national accounts, figures for consumption and investment are subject to a great degree of uncertainty. Official figures on investment expenditure overstate the true figures due to problems of valuation and measurement. In addition, external sector data in the national accounts differ from balance of payments data. The revision of the base of exports and imports, combined with the sharp growth in U.S. dollar-denominated GDP in 1995, make the 1995 current account and savings figures difficult to compare with 1994 and thereby the derivation of savings and investment balances not very meaningful.

Based on the official data, private consumption declined by more than 20 percent in 1995 as disposable income continued to fall, while public consumption (mainly purchases of goods and services and payment of wages) was broadly maintained. Gross fixed capital formation fell by 26 percent and thus contributed to the fall in GDP. This decline was largely the result of the difficult financial situation of enterprises, the cumbersome taxation system that puts a heavy fiscal burden on capital investments, the uncertainty about economic policies, as well as the insufficient legal framework and the lack of a law on property rights for legal entities. The decline was especially pronounced in industry (50 percent), residential construction (48 percent), and agriculture (55 percent).

a. Industry

The industrial sector continues to be mostly state owned. In 1995, state-owned companies and joint-stock companies with the Government owning shares, 1/ produced over 90 percent of total industrial production. Leased enterprises accounted for 6 percent of industrial output and private enterprises less than 2 percent. Within the industrial sector, power generation, petrochemical, and machine building industries are the most important components, while the share of light industry has been declining fastest. State enterprises are closely supervised by branch ministries, although they have become somewhat more independent in day-to-day management. The Government retains a large role in employment and investment decisions and, occasionally in pricing and production decisions.

Industrial output contracted by 11.5 percent in 1995 (Tables 5 and 6). In the years since 1992, industrial activity has been hit relatively more severely than the other sectors of the economy, due to the concentration of large enterprises that previously produced almost solely for the internal market of the former U.S.S.R. and the heavy reliance upon imported raw materials and other inputs. Industrial production used to account for about 37 percent of GDP in 1992 but this declined to less than 26 percent in 1995 (Charts 2 and 3).

Table 5.

Belarus: Industrial Production, 1992-96 (Q1)

(Percentage change in comparable prices)

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

Compared to the first quarter of 1995.

Table 6.

Belarus: Selected Indicators of Industrial Production, 1992-96 (Q1)

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Source: Ministry of Statistics and Analysis.
CHART 2
CHART 2

BELARUS COMPOSITION of GDP

(In percent)

Citation: IMF Staff Country Reports 1996, 099; 10.5089/9781451805017.002.A001

Source: National authorities.
CHART 3
CHART 3

BELARUS Industrial Production

Citation: IMF Staff Country Reports 1996, 099; 10.5089/9781451805017.002.A001

Sources: Belarussian authorities; and Fund staff estimates.

Despite the authorities’ efforts to support industrial production, with credits at preferential interest rates (in the first half of the year), relatively favorable domestic energy prices, and tax exemptions and deferrals, significant declines in output were recorded in most sectors in 1995. Light industry (consumer products) suffered the biggest decline and its output dropped by 33 percent reflecting lower real incomes, quality differences with similar products imported from abroad, and later in the year, the worsening competitive position of enterprises (Table 7). The decline was also sharp (22 percent) in the machine building and construction material sectors as these products faced steeper outside competition in Belarus’ traditional markets in CIS countries. The only industries with positive growth in 1995 were oil refineries and petrochemical companies which increased their production by 8 percent and 10 percent, respectively, benefiting from interstate agreements for processing crude oil from Russia as well as from sub-contracting work for Russia companies. 1/

Table 7.

Belarus: Share of Total Exports in Production of Selected Industrial Products, 1992-96 (Q1)

(In percent)

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Source: Ministry of Statistics and Analysis.

Estimates.

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.

Concerned with the situation in the industrial sector the authorities in October 1995 issued a decree on “Immediate measures to improve the financial position of industry, to restructure industrial enterprises and surmount their insolvency.” Incentives were given to banks to extend long-term credit to enterprises and subsidize investment. Additionally, several tax and import duty exemptions and postponement of payments for utilities were introduced to allow enterprises to operate and build up working capital. Tax obligations were also reduced for selected enterprises that allowed them to pay profit taxes up to a maximum of 40 percent of their profits, regardless of actual tax obligations. 2/ In January 1996, a general agreement was reached between the Cabinet of Ministers, the association of employers, and the trade unions that would prevent production from dropping below 1995 levels and keep official unemployment from rising above 3 percent. Prices of energy for industrial users were also lowered by an average of 5 percent. While these measures contributed to increased output in some sectors in early 1996 they did not lead to equivalent sales. As a consequence unsold inventories of enterprises, which had increased to Rbl 7.2 trillion (about 6 percent of GDP) at end-December 1995, jumped to about Rbl 10 trillion at end-March 1996, further straining enterprises’ financial position. 1/

Data on profits, while probably not accurate in terms of levels as explained above, show a clear trend of a worsening situation. Profits declined significantly in 1995 for virtually all industrial sectors (Tables 8 and 9). While in 1994, the average enterprise was reporting profits in the 21-50 percent range, in 1995 it moved to the 11-20 percent range. In 1995, some 190 enterprises (12 percent of total enterprises in industry) registered losses, compared with only 3 percent in 1994. By March 1, 1996, the number of loss-making enterprises had more than doubled to 442 (about 25 percent of total industrial enterprises). The light industry sector recorded the worst performance, with about 30 percent of the enterprises recording losses, and an additional 34 percent of the enterprises recorded very low profitability levels of 0-10 percent. 2/ The situation was similar in construction, food industry, and machine building.

Table 8.

Belarus: Enterprise Profitability and Number of Loss-Making Enterprises 1/, 1992-96 (Q1)

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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 January-February 1996.

Includes kolkhozes only.

Table 9.

Belarus: Profit-Making Enterprises by Sector, in 1994-95

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Source: Ministry of Statistics and Analysis.

Official figures show that in the last quarter of 1995 enterprises were operating at 30-40 percent capacity and measured lost working time increased by about 20 percent. Net interenterprise arrears of the industrial sector increased to about Rbl 16 trillion (US$1.4 billion) more than tripling compared to end-1994.

b. Agriculture and forestry

In the period 1992-94, the maintenance of extensive price controls on agricultural products, intended to maintain low consumer prices at a time when prices of agricultural inputs were sharply increasing, led to significant financial losses in the agro-industrial complex, sharp declines in agricultural output, and the emergence of significant intra-sectoral arrears. To partly compensate farmers and the agro-industrial sector, and to provide urgently needed working capital, the Government during this period allocated large amounts of credits at preferential rates. 1/ However, despite these credits, the contribution of agriculture as a share of GDP declined from 20 percent in 1991 to about 11 percent in 1995. 2/

Despite the liberalization of procurement prices, 1995 was a difficult year for agriculture, due to the unfavorable economic environment and adverse weather conditions, especially in the early part of the year. Insufficient financial resources to purchase fertilizer in large enough quantities also played a role. Livestock production declined for the sixth consecutive year and the grain harvest fell by about 10 percent although production of potatoes and flax rebounded following a year of disappointing crops (Table 10). Overall, real agricultural output declined by about 8 percent. Preliminary estimates show that in the first quarter of 1996 agricultural production declined by about 6 percent.

Table 10.

Belarus: Agricultural Production, 1992-95

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Source: Ministry of Statistics and Analysis.

End of period stocks.

While Belarus’ natural resource environment favors livestock relative to crop production, the share of land allocated for crops has been increasing at the expense of land used for livestock. The main reasons have been the limited profitability of livestock due to low productivity, increasing costs of fodder, and declining demand from traditional markets (mainly Russia) for Belarussian meat due to strong competition from other countries from within and outside the former U.S.S.R.. The share of non-state livestock output to total livestock output increased from 28 percent in 1992 to about 37 percent in 1995 (Table 11).

Table 11.

Belarus: Share of Private Sector in Agriculture, 1992-95

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Source: Ministry of Statistics and Analysis.

At comparable 1983 prices.

Traditionally, crop production has mainly focused on providing inputs for the livestock industry, as without the heavy use of fertilizers the soil is relatively poor. Until 1994, crop production was supported by preferential allocation of fuel, fertilizers, and other inputs through state orders. In 1995, the degree of direct subsidization was reduced substantially although some credit to agriculture continued to be allocated on preferential terms. Production of forage and feed for livestock continued to be the principal activity in crop production. Overall some 67 percent of agricultural land was used to produce feed grains and fodder crops.

Most agricultural production is still organized into two types of centrally controlled large-scale farms: kolkhozes (collective farms) and sovkhozes (state farms). These two types of farms combined account for more than 80 percent of agricultural land (Table 12). During 1995 there were no significant moves to restructure kolkhozes and sovkhozes or to introduce a more market-oriented environment that would be conducive to development of private farming.

Table 12.

Belarus: Distribution of Agricultural Land by Ownership, 1990 and 1993-95

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Source: 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 agro-industrial enterprises.

Kolkhozes and Sovkhozes

The agricultural sector is dominated by kolkhozes or collective farms in which output and assets are jointly owned by the members, and sovkhozes or state farms in which output and all assets, including land, are owned by the state and the workers-farmers are state employees. The kolkhoz/sovkhoz system is complemented by “interfarm enterprises” and mezkhozes, that produce agricultural services or process agricultural products and are owned jointly by several farms.

Kolkhozes and sovkhozes are generally diversified, large scale enterprises which frequently integrate a whole range of activities from crop and livestock production to processing, (dairy, meat and sugar processing) to providing inputs (machinery and construction services). The kolkhoz-sovkhoz system has traditionally coexisted with quasi-private subsistence agriculture by members of state and collective farms and urban workers. Historically, the large-scale farms and household plots of their members have cooperated closely.

Although a very small private sector has been operating since 1991, the land law that was introduced in 1993 did not establish the land ownership framework required for a market system. It confined private ownership of land to very small plots and has only permitted limited subsistence farming to develop. Since then, private agricultural land has consisted of small household gardens ranging in size from 0.1 hectares to 0.5 hectares and some farms which lease land. 1/ Proposals to expand land ownership and land use rights have not been adopted by the Parliament, and new initiatives are not expected in the near future. In 1995, private farms covered almost 15 percent of agricultural land, slightly more than in previous years, with an average size of 21 hectares compared with the average size of 730 hectares for a state farm. Despite its small share of total land, private crop farming accounted for over 50 percent of total crop output and more than 75 percent of crops such as potatoes (87 percent), vegetables (77 percent) and fruits (95 percent) (Table 11).

In 1995, the subsidization of agriculture started to decline as credit channelled to agriculture, especially in the spring season, was extended at higher interest rates. 1/ Domestic terms of trade improved as the retail prices of most products were freed; price controls have remained only on essential products, in the form of profit margins, such as bread (10 percent), milk and meat (variable rates across regions that are decided at the local level), but no direct price subsidies are provided. At the same time, an extrabudgetary Fund for Support of Agricultural Producers was established in early 1995. The size of this Fund will expand in 1996 to nearly 1.5 percent of GDP. Its assistance to agricultural producers is directed mainly to purchase tractors and other agricultural machinery for leasing to farmers, to improve the fertility of the land, and to reduce the cost of fertilizer and of credit to agriculture.

Due to the fact that most of the wholesale trade system is still state owned, a substantial share of agricultural production of certain products such as grains, sugar beets, meat and dairy, continues to be sold through state procurement organizations (Table 13). However, as farmers are starting to find other ways to sell their products and some small trading firms have been established, the share has been steadily declining. Nevertheless, for some products (meat and sugar beets) the share sold through procurement agencies remained above 50 percent in 1995.

Table 13.

Belarus: Share of Agricultural Production Sold Through State Procurement Organizations, 1990 and 1993-95

(In percent of total production)

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Source: Ministry of Statistics and Analysis.

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

While in principle freely negotiable, in practice, the Government sets indicative contract prices and producers can then decide to sell at this price or not. Contract prices for grain are determined in dollars at last year’s average world market prices. A drawback is that prices are not adjusted once the contract is signed, even if current market prices deviate considerably from last year’s. Producers that sign a contract receive 50 percent of the contract price in advance to provide working capital for planting. Despite the fact that prices were officially freed, frequently, the oligopolistic state-owned trading organizations continue to set low prices for agricultural products for social reasons. This practice adversely affects the financial position of the agro-industrial enterprises, which have become increasingly dependent on bank financing. The number of loss-making enterprises in agriculture increased from 179 in 1994 to 380 in 1995 and to 550 in the first quarter of 1996.

Belarus has significant forest resources with total forest lands covering about 40 percent of total land area. By law forestry lands are the property of the state. The quality of timber is good, particularly spruce. However, the timber industry still remains underdeveloped and in 1995 contributed less than 1 percent to GDP. A project financed by the World Bank is underway to improve the potential of this sector through the introduction of modern forestry techniques and market based marketing of the lumber.

c. Services

As the shares of industry and agriculture to GDP declined from 1991 to 1995, the share of services (e.g., transportation, banking, construction and public administration) increased from 40 percent to 62 percent, despite a real contraction in some of these sectors, as relative prices adjusted. 1/ Construction, trade, and procurement declined more than 20 percent in 1995 in volume terms. Among the sectors recording positive growth in 1995 were banking, housing, public health, and education.

d. Energy

Belarus does not possess significant energy resources and depends for its energy needs on imports, particularly of natural gas and crude oil (Table 14).

Table 14.

Belarus: Production and Consumption of Energy Resources, 1992-95

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Source: Ministry of Statistics Analysis.

Included in consumption.

Gas Imports

Natural gas is imported by Beltransgaz from RAO Gazprom in Russia, which also acts as a holding company for the regional transmission and storage enterprises. The border price for natural gas imports is usually established by an intergovernmental agreement. At present, this price is below the world price because of an offset for the gas transit through Belarus of Russian gas exports to Western Europe and because Belarus receives preferential price treatment. The import price for gas was US$54.4 per thousand m3 in 1994, US$53 per thousand m3 in 1995, and was lowered to US$50 per thousand m3 from January 1996. In contrast, Ukraine pays US$80 per thousand m3, although it also receives payments for transit. To the border price Beltransgaz adds a transmission margin (which is intended to cover operation, maintenance, and depreciation costs) and a margin for gross profit Beltopgaz, the distributor of natural gas to end-users, in turn adds a distribution margin to the price it pays to Beltransgaz. The domestic resale price was an average of US$82 per thousand m3 in the first quarter of 1995 and dropped to US$76.3 per thousand m3 in June. Actual charges to households were considerably lower due to subsidization of the price by the Ministry of Housing that buys gas from Beltransgaz for delivery to households. The tariff charged to households was last increased in October 1995 and cost coverage for households is just above 50 percent.

Domestic production of natural gas (about 250 million m3) covers less than 2 percent of total consumption. Gas import volumes in 1995 were about 20 percent lower than in 1991-92, reflecting the general decline in the economy. 1/ Almost half of the gas imported is consumed in the electricity and heat subsectors. Industry is the next major end-user, absorbing about one fifth of total consumption. Within the industrial sector, the chemical and petrochemical industries account for almost half of industrial consumption. The direct household use of gas represents only about 5 percent of total consumption. A nationwide program for installing gas meters for individual housing and apartment blocks continued slowly in 1995.

Belarus produces some crude oil but not enough to meet domestic demand. The volume of crude oil imported in 1995 remained roughly the same as in 1994, at about 11 million tons. There are two large refineries, at Novopolotsk and Mozyr, with a combined capacity of about 38 million tons of oil products a year, which produce mostly for the domestic markets; but in 1995 also increased exports. Agreements to upgrade the refineries have been reached with Russian oil companies. The price of oil is subject to negotiations between the Russian exporters and the domestic oil refineries. The state has withdrawn from imports of oil, except those for strategic purposes.

Electricity production declined in 1995 by about 20 percent. There is considerable cross-subsidization of electricity tariffs, as enterprises pay significantly more than households. However, during 1995 the extent of cross subsidization was reduced as tariffs for households were raised fourfold while those for enterprises were maintained. 2/

2. Inflation and pricing policies

Following the surge in prices in 1994, largely due to expansionary monetary policies and adjustments in administered prices during the year, 1995 was a turning point. After peaking in January, as financial policies were tightened, monthly inflation decelerated quickly and reached 2.5 percent in June, the lowest level since October 1991 (Table 15). The decline in inflation reflected also the stability in the exchange rate and slowing inflation in Russia. Inflation picked up slightly in July, following adjustments in tariffs for utilities and household services, and sizable credit expansion, and it remained in the 3-5 percent range for the remainder of the year. As a result, average inflation in 1995 was some 700 percent, compared to 2,200 percent in 1994, and end-of-period inflation fell to 244 percent. Nevertheless, relative to other countries in the CIS, inflation in Belarus remained amongst the highest (Chart 4). Expansionary policies toward the end of 1995 resulted in monthly inflation above 5 percent in January 1996, but thereafter inflation came down to 1-2 percent in March-April (Chart 5). 1/

Table 15.

Belarus: Comparison of Price Indicators, 1992-96 (March)

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Source: Ministry of Statistics and Analysis.

The CPI uses 1992 household expenditure weights for January 1992-March 1994; and from April 1994, 1993 weights are used. Weighs were revised in April 1995 using 1994 household survey data. The Ministry of Statistics and analysis does not adjust time series according to the new weights.

Industrial Production Price index Data are based on a corrected index formula (Laspeyres).

CHART 4
CHART 4

BELARUS Inflation

Citation: IMF Staff Country Reports 1996, 099; 10.5089/9781451805017.002.A001

Sources: Notional authorities; and Fund staff estimates.1/ Average for Estonia, Latvia, and Lithuania.
CHART 5
CHART 5

BELARUS Inflation and Wages in Selected Countries

Citation: IMF Staff Country Reports 1996, 099; 10.5089/9781451805017.002.A001

Sources: National authorities; and Fund staff estimates.1/ Average for Estonia, Latvia and Lithuania.

The process of price liberalization was mostly completed in Belarus in 1994 and early 1995, and administered prices are preserved only for a small number of activities which are considered natural monopolies (see below). Thus, in principle, all manufactured products are free from administrative control and industrial enterprises can freely set their prices. However, pressures from local authorities still exist to prevent the erosion of consumers’ purchasing power and prices or profit margins may not be allowed to change or exceed a certain level. Additionally, de facto price controls exist for some essential products like bread (maximum profit margin of 10 percent), meat and dairy products (variable margins across regions).

Administered prices mainly apply to natural monopolies, mostly in the areas of transportation, provision of energy and communications (Table 16). Utility prices are adjusted at discrete intervals. 2/ In the first half of 1995 a series of tariff adjustments were made in the context of the Government’s adjustment program, which envisaged a gradual phasing out of household subsidies. As a result cost coverage increased from less than 12 percent in January 1995 to about 54 percent by October (Table 17). By January 1996 cost coverage had risen to about 60 percent, not as a result of higher tariffs, but a lowering of costs, primarily for heating. 3/ Cross subsidization for heating and electricity was reduced during 1995. To help enterprises overcome the economic crisis a number of measures were introduced in the first quarter of 1996 including reductions in the price of natural gas and electricity (8.5 percent and 2 percent, respectively). Differentiated tariffs were introduced for heating used by enterprises, lowering costs by 5-15 percent depending on the oblast.

Table 16.

Belarus: Changes in Administered Prices of Household Services, 1995-96 (April)

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Source: Ministry of Economy, Price Department; and Fund staff estimates.

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