Belarus
Recent Economic Developments
Author:
International Monetary Fund
Search for other papers by International Monetary Fund in
Current site
Google Scholar Close
Publication Date:
23 Sep 1996
eISBN:
9781451805017
Language:
English
Keywords:
ISCR; CR; U.S. dollar; first quarter; foreign exchange; exchange rate; national bank
Download PDF (8 MB)

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)

article image
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)

article image
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)

article image
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/

article image
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)

article image
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)

article image
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)

article image
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)

article image
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

article image
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

article image
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

article image
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

article image
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)

article image
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

article image
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)

article image
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)

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

Domestic resale.

For preferred users.

Table 17.

Belarus: Tariffs and Cost Coverage January 1995 - January 1996

article image
Sources: Ministry of Housing and Communal Services; and Fund staff estimates.

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

The following assumptions are made to calculate rent and tariffs: 1) the area of the two-bedroon apartment is 30 square meters; 2) each person consumes 9 cubic meters of water and 50 kwh of electricity per month.

Including all services.

Excluding heating.

Including heating, hot water, electricity, and gas.

3. Wage and employment developments

a. Wages

In 1995 real wages registered their first increase since 1991 as wage growth started to outpace inflation, despite the continuing sharp decline in GDP. The average wage increased in nominal terms by about 760 percent (relative to 1994), or about 7 percent in real terms (Tables 18 and 19). 1/ Among the sectors with the largest wage increases were administration, forestry, and communications. In absolute terms, the highest wages in the economy were paid in the banking sector, while the lowest in social services and agriculture. The ratio of average wages in agriculture to the average of the economy was about 60 percent reflecting the difficult financial situation in the agricultural sector. The large wage increases, combined with the decline in output, led to a significant increase in unit labor costs; on average unit labor costs in U.S. dollar terms were 50 percent higher in 1995 than in 1994. 2/

Table 18.

Belarus: Average Monthly Wages, 1992-96 (Q1)

(In rubels)

article image
Source: Ministry of Statistics and Analysis.

Changes compared to same period in 1995.

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

Excluding kolkhozes.

Table 19.

Belarus: Price and Wage Developments, 1992-96 (Q1)

(Percentage change: period average unless otherwise indicated)

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

Data for 1995 are based on a Laspeyres formula.

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

During 1995, faced with a deteriorating financial situation, enterprises increasingly accumulated wage arrears, reduced the hours of work and sent employees on unpaid leave. In early February 1996 efforts were made to settle accumulated wage arrears. 3/ In the absence of a fundamental improvement in the economy, however, new arrears emerged quickly and at end-March had reached Rbl 745 billion.

From January 1, 1996, a new wage scale, with 28 grades, was introduced for public sector wages. 4/ The monthly minimum wage, which had not been changed since March 1995, was raised from Rbl 60,000 to Rbl 100,000 and the first grade wage was set at Rbl 110,000. An additional supplement ranging from Rbl 75,000 to Rbl 20,000 (grades 1 to 8) was added to the wage base. The ratio between the lowest and the highest group was increased to about 11. The wage structure in the budgetary sphere is not compulsory for the nonbudgetary organizations and enterprises. However, enterprises receiving budgetary subsidies are required to observe the same structure.

There is a partial wage indexation mechanism for state sector wages, according to which the portion of up to two minimum wages is fully indexed to inflation while the next two minimum wages are indexed by 50 percent. There is no indexation beyond that. Indexation takes place only when (cumulative) monthly inflation exceeds 5 percent, and is compulsory for wages in the budgetary sphere.

b. Employment

Officially registered unemployment showed only a modest increase in 1995 of 30,000, to 2.8 percent from 2.1 percent in 1994 (Table 20), despite a decline of more than 300,000 (7 percent) in the number of registered employees (Table 21). Relatively high rates of decline in employment were observed in construction (17 percent), information services (14 percent), and science (13 percent). The low unemployment rate can be explained by the reluctance of newly unemployed to register and a shift toward employment in the emerging private sector, coverage of which is incomplete, even though the share of this sector in employment remains low. In virtually every sector of the economy, there is significant labor hoarding as enterprises are unable to shed excess labor. 1/ As a result, there was a growing amount of idle employees in almost all sectors of the economy. Government estimates put the level of hidden unemployment at the end of 1995 as high as 15 percent. Unemployment benefits are low (about one to two times the minimum wage) and this creates a disincentive for the unemployed to register. Also the eligibility criteria for unemployment are stringent and only half of the registered unemployed receive benefits (see also Appendix II).

Table 20.

Belarus: Labor Market Indicators, 1992-96 (Q1)

(In thousands of persons)

article image
Sources: Data provided by the Belarussian authorities; and Fund staff calculations.

Average employment during the year for annual data; end of quarter for the first quarter of 1996.

The definition of unemployment was widened effective January 1993.

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

Table 21.

Belarus: Average Employment by Branches, 1992-96 (Q1)

article image
Source: Ministry of Statistics and Analysis.

Based on comprehensive annual survey data that include small enterprises.

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

Approximately two thirds from collective farms.

Data for 1993 through 1995 reflect reclassification.

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

Excluding kolkhozes.

4. Interenterprise arrears

As enterprises continued to encounter difficulties in 1995, and in the absence of the imposition of hard budget constraints as well as a mechanism to enforce payments discipline, interenterprise arrears continued to grow, although the rate of increase slowed and in real terms arrears declined (Tables 22 and 23). Net arrears on payables and receivables increased threefold in 1995 to about Rbl 16 trillion (13 percent of GDP) at the end of the year. Energy arrears, mostly on gas, were the most important component. While some actions were taken against nonpayers of gas, cut-offs are considered only on rare occasions as the continued operation of enterprises is considered a national priority. At end-1995, domestic gas arrears of enterprises were about Rbl 10 trillion, an increase of about 160 percent relative to 1994. Of these gas arrears, housing and communal services accounted for about 45 percent, and industry for about 53 percent of total (85 percent of which are power plants).

Table 22.

Belarus: Sectoral Distribution of Interenterprise Receivables and Payables, 1994-95

(End of period stocks in billions of rubels)

article image
Sources: Ministry of Statistics and Analysis; and Fund staff calculations.
Table 23.

Belarus: Sectoral Distribution of Energy Debts of Enterprises, 1995-96 (March)

(In billions of rubels)

article image
Source: Ministry of Statistics and Analysis.

III. Public Finances

Despite a difficult year with sizable shortfalls in revenues, the deficit of the general government in 1995 was contained to less than 2 percent of GDP (Tables 24-27). The Government was relatively successful in cash management, and as a result this was the fourth year in a row of similarly low cash deficits (Chart 6). However, this has come at the cost of successively more severe cuts in spending and, in 1995, recourse to significant budgetary arrears. In addition, lending to certain sectors in the form of directed credits through the banking system, often at preferential rates, and the pervasive use of tax exemptions, suggest that quasi-fiscal deficits have been much higher.

Table 24.

Belarus: Summary of General Government Operations, 1992-96

(In billions of rubels)

article image
Sources: Data provided by Belarussian authorities; and Fund staff estimates.

Road Fund, Fund for the Support of Agricultural Producers, Fund for the Support of Exporters, and net expenditures of other extrabudgetary funds identified from bank account data.

Total of State budget, Social Funds, and Extrabudgetary Funds, excluding interbudgetary transfers.

Adjustments include changes in expenditure arrears, cash adjustment for changes in deposits of budgetary organizations and extrabudgetary funds, and the financing discrepancy between above-the-line and below-the-line items

Budget support loans extended by the European Union are included under domestic financing.

Table 25.

Belarus: Summary of General Government Operations, 1992-96

(In percent of GDP)

article image
Sources: Data provided by Belarussian authorities; and Fund staff estimates.

Road Fund, Fund for the Support of Agricultural Producers, Fund for the Support of Exporters, and net expenditures of other extrabudgetary funds identified from bank account data.

Total of State budget, Social Funds, and Extrabudgetary Funds, excluding interbudgetary transfers.

Adjustments include changes in expenditure arrears, cash adjustment for changes in deposits of budgetary organizations and extrabudgetary funds, and the financing discrepancy between above-the-line and below-the-line items.

Budget support loans extended by the European Union are included under domestic financing.

Table 26.

Belarus: State Budget, 1992-96

(In billions of rubels)

article image
Sources: Data provided by authorities; and Fund staff estimates.

Budget agreed by Parliament and awaiting Presidential signature, end-April, 1996.

Excludes debt reimbursements and some privatization receipts that are included in the State budget.

Only capital expenditure recorded under “National economy” item of State budget.

Adjustments include expenditure arrears and the financing discrepancy between above-the-line and below-the-line items.

European Union loans are to the NBB and become domestic credits to the budget.

The negligible amount of nonbank holdings of government securities are included under bank financing.

Table 27.

Belarus: State Budget, 1992-96

(In percent of GDP)

article image
Sources: Data provided by authorities; and Fund staff estimates.

Budget agreed by Parliament and awaiting Presidential signature, end-April, 1996.

Excludes debt reimbursements and some privatization receipts that are included in the State budget.

Only capital expenditure recorded under “National economy” item of State budget.

Adjustments include expenditure arrears and the financing discrepancy between above-the-line and below-the-line items.

European Union loans are to the NBB and become domestic credits to the budget.

The negligible amount of nonbank holdings of government securities are included under bank financing.

CHART 6
CHART 6

BELARUS Fiscal Indicators

(In percent of GDP)

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

Sources: Belarussian authorities; and Fund staff estimates.

1. Revenues

During the last few years, the revenue/GDP ratio remained high in Belarus compared to other countries in transition, despite the sharp decline in output. This was mainly because the state retained strong control over the economy and there was little structural reform. In 1995, however, revenue of the State budget 1/ fell by over 7 percent of GDP, mainly on account of profit taxes, VAT, excises, and customs duties. Tax arrears, which increased to 1.2 percent of GDP at end-1995, were also concentrated in these taxes (Table 28). The decline in revenue of the State budget was somewhat offset by increases in contributions to the Social Protection and other extrabudgetary funds, in part because a new extrabudgetary Fund for the Support of Agricultural Producers was introduced in March 1995, yielding revenue in excess of 1 percent of GDP (Tables 29-32). The revenue decline accelerated in early 1996, with a particularly sharp decline in profit taxes (to 4 percent of GDP in the first four months, compared with 12 percent in the same period of 1995).

Table 28.

Belarus: Tax arrears, 1994-96 (Q1) 1/

(In billions of rubels; end of period)

article image
Source: Ministry of Finance.

Data are not available for arrears on Customs duties, and excises on imports.

This fund was introduced in 1995.

Tax deferments may be granted by the Ministry of Finance (Republican taxes) or by oblasts and Minsk city (local taxes). Tax deferments carry a penalty of 50 percent of the refinancing rate of the National Bank of Belarus (instead of the usual penalty of 150 percent of the NBB refinancing rate).

Table 29.

Belarus: Social Funds, 1992-96

(In billions of rubels)

article image
Sources: Data provided by authorities; and Fund staff estimates.

Since 1993, data include Social Insurance Fund.

Defined as ratio between average pension and average wage.

Table 30.

Belarus: Social Funds, 1992-96

(In percent of GDP)

article image
Sources: Data provided by authorities; and Fund staff estimates.

Since 1993, data include Social Insurance Fund.

Table 31.

Belarus: Extrabudgetary Funds, 1992-96

(In billions of rubels)

article image
Sources: Belarussian authorities; and Fund staff estimates.

New fund operative in 1996, financed by 10 percent fee on purchases of foreign exchange for certain imports.

Estimates based on balances recorded in banking account data; revenue and expenditure of these funds may have accounted for about 5 percent of GDP.

Table 32.

Belarus: Extrabudgetary Funds, 1992-96

(In percent of GDP)

article image
Sources: Belarussian authorities; and Fund staff estimates.

New fund operative in 1996, financed by 10 percent fee on purchases of foreign exchange for certain imports.

Estimates based on balances recorded in banking account data; revenue and expenditure of these funds may have accounted for about 5 percent of GDP.

The real profit tax base of state enterprises continued to fall faster than real output, like in other countries in transition, but in addition there were a number of other factors that contributed to the sharp decline in revenues in 1995 and early 1996 including: (i) enterprises were permitted to postpone tax payments until the end of the year, at half the usual penalty interest rate; (ii) the authorities agreed to allow enterprises to retain 60 percent of profits for working capital, with the remaining 40 percent to be allocated to taxes (not just profit taxes, but also for the payment of VAT, excises, customs duties, social fund contributions, etc.); (iii) exemptions were granted to selected enterprises for profit taxes, customs duties, excises and VAT. 1/

Since there were no major changes in the VAT tax legislation, the decline in VAT revenue in 1995 reflects falling sales, fraud in self-assessments of taxable “value added,” 2/ and lax tax administration. 3/ Excise tax revenue fell due to: (i) an increase in illegal imports of alcoholic beverages and cigarettes, which undermined the collection from domestic producers; (ii) the elimination of excise taxes on cars, tractors, trucks, tires, and color televisions in the mid-January 1995 budget; 4/ and (iii) the lowering of the excise tax on oil products produced in Belarus (from 38 percent to 20 percent). Revenue from customs duties fell significantly because export duties were eliminated and import duties were lowered substantially at the beginning of 1995. In addition, the revenue base was eroded by exemptions. However, the fall was mitigated by the raising of import duties and reimposition of export duties in mid-May, following the customs union agreement with Russia. The sole exception to the decline in revenue/GDP ratios was nontax revenues, which performed better than expected due mainly to the interest received on government bank deposits.

2. Budgetary financing

In 1995, foreign financing of the budget was much lower than expected, and, for the second year in succession, net foreign financing was negative. More than US$80 million was expected from the World Bank and the European Union, but only US$14 million was received for the budget, mainly in response to the change away from market-oriented policies in the latter part of the year. At the same time, the Government, through the budget, repaid the debt obligations of government-guaranteed loans to state enterprises.

Net domestic bank financing was also lower than budgeted (2.1 percent of GDP against 2.8 percent in the revised 1995 budget). About half of this shortfall is due to the above-mentioned delays in external loan disbursements. 1/ The other main shortfall in domestic financing stemmed from the further buildup of bank deposits of budgetary organizations and extrabudgetary accounts (0.4 percent of GDP), instead of being run down as envisaged in the budget. Domestic financing includes the use of the domestic currency counterparts of Fund resources; more than half of the second STF disbursement (US$90 million) was used for general budgetary financing, with the remainder being on-lent to state enterprises. Minor revenue sources of budget financing include new issues of treasury securities (see Section III.5.e below), and revenue from privatization.

Debt of the general government increased by about 11 percent in 1995, considerably slower than GDP (Table 33). This can be partly explained by the large share of external debt in the total, which declined in terms of GDP as a result of the fixed exchange rate that was maintained during the year.

Table 33.

Belarus: General Government Debt, 1992-96 (QI)

(End of period)

article image
Source: Belarussian authorities; and Fund staff estimates.

The data are derived from NBB balance sheets; a break in the series occurs in December 1995.

Including social funds.

Cash balances at end of period.

As recorded in the balance of payments; include IMF. Enterprise debt is usually government-guaranteed.

3. Expenditures

Expenditures of most categories were cut severely in 1995. Faced with declining tax revenues and the shortfall in budgetary financing, non-priority expenditures were sequestered. Outlays for wages, pensions, essential food and medicines (for hospitals and schools), and debt servicing were given higher priority than other expenditures, although delays of up to one week were experienced in making budgetary wage payments. Capital outlays and operations and maintenance spending were either delayed or not paid for. As a consequence, expenditure arrears built up to Rbl 2.5 trillion (2.1 percent of GDP) by end-1995 and rose sharply to more than Rbl 4 trillion by April 1996. Arrears of local governments dominated, particularly for purchases associated with communal services, which accounted for nearly half of all recorded arrears.

Net lending in 1995 was considerably higher than budgeted. This reflects the authorities’ decision to use US$42 million of the Fund’s resources to support various industries, mainly in the agro-industrial sector. Repayments of previous government loans to enterprises were minimal; this is one way the budget provides a hidden subsidy to industry.

4. The 1996 budget

A draft 1996 State budget was approved by the Cabinet of Ministers and the President before the end of 1995. This budget proposal included a deficit of 2.7 percent of GDP and major revisions to tax legislation (see Box below). 2/ During February-March some important modifications to the budget were made by Parliament including: (i) rejecting several of the proposed reductions in tax privileges and introducing additional exemptions; (ii) maintaining the Chernobyl payroll tax at 12 percent, instead of reducing it to 10 percent; 1/ (iii) increasing excises on gasoline and introducing an excise tax on diesel. Parliament raised expenditures by about 0.5 percent of GDP, and with its tax proposals broadly offsetting, the State budget deficit increased to 3.2 percent of GDP. Parliament also approved an additional Rbl 5.3 trillion (3 percent of GDP) of extrabudgetary lending to agriculture, which would have raised the deficit to around 6 percent of GDP.

Recent Changes in Tax Legislation

In the initial (mid-January) 1995 budget, important tax reductions were introduced, including: (i) elimination of the 3.6 percent health care tax; (ii) a reduction of the first marginal income tax bracket for personal income tax; (iii) elimination of all export duties and significant reductions in import duties; (iv) elimination of several excises including those on cars. These reductions were partly offset by: (i) a new presumptive profit tax; (ii) transit fees on foreign cars and trucks; and (iii) other measures, including strengthening tax collection. It was expected that the impact of these measures would be negative, with a net revenue loss amounting to about 4 percent of GDP. This was complemented at mid-year by an increase in the excise tax on alcohol from 75 to 80 percent. Plans to abolish the income tax exemption for military and security personnel as well as tax privileges for employees of budgetary organizations were not followed through.

Several tax changes were included in the 1996 budget and these are estimated to reduce the tax burden by about 4 percent of GDP (Table 34). This reduction stems mainly from a rationalization of various centralized or local government extrabudgetary funds. For the state budget, the revenue loss amounts to 1.2 percent of GDP as a result of: (i) a halving of the profit tax rate for profits derived from export sales; (ii) increased deductions for profits used to provide loans for construction of workers’ housing; (iii) increased exemptions for collective and state farms; (iv) exemption of interest income from treasury bills; (v) lower excise tax rates on tobacco products, and one type of alcoholic beverage, and elimination of the excise tax on carpets; and (vi) reduction in rate of state fire service maintenance levy. The above revenue losses were mitigated somewhat by Parliament’s decision to raise excises on gasoline (from 10 to 30 percent for high-octane gasoline) and introduce an excise on diesel; at the same time the fuel tax (which acted like an excise tax on petroleum products) was abolished.

Table 34.

Belarus: General Government Budget, Impact of Changes in 1996 Tax Law

(In billions of rubels)

article image
Sources: Belarussian authorities; and Fund staff estimates.

As of end-April the President had not signed the Parliament’s budget. Some compromises were reached, including removing the new extrabudgetary lending to agriculture from the State budget 1/ and reducing the Chernobyl tax to 10 percent, with corresponding decreases in Chernobyl-related outlays, but no final decision had yet been made.

The 1996 budget projects substantial increases in the wage bill from 8 percent of GDP in 1995 to 9 percent, partly associated with the introduction of the new wage schedule described in Section II.3.a, and increased outlays for education and health, sectors in which there has been little reform (e.g., eliminating stipends for university students or introducing user-pay principles for medicines, doctors’ visits, etc.). Although there are plans to reduce some direct budget subsidies, indirect subsidies appear to be increasing. In the absence of an approved budget, monthly expenditures in 1996 can be allocated on the basis of one twelvth of 1995 budgeted expenditures (Rbl 3.9 trillion per month) but because the revenue decline was so sharp (Rbl 2.9 trillion per month), outlays of the state budget in early 1996 were reduced to levels consistent with available financing.

5. Institutional developments

a. Revenue-sharing arrangements

Revenue-sharing arrangements between the republican (central) and oblast (local) governments are adopted in the annual budget. For 1996, the allocations to the republican budget are: VAT (25 percent), excises (70 percent), profit taxes (60 percent), Chernobyl and foreign trade taxes (100 percent). Personal income taxes and real estate taxes are retained by oblasts (unless the enterprise paying the real estate tax is owned by the republican government). Despite the erosion of local government revenue in 1996 due to the decision to halve the off-budget taxes levied on enterprises for financing kindergarten and housing maintenance, the sharing arrangements are identical to those in 1995.

b. Tax administration

With the exception of computerization, progress in improving tax administration has been slow. As part of a pilot project for reorganizing tax administration, the State Tax Inspectorate (which is a separate government agency outside the Ministry of Finance) completed the issuance of taxpayer identification numbers for active taxpayers in 1994. By end-1995, the pilot district offices were performing the tasks of returns processing, collections enforcement, and auditing. Further progress could be made by creating an operative large taxpayer unit in the city of Minsk, making collection enforcement and auditing more effective, improving taxpayer services and education, and introducing functional organization in tax offices. Given the decline in revenues, rapid progress is required in: improving reporting of delinquent taxpayers and those that stop filing; identifying new taxpayers; developing a strategy for collecting tax arrears; and reducing the frequency of filing returns and payment.

c. Extrabudgetary funds

The largest extrabudgetary funds are the Social Protection Fund (SPF), which provides pensions and a range of other social benefits and the Employment Fund, which provides unemployment benefits and training and job placement services. The financial position of the SPF deteriorated dramatically in 1995 and early 1996 as enterprises faced difficulties in paying contributions. 1/ Expenditures other than for pensions (especially those on health, such as sanatoria and recreation) were cut significantly. Nevertheless, a deficit would have occurred in the absence of unbudgeted transfers from the state budget (0.3 percent of GDP) and a loan from the Employment Fund (0.2 percent of GDP), which had excess resources due to the low number of registered unumployed (see Section II.3.b). The financial situation of the SPF became increasingly difficult in early 1996; besides cutting non-pension outlays to the minimum, the SPF rescheduled its debt to the Employment Fund and began borrowing from a commercial bank. The latter action was declared illegal, but the SPF was not in a position to repay the loan. Appendix II on the social safety net contains a detailed description of the various benefits the SPF and the Employment Fund provide.

Recognizing that extrabudgetary funds are detrimental to budget transparency and expenditure control, the Government eliminated the State Foreign Exchange Fund and the Price Regulation Fund in 1994. However, in March 1995 a new off-budget Fund for the Support of Agricultural Producers was set up. This fund is financed by a 1 percent turnover tax on non-agricultural enterprises, and is used to subsidize agriculture. In January 1996, another new off-budget fund was introduced, the Fund for the Support of Exporters, which is financed by a 10 percent fee on certain purchases of foreign exchange in the auction (see section V). During the 1996 budget debate, Parliament decided to retain the Road Fund, although one earmarked revenue source, the fuel tax, was abolished, leaving the Road Fund more reliant on budgetary transfers.

d. Treasury development

A Treasury unit was set up in the Ministry of Finance in 1994, with the main objectives to: (i) plan and control budget execution, i.e., to forecast cash revenues, assess expenditure and financing needs, prepare monthly cash limits, and control the budget execution of the spending ministries, budgetary organizations and extrabudgetary funds; (ii) develop accounting standards for all government transactions; and (iii) manage the financing of government deficits and government debt, in collaboration with the NBB. In 1995 progress was made in improving the Ministry of Finance’s information system, particularly on the revenue side. On the expenditure side, a computerized system was developed to process ministries’ payment orders and was tested on two main ministries. In late 1995, a decision was made for the NBB to be the repository for the Single Treasury Account, except in areas where the NBB does not have branches. However, in late-1995, all government deposits in commercial banks were centralized in the Belarusbank. During 1996, the Ministry of Finance is planning to develop a new classification system for revenue and expenditure. 1/

e. Government securities

In order to develop a market-based alternative form of financing the fiscal deficit, the authorities have been auctioning government securities since February 1994. At each auction, the NBB receives price and volume bids and then decides on a cut-off price based on the total auction volume (the latter is determined by a Committee within the Ministry of Finance). Following only four auctions in 1994, there were 19 auctions in 1995. Since December 1995, the frequency of auctions was stepped up further; in principle they are now held twice a month. The bulk of the securities are bought by commercial banks, that can use them as collateral to obtain financing from the NBB. Nonbank purchases, mostly by finance companies, although growing, are still very small (about 8 percent of the outstanding stock). Average auction yields declined from over 200 percent per annum at the beginning of 1995 to 54 percent in early 1996 (Table 34). In late 1995, auctions were frequently undersubscribed, mainly because corresponding yields on Russian treasury bills were much higher at about 130 percent (in rubel terms). Since interest income from Treasury bills is tax-free in Russia, the Government removed the 15 percent withholding tax on income from government securities.

In 1995, the authorities decided to stop issuing 35-day securities, as it was decided that short-term bills for money management purposes should be provided by the NBB’s own securities. The first 6-month treasury security auction was held in February 1996. However, unlike the six auctions for standard 3-month securities held during January-April 1996, this auction was markedly undersubscribed, and the NBB had to purchase about half the offering. Until investors have more confidence that inflation is durably reduced, the demand for longer-term rubel-denominated treasury securities is likely to remain weak. A second auction for 6-month securities is to take place before November 1996.

IV. Monetary Policy and Developments

During 1995 and early 1996, monetary developments in Belarus were dominated by three factors, namely the tightening of financial policies compared to 1994, the de facto adoption of a fixed exchange rate regime, and large swings in capital movements. After an unsuccessful attempt to reduce inflation in 1994, a new effort was launched in January 1995 and, overall, significant progress in tightening credit conditions was achieved, including through an increased use of market-based instruments of monetary management. However, monetary policy implementation was uneven and subject to large swings during the year (Chart 7). This was partly related to the fact that from March 1995 through March 1996 Belarus maintained a fixed exchange rate regime (with the rubel pegged at Rbl 11,500 per U.S. dollar). As foreign capital flows during the year were substantial--with large inflows in the first seven months and outflows thereafter--the NBB had to intervene regularly in the foreign exchange auctions to maintain the peg, with resulting changes in foreign exchange reserves and, in the absence of sterilization measures, in other monetary aggregates. The growth rates of monetary aggregates eased substantially in 1995, which aided the disinflation process. Reserve money and broad money grew by 286 percent and 158 percent, respectively, compared with nearly 2,000 percent for both aggregates in 1994, and income velocity declined steadily during the year. The relatively tight credit stance was maintained in the first quarter of 1996.

CHART 7
CHART 7

BELARUS Monetary Aggregates

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

Source: National Bank of Belarus.

To conduct monetary policy the NBB used a number of instruments. While the most important of these were credit allocation and interest rate policy, the NBB also used reserve requirements and made progress in employing indirect instruments such as purchases and sales of government and NBB securities.

1. Credit developments

The decline in the growth of monetary aggregates in 1995 compared to 1994 was caused primarily by a substantial reduction in the rate of credit expansion from the NBB. For the year as a whole, net domestic assets (NDA) of the NBB grew by 211 percent, compared to more than 1,200 percent in 1994. To a large extent the decline in the rate of credit expansion was achieved at the expense of commercial banks, whose share in NBB credit declined substantially. NDA of the commercial banks increased by 250 percent in 1995, compared to almost 2,000 percent in 1994 (Tables 35-38).

Table 35.

Belarus: Monetary Survey, 1993-96 (March)

(End of period balances in billions of rubels)

article image
Source: National Bank of Belarus (NBB).

Excludes Russian rubles.

Includes local government deposits.

Table 36.

Belarus: Monetary Authority Accounts, 1993-96 (March)

(End of period balances in billions of rubels)

article image
Source: National Bank of Belarus (NBB).

Excludes Russian rubles.

Table 37.

Belarus: Deposit Money Banks Accounts, 1993-96 (March)

(End of period balances in billions of rubels)

article image
Source: National Bank of Belarus (NBB).

Excludes Russian rubles.

Table 38.

Belarus: Factors Contributing to the Growth of Monetary Aggregates, 1993-96 (March)

article image
Source: National Bank of Belarus

Annual data are calculated as year-on-year ratios; quarterly data are calculated as quarter-on-quarter ratios. All ratios are based on end-period balances.

Include cash in vaults, correspondent account balances, and banks deposits at the NBB.

Despite the overall tightening in 1995 and early 1996, during the year monetary policy was conducted in a stop-and-go manner with alternating periods of very rapid credit expansion and contraction. A large increase in credit in December 1994 resulted in a large increase in broad money (by 56 percent for the month), and contributed to the high inflation in January 1995. In response to the surge in inflaton that followed this expansion, the NBB curbed domestic credit and raised interest rates. As a result NDA of the NBB grew by only 12 percent in the first quarter of 1995. The NBB continued its restrained credit policy through most of the first half of 1995. However, in June-July the NBB injected substantial liquidity into the economy, and its NDA grew by 68 percent both on account of increases in credit to banks and to the Government. 1/

Toward the end of August, the authorities tightened policy again and NDA expansion was limited to 7 percent between then and the end of November, with net credit to banks actually falling slightly. In December alone, however, NDA of the NBB grew by 9 percent, mostly on account of credit to the Government to meet end-year obligations. This was followed by three months of relative restraint, before another reversal of the policy stance in April, partly on account of credits provided by commercial banks to the agricultural sector through the NBB, and credit to settle wage arrears as well as renewed financing of the budget, which had received very little credit in the first quarter. In that month NDA of the NBB grew by 14 percent. Movements in NDA of the commercial banks more or less mirrored the movements in NDA of the NBB, although the banks’ NDA grew faster than that of the NBB in the first half of the year, reflecting capital inflows that provided more resources for lending. 2/

The NBB achieved significant progress in 1995 in implementing an auction mechanism to allocate credit (Chart 8). The share of auctioned credit in total NBB credit (with the exception of credit extended to the Government) reached 45 percent on average compared to 6 percent in 1994. The improvement during the year was particularly noticeable, with the share of auctioned credit in total NBB new credit at 83 percent in the last quarter of 1995. By the end of 1995, the NBB was prepared to auction 100 percent of its credit in 1996. Agriculture continued to be the main recipient of directed credit, but its share dropped from 83 percent in 1994 to 68 percent in 1995 while the share of industry and trade increased from 9 percent to 26 percent (Table 39). This reflected the authorities’ concern regarding the rapid decline during 1995 of the profitability of non-agricultural enterprises. A policy switch in early 1996, however, reversed most of the gains achieved in 1995. Almost all the credit extended in the first four months of 1996 was directed credit to the agricultural sector and for housing, following a decision by the Government to allocate Rbl 600 billion for construction of houses in 1996.

CHART 8
CHART 8

BELARUS Composition of NBB Credit

(In percent)

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

Source: National Bank of Belarus.
Table 39.

Belarus: National Bank Credit 1993 (Q4)-1996 (Q1)

article image
Source: National Bank of Belarus.

Excluding credit extended for state emergency reserves.

NBB lending to commercial banks decreased from 46 percent of total NBB credit in 1994 to 32 percent in 1995, with the share of lending in foreign currencies declining from just over half to about one third. 1/ At the same time, net lending to the Government increased correspondingly. Commercial banks’ gross lending increased in 1995 by 111 percent (a decline of 39 percent in real terms). Two major changes characterized banks’ lending in 1995, namely the relative decline in the interbank lending (from 21 percent of total to 12 percent), and the relative increase in foreign currency lending (from 25 percent of the total to 35 percent) (Chart 9). The increase in lending in foreign currencies reflected the increased availability of foreign currency resources, particularly during the first seven months of the year; it peaked in June 1995 and dropped rapidly thereafter.

CHART 9
CHART 9

BELARUS Composition of Commercial Bank Lending

(In percent of gross lending)

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

Source: National Bank of Belarus.1/ Nonfinancial public enterprises.2/ Includes lending to individuals, households, private/mixed enterprises, cooperatives and social organizations.

The share of credit by commercial banks to agriculture dropped in 1995, reflecting the declining share of NBB credit to commercial banks for this purpose, the relatively tight credit policy by the NBB in general, and the high risk associated with lending to this sector (Table 40). The share of credit to the industrial sector remained about the same. The bulk of the credit continued to be provided to state enterprises (about two thirds) as working capital. Credit to the private sector declined compared to 1994, possibly reflecting the generally hostile environment, in particular for trading companies.

Table 40.

Belarus: Composition of Bank Lending by Type of Credit and Sector, 1992-95

(End of period balances)

article image
Source: National Bank of Belarus.

2. Net foreign assets, reserve money, and broad money

Capital flows had an important effect on monetary developments in 1995 and early 1996. Because of the policy of pegging the rubel to the U.S. dollar, capital movements contributed to large movements in official foreign exchange reserves. Two distinct periods can be considered: (i) January-July 1995, when Belarus experienced significant foreign capital inflows, and (ii) post-July 1995, when the trend was reversed (Chart 10).

CHART 10
CHART 10

BELARUS Foreign Assets of the NBB

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

Source: National Bank of Belarus.1/ Excluding holdings of Russian rubles.

Net capital inflows in the first half of 1995 were associated with the tightening of monetary policy as explained above and the consequent large increase in real interest rates. At the same time there was a currency switch away from foreign currencies, which could no longer be used for domestic transactions. As a result, holding rubel and foreign currency bank deposits became more attractive. To prevent the nominal exchange rate from appreciating, between January and July, the NBB bought more than US$300 million (most of it in the auctions). At the same time foreign currency deposits in commercial banks increased by some US$100 million.

Inflows reversed starting in August 1995, partly due to increased demand for foreign exchange following the rapid expansion of domestic liquidity in June-July and the sharp decline in interest rates that took place at the same time (see below). Confidence started to erode as the deterioration of the economy continued. The supply of foreign currency in the auctions (excluding NBB’s) disappeared completely. Intervention policy of the NBB was reversed to prevent the rubel from depreciating and the NBB sold large amounts of foreign exchange (Table 41).

Table 41.

Belarus: Net Purchases of Foreign Exchange by the NBB and Commercial Banks, 1995

(In thousands of U.S. dollars) 1/

article image
Source: Data provided by the National Bank of Belarus (NBB).

Includes transactions in Russian rubles.

ICE stands for Interbank Currency Exchange.

In line with the above, net foreign assets of the NBB grew from less than US$5 million at end-1994 to over US$223 million in July 1995, before declining to US$105 million by the end of December, and just over US$40 million by end-April 1996. 1/ Net foreign assets of the commercial banks in contrast declined in the first half of 1995 (by about US$50 million) and continued to decline thereafter.

Reserve money grew by some 290 percent during 1995, compared to 1,890 percent in 1994, but growth was much faster in the first half of the year (190 percent) than in the second half (34 percent) (Chart 11). Increases in net foreign assets (NFA) of the NBB, accounted for almost 88 percent of reserve money growth in the first quarter and 53 percent in the second quarter (Table 38), as the NBB was buying large amounts of foreign currencies from commercial banks to defend the nominal fixed exchange rate, without sterilization. Changes in NFA had a negative contribution to the growth of reserve money in the second half when the NBB lost reserves. For 1995 as a whole, the increase in the NBB’s NFA accounted for some 25 percent of the growth in reserve money.

CHART 11
CHART 11

BELARUS Monetary Ratios

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

Source: National Bank of Belarus.1/ Nominal base money deflated by the consumer price index.2/ Nominal broad money deflated by the consumer price index.3/ Ratio of brood money to reserve money at the NBB.

In sharp contrast to the first half of the year, NBB domestic credit expansion was the major factor contributing to the growth of reserve money in the second half of 1995. The large credit expansion in June-July mentioned above swelled banks’ correspondent accounts at the NBB, resulting in a large increase in banks’ excess reserves. To reduce liquidity and prevent a resurgence of inflation, in August the NBB blocked significant amounts of the excess liquidity by selling NBB securities and opening a deposits facility for banks. With the tight control on the growth of credit during the next few months and the decline in NFA mentioned above, reserve money actually declined between August and November.

The loosening of monetary policy in December 1995 resulted in a 10 percent increase in reserve money in that month alone, although growth slowed down in the first quarter of 1996 to 4 percent: credit expansion continued to be the main contributing factor in the growth of reserve money. Within reserve money, by the end of 1995, expansion of currency-in-circulation had become the major contributing factor to the growth.

Reflecting the relatively tight monetary policy of the NBB during 1995 and the developments in reserve money, broad money grew by about 160 percent in 1995 compared to 1,880 percent in 1994. Following the steps to contain the growth of reserve money in the first half of the year, the money multiplier declined sharply (Chart 12). As banks subsequently increased credit by drawing down excess reserves, the multiplier rose in the second half of the year.

CHART 12
CHART 12

BELARUS Ratios of Foreign Currency Deposits to Broad Money 1/

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

Sources: National authorities; and Fund staff calculations.1/ Broad money is defined as sum of currency in circulation, domestic currency deposits and foreign currency deposits.

Broad money developments in 1995 and early 1996 were dominated by the growth in currency-in-circulation and the decline in foreign currency deposits during the year. A relative tightening of credit to enterprises, the NBB’s large purchases of foreign exchange during the first seven months of the year, and banking system difficulties (see Section IV) were the major factors behind the increase in currency-in-circulation. The marked increase in NBB directed credits (channelled through banks) in 1996 resulted in a relative decline in the contribution of currency-in-circulation to broad money growth. While there was a sharp jump in velocity in the first quarter of 1995, associated with the large expansion late in 1994, during the year velocity declined gradually, and for 1995 as a whole was just slightly higher than in 1994.

The share of foreign currency deposits in total deposits increased markedly in late 1994 and January 1995, partly due to the relatively attractive interest rates on foreign currency deposits and the generally uncertain policy environment (Chart 12). From February 1995, however, the share of foreign currency deposits in total deposits declined throughout the year and into 1996, reaching 35 percent in April 1996. The initial decline was linked to a portfolio shift as domestic real interest rates rose, foreign exchange could no longer be used for domestic transactions, and the stable exchange rate made holding rubels more attractive. Rubel denominated time and savings deposits increased steadily. During the second half of the year the decline reflected the large capital outflow that started in August 1995.

3. Interest rates

In January 1995, the NBB raised the refinance rate substantially from 25 percent per month to 40 percent in order to achieve a positive real rate and counter the effects of the large credit expansion in late 1994. The refinance rate was lowered sharply in June and July to 5.5 percent, and remained at that level until April 1996 when it was lowered to 4.6 percent (Table 42). The refinance rate remained positive in real terms (Chart 13).

CHART 13
CHART 13

BELARUS Real Interest Rates

(In percent per month)

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

Source: National Bank of Belarus.
Table 42.

Belarus: Interest Rates of the National Bank of Belarus, 1995-96 (April)

(In percent per annum; beginning of period)

article image
Source: National Bank of Belarus.

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

Since January 1994, a single interest rate applies to all loans to the central government. Starting January 1996, the NBB refinance rate applies to loans to government.

The refinance rate has been used as the key reference rate and the NBB has tried to reduce the gap between it and all its other lending rates. During 1995, the NBB reduced the amount of directed credit extended at preferential rates (i.e., below the NBB refinance rate); no such credits were extended in the second half of 1995, although the NBB reverted to this practice in the first quarter of 1996 under pressure to provide low interest rate credits for housing and agriculture. As a result the spread between the actual average refinance rate on all credit and the official refinance rate, which reached 30 percentage points on a monthly basis in February 1995, had all but disappeared by August 1995 (Chart 14). 1/ Moral suasion also led to the auction rate for NBB credit being basically the same as the refinance rate from October 1995 (Table 43).

CHART 14
CHART 14

BELARUS NBB: Monthly Interest Rate Spreads

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

Source: National Bank of Belarus.
Table 43.

Belarus: Auctions of NBB Credits, 1995-96 (April)

article image
Sources: National Bank of Belarus; and Fund staff calculations.

In January 1995, the NBB extended the minimum interest rate requirement that had been introduced in October 1994 on banks’ term deposits to all deposits, with differentiated rates for demand and term deposits. The NBB also reintroduced the ceiling on the spread between banks’ lending and deposit rates at 3 percent per month. This was raised to 5 percent in July 1995. The reintroduction of the ceiling was prompted by the high profits reported by banks at the end of 1994. Interest rate margins, however, lost their effectiveness in 1995 as deposit interest rates remained substantially above the minimum rate requirement and lending interest rates were constrained more by demand than by the ceiling on the spread between the lending and deposit rates (Chart 15). 2/ Lending and deposit rates remained high in real terms and the spread between the two rates stabilized by July 1995. The minimum deposit interest rate requirement was lifted in July 1995 and the ceiling on the interest rate spread was eliminated in January 1996 (Tables 44 and 45). 3/

CHART 15
CHART 15

BELARUS Nominal Bank Deposit and Lending Rates

(In percent per month)

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

Source: National Bank of Belarus.1/ Mainly on U.S. dollar loans/deposits of one to three months maturity.2/ On loans/deposits of one to three months maturity.
Table 44.

Belarus: Interest Rates on Bank Deposits, 1995-96 (March)

article image
Source: National Bank of Belarus.

Sberbank was merged with Belarus Bank in November 1995 and data are no longer provided separately.

A minimum interest rate on deposits with a maturity of at least one month was introduced in October 1994. It is set one monthly basis. Interest rate margins were lifted in July 1995.

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

Deposits received within the current month, excluding Sberbank. Starting January 1996, the interest rates for deposits with up to one month maturity are the average ratio on deposits from 8 days to 1 month; the overall average includes the rates on deposits for one week or less.

Table 45.

Belarus: Interest Rates on Bank Credit, 1995-96 (March)

(In percent per annum; period average)

article image

Interest rates on credits granted between the twenty first of the preceding month and the twentieth of the current month. How loan classification was introduced in January 1996.

Sberbank was merged with Belarus Bank in November 1995 and data are no longer provided separately.

The lower rate applies to households living in residences with up to 10 m2 par person.

Interest rates on credits within the month, excluding credits granted by Sberbank. Starting January 1996, interest rates for maturities up to one month are the average rates on credits from 8 days to 1 month; the overall average includes the rates on credits for one week or less.

Interest rates on foreign currency deposits remain substantially lower than rubel interest rates (Table 46). A steady supply of depositors, including the NBB, who were willing to hold their deposits at interest rates that were much lower than those on rubel deposits, allowed banks to extend foreign currency denominated loans at lower rates, but also led to market segmentation, whereby only preferred clients with strong links to banks were able to obtain credits in foreign currency.

Table 46.

Belarus: Interest Rates on New Foreign Exchange Deposits and Credits, 1995-96 (March)

(In percent per annum)

article image
Source: National Bank of Belarus.

Rates are on loans granted and deposits received between the twenty first of the preceding month and the twentieth of the current month. Starting January 1996, interest rates for maturities up to one month are the average rates on deposits and credits from 8 days to one month; the overall average includes the rates on deposits and credits for one week or less.

Interest rates in the interbank market remained high in the first half of 1995. The rapid expansion of liquidity in mid-1995 resulted in a sharp drop in the interbank rate from a monthly average of about 20 percent in June 1995 to 5 percent in August. The rate increased somewhat in September as part of the excess liquidity was blocked. The transfer of government deposits to the Belarusbank in October caused significant liquidity shortages in the interbank market, raising the interbank interest rate to 7 percent. Between November 1995 and April 1996, the interbank interest rate movements mirrored the uneven conduct of monetary policy.

4. Reserve requirements and other monetary policy instruments

Required reserve ratios on domestic currency deposits were unified in August 1994 and remained unified during 1995, increasing to 12 percent in June (Table 47). The required reserve ratio on foreign currency, introduced in October 1994 at the same rate as on domestic currency deposits, started to diverge from that on domestic deposits in March 1995, before being gradually unified again at 12 percent in August. 1/ In November 1995, banks were given the choice of holding the required reserves on foreign currency deposits in either foreign currency or rubel. There are plans to reintroduce a differentiated rates system but no decisions have been made.

Table 47.

Belarus: Minimum Reserve Requirements, 1992-96 (April)

(In percent of eligible deposits; beginning of period)

article image
Source: National Bank of Belarus.

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

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

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

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

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

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

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

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

The required reserves on foreign exchange deposits are not remunerated.

The implicit burden that the required reserves impose on banks is less than implied by the required reserve ratio. Banks are allowed to use government securities to cover up to 10 percent of the required reserves and required reserves on rubel deposits became remunerated in March 1995 (one percent per month). 2/ Furthermore, the NBB has used the reserve requirement as a tool to regulate short term liquidity. However, instead of changing the official reserve requirement, the NBB selectively allowed banks to use part of the required reserves to meet short term liquidity needs, thereby reducing the effective required reserve ratio. 3/ From August to December, the average monthly actual reserve ratio on rubel deposits was 9.6 percent and on foreign currency deposits 8.4 percent. In addition, in December, in an effort to increase the supply of foreign exchange banks were allowed to hold lower required reserves on foreign currency deposits (the actual ratio dropped to 4.3 percent). This provided some US$21-22 million of additional foreign currency resources during that month. Most of the released resources were used to boost banks’ gross foreign reserves rather than finance domestic lending operations.

During 1995 the NBB extended its range of indirect monetary instruments to include (in the second half of the year in particular) open market operations in government and NBB securities, deposit facilities at the NBB, and swap operations (in foreign exchange and domestic securities). Plans are under preparation for opening a Lombard facility.

The NBB started to offer its own securities in June 1995 and sold a considerable amount in particular in August, when it urgently needed to mop up some of the excess liquidity that had been injected into the economy in June-July (Table 48). Additional large auctions were held in early 1996, again in response to a liquidity increase. Thus, the tendency has been to use these securities in response to short-term crises, while their use as a longer term instrument, which could be employed by commercial banks to better manage their liquidity, has been limited. The short-term nature of the securities has made their use also less effective in reducing liquidity as transactions are quickly reversed.

Table 48.

Belarus: Auctions of Securities, 1995-April

article image
Sources: National Bank of Belarus; and Fund staff calculations.

As regards government securities, the frequency of auctions has picked up (see also Section III.5.e). Most of the securities are bought by commercial banks that can use them as collateral to obtain refinancing from the NBB in the credit auctions. The NBB has conducted operations with commercial banks to purchase securities in case of urgent liquidity needs. Overall their effectiveness remains limited, owing to their short maturities and the fact that nonbank holdings are very small.

V. Banking Sector Developments

1. Background

Belarus’ banking system was established after laws on the National Bank and on Banking and Banking Activities (since amended) were adopted in December 1990. Four of the five specialized banks of the former Soviet Union 1/ were re-chartered into commercial banks and licenses for new commercial banks were granted. The number of banks increased rapidly in the following years, reaching a peak of 52 banks in 1994. In 1995 the NBB tightened its licensing procedure and licensed only one new bank (compared to 18 new banks in 1994). The number of banks declined during the year to 47 as a few small illiquid banks were merged with larger ones and others closed voluntarily. The largest merger involved Sberbank and Belarusbank (a relatively new, but troubled, privately owned bank) creating the largest bank in Belarus with the Government holding 99 percent of the bank’s shares. Following the merger, the authorities ordered the transfer of all government deposits from other banks to the new Belarusbank, creating an acute liquidity shortage in the other banks that exacerbated the financial problems of many.

With the exception of Priorbank, all new banks created since early 1992 have remained small. The assets of the six largest banks (the former specialized banks, the new Belarusbank, and Priorbank) account for over 80 percent of all banks’ assets, and their lending constitutes over three quarters of banking sector gross credit (Table 49).

Table 49.

Belarus: Structural Characteristics of the Banking Sector, 1992-95

(In percent of total: end of period)

article image
Sources: National Bank of Belarus; and Fund staff calculations.

Foreign and joint venture banks have been allowed to operate in Belarus since July 1994. The regulatory regime governing foreign banks’ entry to Belarus’ banking sector is not yet well defined. In practice, the NBB has been handling the licensing applications of foreign banks on a case-by-case basis. At present there are three joint venture banks and two foreign bank branches operating in Belarus. These banks, however, have been playing only a minor role.

In 1995 and early 1996, there was an increasing tendency for the state to reinforce its control over the banking system. The authorities stopped the process of reducing government shares in banks’ ownership that started in 1991. In November 1995, the authorities declared their intention to regain government control over the six largest banks (although no concrete moves had been taken in this direction as of April 1996).

2. Banking sector difficulties and performance

The banking sector features weaknesses that are typical of banks in other transition economies: (i) inadequate supervision and weak regulatory environment, including lax licensing procedures; (ii) nonmarket-based lending practices and significant interference by authorities in lending decisions; (iii) weak market-based banking skills, credit management, and risk analysis; (iv) inadequate property ownership and bankruptcy laws; and (v) substandard accounting practices.

The growth of the banking sector in 1991-94 was fueled primarily by inflationary profits and devaluation gains which masked the underlying weaknesses. In 1995, with lower inflation and a stable exchange rate, these weaknesses were exposed and there was sector-wide distress.

An accurate assessment of the banking sector’s health is difficult to achieve as official data continue to underestimate the problem. The current accounting practices hide many major shortcomings in banks’ practices and weaknesses in bank portfolios. Bank capital, for example, is usually overstated because its calculation is still based on the former Gosbank guidlines rather than the internationally accepted Basle Committee definition, with fixed assets constituting a large part of capital. 1/ However, there is no market value for these assets, since land and real-estate ownership have not yet been legally established and the value of the assets is determined on an ad hoc basis and tends to overstate their actual worth. Finally, reserves for possible loan losses have not been established properly, resulting in an artificially overstated capital positions.

The loan provisioning regulations adopted in 1994 have major shortcomings. The loan loss provisions are based primarily on overdue loans. Other important factors such as a project’s present and future performance, enterprise competitiveness and management, and general economic conditions are not considered in the provisioning decision. As long as borrowers are current on their repayments, no risk is perceived to be attached to their loans and, therefore, no loan loss provisions are applied. Enforcement of the regulation continues to be a problem. On-site inspections by NBB inspectors, for example, have shown that banks tend to systematically classify bad loans in less risky categories than warranted to avoid the cost of higher provisioning.

Weaknesses in bank loan portfolios have been exacerbated by the continued interference of the NBB and the Government in allocating bank credit to high risk and less creditworthy borrowers. In particular, directed credits are channeled through commercial banks, mostly to agricultural borrowers and state-owned enterprises. 2/ Despite the high delinquency rate of the recipients of NBB directed credit and the absence of explicit guarantees on these loans, banks did not actively resist external pressures because of the implicit understanding that financial assistance would be forthcoming, if needed, from the Government and the NBB. These practices have contributed significantly to the weakness of banks’ loan portfolios.

Major shareholders have also exerted strong influences on banks to obtain credit at favorable terms, further weakening bank loan portfolios. Moreover, many small banks were established directly by large enterprises for the purpose of reducing the cost of financial intermediation for their shareholders, and prudent banking practices were not followed.

In 1995, banks’ capital funds (own funds) increased by 166 percent and banks risk-weighted assets by 150.6 percent, representing a decline of 22.8 percent and 27.2 percent respectively in real terms (Table 50). 3/ As a result, the overall capital adequacy ratio of commercial banks (capital funds divided by risk-weighted assets) improved to 17.7 percent compared to 16.7 percent in 1994. The apparent improvement in the banks’ capital position reflected partly the gradual increase in the minimum capital requirement in 1995. However, the capital adequacy ratio of the six largest banks dropped to 15.6 percent from 16.9 percent in 1994 (Table 51). The drop in the ratio reflected mainly the merger of Belarusbank (with a capital adequacy ratio in 1994 of 10.2 percent) with the Sberbank.

Table 50.

Belarus: Commercial Banks, Selected Indicators, 1994-95

article image
Sources: National Bank of Belarus; and Fund staff estimates.

Based on end-period CPI.

Capital fund divided by banks risk weighted assets.

Table 51.

Belarus: Six Largest Commercial Banks, Selected Indicators, 1994-95 1/

article image
Sources: National Bank of Belarus; and Fund staff estimates.

Includes Sberbank (Belarus-bank in 1995), Promstroibank, Agroprombank, Businessbank, Priorbank and Vnesheconombank.

Based on end period CPI.

Capital fund divided by banks risk weighted assets.

The riskiness of banks’ assets reportedly declined in 1995 relative to 1994, and the ratio of risk-weighted assets to balance sheet assets improved from 35.9 percent to 40.5 percent.

Banks also reduced the rate of credit expansion considerably in 1995 as the NBB followed relatively tight policies as described in Section IV. Although gross credit increased by 111 percent, the stock of credit declined in real terms by 39 percent and the share of loans in banks’ assets declined to 39.9 percent from 41.7 percent in 1994. Credit of the largest banks, however, declined in real terms by 25.1 percent, much less than the average decline for all banks. Furthermore, the share of loans in the assets of the largest banks increased, contrary to the average for all banks, from 32.7 percent to 36.7 percent. As a result the share of these banks’ loans in total lending increased from 63 percent in 1994 to 77 percent.

The apparent improvements in banks’ capital positions and assets, and the tightening of credit in 1995 were positive developments. However, they can not be interpreted as an improvement in the soundness of the banking sector. Substandard accounting practices mask the true capital position, and the reported decrease in the riskiness of banks’ assets cannot be reconciled with the large growth (by 460 percent) in loan arrears. 1/ As a result the ratio of loan arrears to credit increased to 11.3 percent from 4.2 percent in 1994. A more alarming sign is the ratio of loan arrears to banks’ capital which more than doubled to 61.8 percent from 29.1 percent. The increase in principal arrears was the driving force behind the growth in total arrears. While interest arrears grew by 278.5 percent, principal arrears increased by 513.5 percent and the ratio of principal arrears to credit rose almost threefold.

As a result of the increase in arrears, the required provisioning against bad loans rose significantly in 1995, from 2.5 percent of loans to 8.2 percent. However, the increase in the required provisioning was not adequate and did not even match the growth in loan arrears. A realistic assessment of loan riskiness in 1995 would have required a significantly higher bad loan provisioning than the current level. Although the provisioning required by regulation is less than adequate, banks have maintained even less provisions than required. In 1995, banks’ actual provisions amounted to 7.3 percent of total loans compared to the required 8.2 percent. Banks used the shortfall in provisioning to boost their profits. Nevertheless, in 1995 profits increased by a relatively modest 32 percent only, which represents a decline in real terms. While all banks reported profits in 1994, nine banks reported losses in 1995. Overall, the average loan profitability rate (the ratio of bank profit to gross credit) dropped from almost 10 percent to 6 percent.

The situation in the banking sector worsened significantly in early 1996. Principal arrears increased in the first quarter by rubel 300 billion (some 20 percent higher than at end-1995) and banks’ profits fell significantly (with 18 banks incurring heavy losses in the first quarter).

3. Banking supervision

The existing legal framework is inadequate for effective banking supervision. The existing bankruptcy law also has many shortcomings and the legal provisions regarding the circumstances under which a bank may be closed and the relevant procedures are ambiguous. The NBB remains handicapped by the lack of power to decide on corrective actions against weak banks without reference to court. 1/ As a result, the NBB options in dealing with weak and bankrupt banks remain limited. A draft banking code has been prepared which addresses some of these problems.

Despite the difficulties, progress was achieved in addressing important issues that are vital to the health of the banking sector. The NBB has significantly tightened the licensing procedures for new banks. While yet unable to fully enforce closures, the NBB managed to persuade three bankrupt small banks to close. The minimum capital requirement was increased gradually from ECU 600,000 on January 1, 1995 to ECU 1.1 million on July 1, 1995 and to ECU 2 million effective starting January 1, 1996. However, only 19 of the 47 banks were able to comply immediately, although 15 more banks were close to meeting the requirement. A draft regulation has been prepared restricting access to deposit and credit markets for banks that do not meet the requirement. To enforce the loan provisioning requirements, a new regulation was issued in January 1996 allowing the NBB to deduct banks’ provisioning shortfalls from their authorized capital.

New changes to prudential regulations were introduced in early 1996. Effective January 1, 1996, the risk concentration ratios (lending to a single borrower) have been unified at 25 percent (previously the ratios were 30 percent for nonshareholders and 25 percent for shareholders). Loans to shareholders are now restricted to a maximum of 100 percent of own capital. The banks’ borrowing capacity has been restricted to a maximum of 100 percent of own capital (compared to 35 percent of own capital plus deposits), with the exception of NBB directed credit. The new Belarusbank has been granted exemptions from some of the lending and borrowing regulations because of the concentration of government and state enterprise deposits in the bank.

A deposit guarantee fund was established in mid-1995 financed by banks at 0.3 percent of total household deposits (the NBB is not participating in financing the fund). Household deposits are guaranteed up to the equivalent of US$2,000 at the NBB official exchange rate (household deposits at Belarusbank are 100 percent guaranteed by the Government). Private insurance companies still offer deposit insurance services to banks, but as of May 1, 1996, all household deposits are required to be guaranteed by the fund. The NBB is considering establishing a General Loss Fund financed by banks with up to 15 percent of their total capital.

VII. External sector

In the first half of 1995 Belarus continued with the gradual liberalization of the exchange and trade system that had started in 1993, and by mid-year virtually all restrictions and controls had been eliminated.

External Environment

Belarus is a small, very open economy with historically strong economic ties to Russia and some other newly independent republics of the former U.S.S.R.. Within the Soviet Union, Belarus was a major manufacturing center, processing raw materials from Russia and other republics (and using imported energy) to produce machinery and equipment, petroleum products, military hardware, and a variety of other manufactured goods which were “exported” back to the other republics, as well as to non-Soviet destinations, mainly within COMECON. From independence in 1991 to 1995, the balance of Belarus’ trade and investment shifted toward non-CIS countries, as the former Soviet republics embarked on the difficult process of transition to a market economy and integration into the global trading system, with an attendant contraction in output and intra-CIS trade (Chart 16).

From mid-1993 Belarus made considerable progress in liberalizing its external trade and exchange systems and putting its external relations on a market footing. Tariff rates were cut and their dispersion reduced, quotas were progressively removed, and other nontariff barriers were largely eliminated.

CHART 16
CHART 16

BELARUS Share of CIS Countries in Total Trade of Belarus

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

Sources: Belarussian authorities; and Fund staff estimates.

Trade with non-CIS countries, especially exports, increased throughout 1994 and in the first half of 1995 as Belarus was opening up and the exchange rate of the rubel made Belarussian goods attractive in new markets. At the same time the share of barter trade and trade under clearing arrangements with other CIS countries shrank steadily. 1/

After mid-1995, however, many of these trends were reversed. Beginning in November 1995 several exchange restrictions were introduced in an attempt to stem the loss of NBB reserves. Import transactions came under increasing scrutiny and administrative controls were imposed, and there was a resurgence of barter arrangements with other CIS countries (especially Russia).

From March 1995 through the beginning of April 1996 the rubel/U.S. dollar exchange rate was kept fixed at 11,500, a level that became increasingly unrealistic given the stance of financial policies. Partly as a result, the steady rise in the share of Belarus’ total trade accounted for by non-CIS countries was reversed and the non-CIS trade deficit widened rapidly in late 1995/early 1996. The current account deficit in 1995 was about half the level of 1994, but with the decline in exports widened in the first quarter of 1996. Direct foreign investment remained very low, and external loan disbursements dropped, partly reflecting the unfavorable investment environment in Belarus and the slow pace of reforms, which is also at the root of the continuing recourse to the accumulation of interstate interenterprise arrears. The overall balance of payments deficit, somewhat lower than in 1994, was almost entirely financed by the accumulation of new arrears on payments for gas imports.

1. Exchange and payments system

As noted above, in early 1995 the authorities decided to peg the rubel against the U.S. dollar to help control inflation and provide a stable cost environment for enterprises that depended on imported inputs and energy. Thus, from end-March onward, until March 1996, the nominal exchange rate was kept fixed at Rbl 11,500 per U.S. dollar. As inflation was about 275 percent over the 15-month period through March 1996, the rubel appreciated by 220 percent against the U.S. dollar (and as a result other major currencies) in real terms. The real appreciation against the Russian ruble, at over 80 percent, was less marked, since the ruble also appreciated against the U.S. dollar in the second half of 1995 (Chart 17).

CHART 17
CHART 17

BELARUS Exchange Rates

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

Source: Belarussian authorities.1/ Calculated as the ratio of relative prices in Belarus and abroad, and corresponding exchange rate In Rubels. Decline Indicates real depreciation.

In the face of sizable net foreign capital inflows in the first half of 1995, the NBB purchased substantial amounts of foreign exchange in the auctions in order to prevent the rubel from appreciating. As monetary policy became more expansionary in mid-1995, the trade balance started to worsen and there were growing expectations of an eventual devaluation. By October, maintaining the parity had begun to require increasing NBB intervention in the form of sales of foreign exchange, threatening to deplete the NBB’s official foreign exchange reserves.

In order to stem the drain on reserves, from November 1995 onward, the authorities resorted to a succession of administrative controls to influence the supply of and demand for foreign exchange. These initially included: (i) restrictions on the purchase of foreign exchange from nonresident (“N”) accounts at Belarussian commercial banks; (ii) the virtual prohibition of off-auction inter-bank trading, through the imposition of very small maximum transaction values; 1/ and (iii) the rejection (as of December 1995) of certain bids for foreign currency at the Interbank Currency Exchange, based on a list of priority imports prepared by the Ministry of Economy. 2/ The increased liquidity in the banking system in December 1995 resulted in particularly strong pressures on the exchange rate. As a result, on January 25, a decree was issued: (i) reintroducing 100 percent surrender requirements (these had been removed as of July 1, 1995); and, (ii) imposing, at that same time, a 10 percent fee on the acquisition of foreign exchange at the auction in the Interbank Currency Exchange. 3/ Furthermore, in April the Interbank Currency exchange was nationalized and placed under the direct control of the NBB. 4/

On January 25, 1995 the authorities also introduced an exchange rate band of Rbl 11,300 to Rbl.13,100 per U.S. dollar, within which the rubel would be allowed to float. In practice, however, the rate remained at Rbl 11,500 per U.S. dollar until April. At that time, given persistent strong pressures on the exchange rate despite the restrictions, the authorities allowed the exchange rate to adjust slowly, basing the adjustment on 80 percent of inflation in the previous quarter. At the end of April the exchange rate stood at Rbl 12,290, but the NBB continued to lose reserves.

Apart from formal administrative controls, the authorities have also made use of moral suasion to influence developments in the foreign exchange market. In early April, the cash rate at some exchange bureaus began to exceed the upper limit of Rbl 13,100 per U.S. dollar, but as a result exchange bureaus faced stiff penalties and the rate quickly returned within the limits. By end-April, dollars were only sporadically available at the foreign exchange bureaus, as spreads between buying and selling rates had been compressed almost to zero. At that time the parallel rate for dollars was reported to be 25-30 percent above the auction rate.

With the effective closing of the interbank market in late 1995, almost all foreign exchange trading now takes place at the daily auction. The normal procedure is for an initial rate (based on the previous day’s fixing) to be set and bids and offers to be declared. If the NBB is unwilling to clear the market at that rate, the rate is adjusted and new bids and offers are solicited. The rate that succeeds in clearing the market (with or without intervention by the NBB) is the official rate for that day. In December 1995-January 1996, and again in May 1996, bids for foreign exchange were first screened on the basis of the priority list of imports, with bids for nonessential imports summarily canceled. In addition, banks are not permitted to buy foreign exchange on their own account: only bids on behalf of clients for imports are accepted.

In 1995 Belarus continued to move away from settlements via official correspondent accounts and clearing agreements. Only two clearing arrangements, with Russia and Uzbekistan for the import of oil and cotton respectively, are currently in place.

2. Trade system

In 1995-96 the main changes to the trade regime have come about through the implementation of the customs union with Russia, Kazakstan, and, since March 29, 1996, the Kyrgyz Republic. 1/

In May 1995, Belarus signed a protocol declaring the completion of the first phase of the customs union with Russia. In principle, this phase included, in addition to the completion of a free trade area “without exceptions,” the complete harmonization of import and export duties, excises on imports, and nontariff regulations. In practice, such harmonization has been gradual and incomplete. 2/ After an initial round of amendments of export and import duties (phased over the summer of 1995) to bring them into line with those prevailing in Russia, actions taken by Belarus to maintain a unified duty structure have been subject to delays. 1/ Changes to Russian export duties in August and December of 1995 and April 1996 were followed by Belarus after a delay of weeks or months, sometimes with exceptions. As of mid-May 1996, Belarus had yet to follow the Russian decision, effective April 1, to eliminate all export duties except on crude oil.

On import duties, harmonization has been more or less maintained since mid-1995, although in January 1996 Belarus reduced the tariff applying to imported cars for own use, from ECU 5 to ECU 0.3 per cubic centimeter of engine capacity. 2/ Import duty rates are mostly in the range of 5-30 percent. Higher rates of 40-100 percent apply to a limited number of commodity groups including weapons and ammunition, gems and precious metals, some motor vehicles, playing cards and articles for casinos. There are numerous exemptions. In some cases, Belarus has found the common external tariff with Russia to be disadvantageous, and has sought flexibility to make changes. In addition to cutting duties on car imports, Belarus is proposing reductions in import duties on certain raw materials and intermediate goods, in order to reduce input costs for its manufacturing industries.

Importers pay customs duties and other taxes on imports, or obtain a guarantee of payment, prior to shipping goods into the country. At the border, proof of payment or a guarantee of payment is presented, and documents are stamped. For goods whose ultimate destination is Russia, customs duties and other taxes are paid directly to the customs authorities in Moscow. “Marked” goods (alcohol and tobacco) require stamps showing proof of prepayment of excise taxes. A procedure has been in place since mid-1995 to share revenues from export duties on exports of Belarussian processed goods manufactured using imported Russian raw materials (Appendix I).

As the emphasis in 1995-96 has been on trade relations with Russia and the rest of the CIS, progress on other trade initiatives, such as joining the World Trade Organization (WTO), has been slow. In late-1995, with technical assistance from Switzerland, Estonia, and Poland, Belarus submitted a response to the first round of WTO questions.

3. Balance of payments developments in 1995-96

While the quality of balance of payments data has improved, serious problems of coverage and consistency remain, making meaningful comparisons of the 1995 outcome with earlier years difficult. 1/ Based on official data, however, both the trade and current account balances improved in 1995 compared to 1994. The overall balance of payments deficit was also somewhat lower (Table 52). There was, however, a marked difference in developments in the first half of 1995 compared with the second half, to a large extent associated with exchange rate developments.

Table 52.

Belarus: Balance of Payments, 1993-96 (Q1) 1/

(In millions of U.S. dollars)

article image
Sources: Data provided by the National Bank of Belarus, the Ministry of Statistics and Analysis, and the Ministry of Finance; and Fund staff estimates.

Data are not comparable across years due to significant and continuing data revision for 1993, 1994, and 1995.

Excluding arrears of Beltransgaz to RAO Gazprom (shown separately as exceptional financing).

The sharp real appreciation of the rubel against the dollar from early 1995 through end-March 1996 implies a rapid increase in dollar GDP, complicating the interpretation of ratios to GDP.

Gross official reserves excluding CIS currencies.

Excludes arrears for imports of natural gas. Reflects cancellation in February 1996 of debt to Russia amounting to US$471 million.

For Q1 1996, includes in amortization the cancellation of Russian technical credits.

a. Direction and composition of trade

Russia continues to account for the bulk of trade with CIS countries, accounting for about 80 percent of exports and 90 percent of imports, almost the same as in 1994 (Table 53). Ukraine is the second most important trading partner in the CIS. On the import side imports of oil and gas (from Russia) are the most important components (almost 60 percent of the total). Exports are more diversified, although commodities produced by the machine-building and metal-processing industries make up about 40 percent of exports (Tables 54 and 55). While the general trend of declining export volumes continued in 1995 there were some notable exceptions, in particular electric pumps, glass, and paints. On the import side increased volumes of gasoline, chemical fibers, grain (35 percent) and tractors could not mask declining import volumes for most other products.

Table 53.

Belarus: Trade with CIS Countries, 1993-95 1/

(In billions of rubels)

article image
Source: Ministry of Statistics and Analysis.

Data may include some services.

In 1993, Estonia, Latvia and Lithuania are included amongst CIS countries.

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

Includes glass and porcelain.

Table 54.

Belarus: Selected Exports to CIS Countries, 1993-95

(Values in millions of rubels, quantities in units as specified)

article image
Source: Ministry of Statistics and Analysis.
Table 55.

Belarus: Selected Imports from CIS Countries, 1993-95

(Values in millions of rubels, quantities in units as specified)

article image
Source: Ministry of Statistics and Analysis.

Trade with non-CIS is more diversified, with Germany and Poland the major destinations for exports and imports, but together accounting for only 28 percent of exports and about 40 percent of imports. Major export items to non-CIS countries are potassium and nitric fertilizers, trucks (although in substantially lower numbers than a few years ago), and refrigerators. Particularly strong growth has been recorded in exports of fertilizers. Cars accounted for the single largest item in imports (increasing by 12,000 percent in 1995, see also below) (Tables 56-58). The role of state-owned foreign trading organizations in exports and imports has shrunk to a minimal level (Table 59).

Table 56.

Belarus: Selected Exports to Non-CIS Countries, 1993-95

(Values in millions of rubels, quantities in units as specified)

article image
Source: Ministry of Statistics and Analysis.
Table 57.

Belarus: Selected Imports from Non-CIS Countries, 1993-95

(Values in millions of rubels. quantities in units as specified)

article image
Source: Ministry of Statistics and Analysis.
Table 58.

Belarus: Direction of Trade: Exports and Imports from Non-CIS Countries, 1993-95

(In millions of U.S. dollars)

article image
Sources: Ministry of Statistics and Analysis.

Included in totals.

Table 59.

Belarus: Trade by State Foreign Trade Organizations (FTOs) in 1993-95

(In millions of U.S. dollars)

article image
Source: Ministry of Statistics and Analysis.

b. Trade balances

Exports to non-CIS countries are estimated to have increased in the first half of the year as Belarus was able to access new markets for some of its industrial products, such as certain textiles, tractors, motorcycles, and fertilizers. However, the sustained real appreciation of the rubel vis-à-vis the dollar (and other hard currencies) during the year was associated with a decline in exports to these countries in late 1995 and early 1996. Some of that decline, however, reflects normal seasonal factors. Compared with the year-earlier period, the volume of exports to non-CIS countries in the first quarter of 1996 is estimated to have fallen by about 10 percent. At the same time, imports from outside the CIS showed an upward trend through March 1996, rising from an average of less than US$150 million a month in the third quarter of 1995 to almost US$200 million a month in the first quarter of 1996. As a result, trade surpluses vis-à-vis non-CIS countries which had averaged about US$50 million a month in the first four months of 1995 had become deficits of some US$65 million a month from December 1995-March 1996.

As regards intra-CIS trade, the contraction of export and import volumes has continued to date, largely reflecting the prolonged fall in overall economic activity in the region. 1/ Belarus’ trade deficit with the rest of the CIS was about US$350 million in 1995 and over US$200 million in the first quarter of 1996. The large deficit in the first three months of the year is consistent with the usual seasonal pattern, as energy imports for heating are then at a peak.

Reflecting the above developments in trade, in 1995, the overall trade balance deficit was US$530 million, some US$180 million lower than in 1994. However, the gap between imports and exports increased in 1996 and reached US$410 million in the first quarter alone.

c. Other balance of payments developments

The current account deficit improved by more than the trade balance in 1995 (from US$600 million in 1994 to US$254 million) as Belarus registered a surplus on trade in nonfactor services of US$262 million. Most of that surplus derives from trade in services with other CIS states, principally Russia. The most important credit item (amounting to nearly US$300 million in 1995) is transportation, about a third of which is accounted for by fees for Russian energy exporters’ use of oil pipelines running across Belarussian territory. 2/ Payments for road and rail transport are the largest debit item.

The capital account showed a dramatic worsening from a surplus of nearly US$800 million in 1994 to less than US$100 million in 1995. Belarus received US$191 million in disbursements of medium- and long-term official loans, down substantially from the US$283 million recorded in 1994 (see below). With amortization rising to US$113 million from US$90 million a year earlier, net inflows of official medium- and long-term capital fell by more than half in 1995, to US$79 million. The largest difference, however, was in terms of short-term capital, as Belarussian enterprises were no longer able to obtain short-term import financing and the growth in net interenterprise arrears (other than for gas imports) slowed down significantly (Table 60). In the first quarter of 1996, the net inflow of foreign loans fell further (to an annualized rate of just US$36 million), although there was a small increase in interenterprise arrears.

Table 60.

Belarus: Distribution of External Interenterprise Debts by Country, 1994-95

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

article image
Source: Ministry of Statistics and Analysis.

Despite prolonged discussions with a number of large western enterprises on projects in Belarus, foreign direct investment has been negligible for the last two years. 1/ Even if some inflows are not captured by the official figures (which are based on NBB data), it is clear that Belarus has been a laggard among former Soviet republics in attracting direct investment from abroad (Chart 18).

CHART 18
CHART 18

BELARUS Foreign Direct Investment, 1995

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

Sources: National authorities; and Fund staff estimates.

For the first half of 1995 there were large positive errors and omissions in the balance of payments, which were more than offset in the second half of the year. This pattern may have corresponded in large part to unrecorded short-term capital flows, as mentioned earlier. The strongly positive errors and omissions in the first quarter of 1996, on the other hand, are probably of a different nature, related to an underrecording of exports (especially to Russia). With the sharp reduction in January of tariffs on cars for personal use, there was a surge in automobile imports in the first quarter, many of which reportedly are destined for Russia. In contrast, the large negative errors and omissions in 1994 probably reflected unrecorded capital outflows.

The pattern of short-term capital flows (including errors and omissions) in 1995 is mirrored in movements in the net foreign assets of the NBB as explained in Section IV.2: In the first half of the year, the central bank’s net reserves increased by US$180 million; half of that increase was reversed in the July-December period. The NBB saw a temporary pickup in net foreign assets in the first quarter of 1996 (though NFA of the banking system fell by US$40 million, as commercial banks were running down their reserves), but by April it was again losing reserves rapidly. At end-April, gross reserves provided less than three weeks’ import coverage.

The increase in net foreign assets of the NBB in 1995 was almost completely nullified by the loss of foreign reserves of commercial banks. As a result, the overall balance of payments deficit was financed by the accumulation of external arrears, almost entirely on account of nonpayment for gas imports from Russia. Net interenterprise arrears owed to most other countries of the former U.S.S.R. decreased, except arrears owed to Lithuanian companies.

Gas Arrears

A large part of the gas arrears accumulated in 1993-94 when domestic prices were not sufficient to cover costs. After August 1994, when prices were adjusted, most import payments were met in full. However, in mid-1995 new arrears started to accumulate, as the financial position of many enterprises worsened and there was no effort to impose payments discipline by shutting off gas deliveries. In fact, the budgetary policy of sequestration, and the designation of payments for utilities as nonessential, contributed to the problem. Thus the root of the problem is nonpayment by domestic users to Beltopgaz, the distribution company, which then in turn cannot pay Beltransgaz, which then has no resources to purchase foreign exchange to pay RAO Gazprom in Russia.

By end-1995, arrears for gas imports (excluding penalties) had increased to US$595 million) and to US$651 million by February 1. Arrears as of that date were canceled under the debt agreement with Russia. Thus, under the agreement Russia provided debt relief of US$916 million (including penalties) on account of gas alone. However, since February 1 Belarussian enterprises (and the Government) have been incurring new arrears domestically for gas payments, resulting in accumulation of new external arrears on import payments of about US$60 million by end-April.

d. Terms of trade

Data on the movements of dollar prices of imports and exports at an aggregate level over the period 1992-96 are incomplete and of uncertain quality. 1/ For that reason, information on the evolution of the terms of trade is at best sketchy. Nonetheless, the general price trends of selected import and export commodities are known, enabling rough estimates of terms of trade movements.

Energy products accounted for between a third and half of Belarus’ imports over the last few years, and thus changes in oil and gas prices have had an important bearing on the terms of trade. In 1994, notwithstanding a fall in the world price of oil, the price of oil imported by Belarus (from Russia) increased by over 30 percent, as intra-CIS trade was adjusted to a more market-oriented basis, with a consequent rise in prices toward world levels. For natural gas imports the 1994 price increase Was even larger, exceeding 50 percent. As other dollar import and export unit values were relatively stable, the deterioration in the terms of trade in 1994 is estimated to have been around 20 percent.

In 1995, this pattern was reversed, as the overall terms of trade were profoundly affected by the sharp rise in the dollar prices of most nonenergy imports and exports vis-à-vis the rest of the CIS. Despite continued shrinkage in the volume of intra-CIS trade in 1995, the dollar value of Belarus’ trade with other CIS countries is estimated to have increased by about three fifths. With the dollar prices of oil and gas changing relatively little, 1/ and an estimated small improvement in the terms of trade with respect to non-CIS countries, this rise in the dollar prices of most other traded goods appears to have resulted in a substantial improvement in Belarus’ terms of trade vis-à-vis Russia in particular, and an overall improvement of around 30 percent. 2/

4. External debt and debt service

From January 1995 through March 1996, disbursements of official loans (excluding the Fund) averaged about US$50 million per quarter, down about 30 percent compared with 1994. The stock of official debt increased from US$1,251 million at end-1994 to US$1,513 million at end-1995. 3/ The cancellation, effective January 1, 1996 of outstanding technical credits from Russia reduced the debt stock by $471 million, and by end-April 1996, it stood at about US$1,050 million.

The main bilateral creditors since 1991 have been Germany, Russia and the United States, with Germany the largest provider of credit lines for importers in Belarus (about 30 percent of total debt owed to bilateral creditors at end-1995). The bulk of credit from Russia was in the form of converted technical credits, provided in 1992-93 by the Central Bank of Russia; as noted above this debt was canceled as of January 1, 1996. Bilateral loan disbursements in 1995 were again predominantly from Germany. Among the multilaterals the Fund is the largest creditor, followed by the World Bank, the European Bank for Reconstruction and Development (EBRD), and the EU. During 1995 the World Bank and the EBRD each disbursed US$20-40 million, while the amount of debt outstanding to the Fund increased by about US$170 million. Since the fourth quarter of 1995, there have been no commitments of new credits, although there were still some disbursements in early 1996 on earlier committed loans, such as from the EU (about US$40 million) and the European Bank for Reconstruction and Development.

The bulk of debt service payments in 1995 were to Germany and Austria on trade credits granted in 1992-94.

VII. Structural Reforms

After some hesitant first steps in 1993 structural reforms were speeded up and intensified in 1994 and early 1995, especially in the areas of price and external trade liberalization. However, opposition to significant reforms and weak commitment to follow through on earlier initiatives, especially in the areas of privatization and enterprise reform, resulted in a virtual halting of structural reforms in the second half of the year and in early 1996. As a result, in many areas the Belarussian economy remains unreformed and the state continues to play a major role in production and distribution. Private sector activity remains relatively small and is mostly limited to subsistence agriculture (basic food) and parts of retail trade.

1. Institutional environment

At present, economic and investment activities are regulated by more than 70 laws, several hundred presidential and government decrees, and a few thousand by-laws, some of very specific nature, that were introduced and/or amended since Belarus became independent. Often this legislation is inconsistent, difficult to interpret, and introduced as ad hoc reactions to problems that arise. A special “National Program for Attraction of Investment” was recently adopted, which envisages simplification of the current system of laws. In particular, there are plans to redraft the civil code, the entrepreneurial code, the tax code, the banking code, the land code, and the labor code.

Much of the present legislation such as the bankruptcy law, the land law, and the investment law are inadequate, and while amendments to some laws have already been proposed for some time, no action has yet been taken. Revisions to the bankruptcy law have been on the drawing board for more than a year. Similarly there are proposals to extend the rights of ownership to the land that is occupied by enterprises and to introduce transferability of lease rights, which would be especially important in agriculture, but these have also not yet been considered by the Parliament, although some progress is expected in the second half of 1996.

2. Deregulation, demonopolization

After significant progress in price liberalization and the formal abolition of most price controls in November 1994, further steps were taken in the first six months of 1995 to reduce the role of Government in price formation. The number of monopolistic enterprises subject to price regulations (mostly in the form of maximum profit margins) was gradually reduced from close to 300 in mid-1994 to 70 in the beginning of 1995, and to zero on July 1, 1995. In February 1995, agricultural procurement prices were liberalized and in June 1995 the practice of continuing controls at local levels was officially repealed. Formally, price regulation is now limited to natural monopolies (55 enterprises providing energy, public transportation, and communications). However, some restrictions in the form of profit margins remain on essential agricultural products. 1/

Some progress was also made in demonopolizing the economy and creating a more favorable environment to private activity by the abolition of licenses for production of a large number of products that previously were considered in need of strict control. 2/ However, the structure of the economy de facto remained highly monopolistic in 1995, despite the abolition of formal monopolies. This is mainly the result of failure to break up the monopolistic structures that Belarus has inherited from the past and of locally imposed restrictions on interregional trade and distribution, which create monopolies at the regional level. 3/ Domestic trade and transportation are some of the sectors with the highest concentration of regional monopolistic structures.

The Ministry of Anti-Monopoly has the responsibility for supervising and regulating natural monopolies and enterprises that have no domestic competitors. Additionally, it has the mandate to create an environment in which economic entities have a level playing field by demonopolizing major enterprises. Preliminary work that started in 1994 for the demonopolization of the domestic trading system continued slowly in 1995. A pilot project, designed with the assistance of the World Bank for the demonopolization of one trading organization (the Gomel torg) and the privatization of three trading conglomerates by creating independent joint-stock subdivisions of the main enterprise was initiated. It was hoped that this project could become a model for breaking up other trade monopolies, but reluctance to move decisively so far, particularly at the local level, has complicated the process. Some minor amendments to the law on “Counteracting monopolistic activities and competition development” were made in the second half of 1995.

In terms of the direct role of the state in procurement, there has been a marked decline. State procurement in industry declined to about 8 percent.

3. Privatization and corporatization

a. Enterprises

Belarus’ privatization program dates from 1993 and has the objective of denationalizing two thirds of the enterprises that were owned by the central (republican) and local (communal) governments by the year 2000. 1/ However, partly due to dissatisfaction with the result of privatization in the early stages, but also because of a perception that the state should continue to be a major player in the economy, progress with achieving the privatization goals has been modest. Thus, after three years of privatization, as of January 1, 1996, a total of 1,595 republican and communal enterprises had been transformed, or only about 20 percent of the overall target. 2/

Early in 1995 the President issued a decree supporting the continuation of the privatization process in Belarus. Nevertheless, the 1995 privatization program was not formally approved until late September and was in fact not implemented at all at the republican level. At the communal level, progress has been faster as most of the enterprises are small and can be privatized through direct sales. The 1995 program envisioned the transformation of about 700 republican and 1,000 communal enterprises. Under the program, privatization of enterprises with assessed value amounting to 10,000 minimum wages (i.e., about US$52,000) required the approval of the President. During the year, 468 enterprises were transformed (53 republican and 415 communal) but these were enterprises covered under the 1994 program and under a special program to denationalize the agro-processing sector and the number of employees in transformed enterprises remains limited (Tables 62 and 63). As a result, 47 percent of the transformed enterprises were in the agro-processing sector, 35 percent in the trade sector and only 4 percent in industry (Table 64).

Table 61.

Belarus: Medium- and Long-Term Public and Publicly-Guaranteed External Debt, 1993-96 (Q1)

(In millions of U.S. dollars)

article image
Sources: Ministry of Finance, and Fund staff estimates.

Reflects cancellation of US$471 million in technical credit, effective January 1, 1996.

Table 62.

Belarus: Transformation of State Property, 1992-96 (Q1) 1/

article image
Source: Ministry of Management of State Property and Privatization.

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

As of January 1, 1994, 4,423 Republican enterprises and 4,114 communal enterprises were planned to be privatized. However, figures are subject to constant change as the count of state owned enterprises is revised. More recent data on the number of enterprises are not available.

Table 63.

Belarus: Number of Employees in Transformed Enterprises, 1992-96 (Q1) 1/

article image
Sources: Ministry of Management of State Property and Privatization.

Number of employees at the time of transformation.

Table 64.

Belarus: Number of Transformed Enterprises by Activity, 1992-96 (Q1)

article image
Sources: Ministry of Management of State Property and Privatization.

The majority (55 percent) of state enterprises were transformed by converting them into joint-stock companies (Table 65), with the state in most cases (at least initially) retaining 100 percent ownership. Since the beginning of privatization this approach has been applied to about 70 percent of republican-owned enterprises. At the local level, privatization (mostly of small service and trade-oriented stores) has mostly taken the form of auctions and competitive bidding (30 percent of all transformed enterprises in 1995, 52 percent since 1993) as this method has proven easier to implement for this size enterprises.

Table 65.

Belarus: Number of Transformed Enterprises Distributed by Method, 1992-96 (Q1)

article image
Sources: Ministry of Management of State Property and Privatization.

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

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

The republican privatization program for 1996 was approved on December 30, 1995. A significant difference with earlier programs is that for 1996 it is envisaged that all enterprises considered for transformation will be converted into joint-stock companies. According to new procedures, the labor collective of an enterprise can initiate the privatization procedure and send a proposal to the line ministry and the local authorities. If there is no opposition, the proposal is then forwarded to the Ministry of Management of State Property and Privatization and subsequently to the President for final decision. In case of disagreement as to the desirability of the denationalization of the enterprise a decision will also be taken by the President based upon the presentation of the Ministry. Privatization plans for state-owned enterprises can also be drawn up by the Ministry directly in cooperation with line Ministries and local governments which submit privatization plans for enterprises under their control. The labor collectives have to agree, otherwise the process cannot proceed. The plan for 1996 envisions the corporatization of 516 republican enterprises and about 1,000 local enterprises. 1/ However as of mid-May, not a single republican enterprise had actually been converted.

In order to promote participation of the population in the privatization process a voucher program was adopted in 1994. From April 1, 1994 each citizen could apply for privatization vouchers and open a special voucher account at Sberbank (now Belarusbank). The face value of property vouchers issued was Rbl 2,500 but this value was adjusted for revaluations of the state property and was Rbl 35,000 in April 1996. Each citizen was allocated 20 vouchers, plus an additional amount based on the number of years a person has worked, age, and number of children. 2/ As interest in the voucher plan was relatively low, in the beginning of 1996, the deadline by which citizens could apply for vouchers was extended to May 1, 1996. As of March 15, 1996, 5.6 million individuals had applied for vouchers, or 71 percent of the eligible population. Voucher certificates had been received by 3.6 million people. Only a fraction (about 25 million certificates or 6 percent of the total) of these certificates had actually been traded for shares of corporatized companies and investment funds, or used for buy-outs of state assets.

Citizens can directly exchange their vouchers for shares of enterprises through one of the Belarusbank branches or indirectly through investment funds. In 1995, a start was made with holding auctions for investment funds in which they could acquire additional shares. A first auction was held on March 30, but soon thereafter the operations of all investment funds were suspended (and the results of the first auction declared null and void) pending investigations of their activities. Licenses of 34 of the 38 existing funds were reinstated in August 1995. The remainder had their licenses revoked. A small number of additional auctions were held but most were not very successful.

Besides the generally skeptical attitude of the authorities toward privatization, there are a number of factors which hamper the process. One of these is the modalities of privatization through vouchers. The voucher system was designed such that 50 percent of all shares of enterprises have to be reserved for exchange for vouchers. However, given the slow pace of corporatization, only a limited number of shares are available to the public at any given time, and frequently loss-making enterprises are corporatized first. Furthermore, shares can be exchanged for vouchers at a fixed price at Belarusbank locations, and thus there is limited interest in placing vouchers with investment funds that then would bid on shares. Failure to pursue enterprise reform is also a factor that discourages investment in enterprises that are being privatized. In late 1995, all enterprises were required to be re-registered, with new licenses to be given only to enterprises that did not consistently make losses or were considered important. This created a lot of uncertainty. In early 1996, the re-registration process itself was suspended as a measure to combat corruption, but this implied that no new firms could be registered (since the re-registration requirement still exists), and the privatization process was basically frozen. New enterprises can be registered now only by special permission of the President.

b. Housing

Housing privatization in Belarus started in 1989 when the Soviet Union launched a housing privatization program. Less than 3 percent of houses were privatized until 1991 as the initial pace of privatization was extremely slow due to absence of a clear legal framework. After Belarus became independent and with the adoption in 1993 of the Law on Housing Privatization, the process of privatization accelerated. In 1995 about 112,000 apartments were privatized, with an average size of about 52 square meters, bringing the share of private-owned apartments to about 36 percent of total (Table 66). By end-1995, about 60 percent of the housing stock had been privatized.

Table 66.

Belarus: Housing Privatization, 1992-95

article image
Source: Ministry of Statistics and Analysis.

The total number of dwelling units that had been privatized at 1995 corresponds to about 35.9 percent of the total stock of government and public-owned housing. Adding annual percentages will give a different result due to the expansion of the housing stock during this period.

In order to help the privatization of housing, a system of vouchers was introduced at the same time but independently from the privatization vouchers. All citizens were eligible to receive vouchers. The total value of vouchers was based on the estimated value of the housing stock in 1992. The value of the voucher is adjusted at the time of the purchase of a dwelling unit by a factor representing the increase in the value of the unit between 1992 and the date of purchase.

4. Enterprise reforms

A few modest steps were taken in 1995 in the area of enterprise reform. Sectoral ministries retained supervision of state enterprises, but enterprises were given more independence in the day-to-day management. Managers were made more accountable for their actions, and their salaries as well as their employment status were linked to production performance. However, they still do not have authority to lay off personnel or to dispose of fixed assets. Government intervention continued to exist in capital and investment decisions and on some occasions consisted of pricing and production targets. Individual Deputy Prime Ministers have been assigned personal responsibility for the performance of some of the largest enterprises.

The Government continued its policy of directly supporting enterprises in an attempt to mitigate the downturn in real output. Early in 1995, successive decrees were issued granting financial aid (through the tax system and the banking system) to enterprises of priority significance for the country. Additionally, the NBB and commercial banks were requested to earmark credits to selected sectors in decline. At the same time, some steps were taken to encourage entrepreneurial activity (in particular, with a reduction of license requirement for new business activities and simplifying registration procedures) to improve payments discipline and to avoid accumulation of new interenterprise arrears. In the second half of the year, a Presidential decree was issued guaranteeing ownership rights of land for use in production, until a formal law on ownership rights of land and on the participation of foreign legal entities and individuals in the privatization of state-owned facilities would be adopted by the Parliament. Toward the end of 1995 and early 1996 some additional measures were adopted, including: (i) granting of further tax and import duty exemptions; (ii) postponing tax obligations and payment of utilities (the latter could be postponed until the start of the heating season in October); and (iii) limiting total tax obligations (see Section II.1.a).

A major obstacle to enterprise reform has been the absence of functioning bankruptcy legislation as well as the continued perception that for many enterprises the problems that were encountered were only of a temporary nature. There is a bankruptcy law, but this has proven ineffective and lacks an implementation mechanism. Amendments have been proposed so that a start can be made with declaring enterprises bankrupt and liquidating them. However, this legislation has not yet been put on the agenda of the Parliament, although there are plans to do so later in the year.

5. Agricultural reforms

The authorities recognize that agriculture is in a very difficult position, as the past policy to control output prices to ensure cheap agricultural products for the population, led to a serious deterioration of the financial situation of most agricultural enterprises. Thus, in February 1995 most existing restrictions on agricultural food prices were eliminated and agricultural procurement prices were liberalized. Further, it was decided that the Ministry of Agriculture together with the Ministry of Privatization and the local authorities should make sustained efforts to accelerate the transformation of ownership of collective and state farms to enterprises in an effort to increase production, mostly through converting state farms (sovkhozes) into collective farms (kolkhozes). In addition, to assist farmers with spring sowing and autumn harvest, directed credits from the NBB were extended for advance payments to producers of agriculture (for purchases of fuel, fertilizers, and inputs) in the total amount of some Rbl 500 billion in 1995.

The Government also decided to start a special program to restructure the agro-processing industry. In this context, by end-1995, some 221 agro-processing enterprises (27 republican and 194 communal property) were transformed into joint-stock companies. Under the program, no less than 40 percent of the shares is to be sold to producers of agricultural products (i.e., agricultural workers). In view of their low level of income they could pay for shares in installments. The state was to retain a controlling share in certain enterprises, such as in the confectionery industry, and the oils and fats industries. While the transformation of enterprises into joint-stock companies took place, as of April 1996, the Ministry of Agriculture still held all the shares due to disagreements on the revaluation of the property and the price of the shares.

One of the biggest obstacles in agriculture continues to be the lack of progress on granting individual members of state and collective farms transferable rights to the separately identifiable parcels of land they currently share. Life time inheritable leases of land for private farming are permitted, with private farmers allowed to lease up to 50 hectares, but these leases cannot be sold or mortgaged nor can the land be bought. Private ownership of land is currently allowed only for three purposes: to build a house, to use as agricultural land (with a maximum of one hectare), and to use as gardens. There are no plans for land reform at present.

APPENDIX I Belarus: Status of the Tax System

This appendix describes the main features of Belarus’ tax system as of April 1, 1996. It reflects changes made to rates and other features of the system during 1995 and early 1996.

1. Individual income tax

Taxable income is monetary income including that earned abroad or paid in foreign currencies (converted at the official exchange rate). In principle, all bonuses and in-kind payments are included, but numerous exemptions apply (e.g., in-kind bonuses up to 20 times the minimum monthly wage (MMW) per year; imputed value of free health resort treatment and other social protection offered by employers, up to 30 MMW per year). Excluded from taxable income are: all social welfare incomes (pensions, unemployment benefits, student stipends, Chernobyl benefits, etc., except temporary disability incomes), severance payments, receipts from the sale of personal properties (every five years for real estate, every year for vehicles), sales from auxiliary farming, inheritances, interest on bank deposits and Treasury bills, and incomes received as gifts from nonresidents and close relatives living abroad (the latter two exemptions became effective on April 1, 1996).

Personal income taxation is progressive, with seven nonzero rates. The tax scale is indexed to the MMW (which was Rbl 100,000 per month on April 1, 1996). The tax scale below became effective on April 1, 1996. 1/ Local governments are permitted to establish fixed tax rates for income derived from economic activities approved by the Cabinet of Ministers. Dividend and similar income is taxed separately, at 15 percent.

article image

Collective farm workers’ income is taxed at a preferential rate of 8 percent (after deduction of 1 MMW per farm worker). Income from the sale of products of private subsidiary farms, such as vegetables, seeds, cattle and poultry raising, is exempt from tax.

Deductions for children and dependents are:

  • 1 MMW per child if the number of children under 18 is less than 3;

  • 2 MMW per child if the number of children under 18 is 3 or more;

  • 1 MMW for each dependent family member of pensionable age.

A deduction of up to 120 times the MMW from annual income (10 times for monthly incomes) is allowed for the following taxpayers:

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

  • various war veterans and active servicemen;

  • employees of the KGB and Ministry of Internal Affairs;

  • disabled persons;

  • persons growing medicinal plants for sale to procurement agencies.

For employees, the tax on monthly income is deducted at source, being paid by employers within one day after pay day. For the self-employed, installments are paid quarterly, based on self-assessments. An annual income declaration has to be submitted before February 15 of the following year and the remaining tax (or refund) has to be paid (received) by March 15.

2. Enterprise profit and income tax

The enterprise profit and income tax is levied on enterprises, associations, and organizations. Taxable income includes capital and financial incomes. Taxable profit is defined as the total proceeds from the sale of goods and services minus the associated costs of production. The following costs are included: material costs, wages (including bonuses) and other payroll costs (e.g., Social Protection Fund contributions), insurances, depreciation allowances for replacing fixed capital, and interest on loans. Up to 10 percent of profits may be deducted if used to provide loans for acquisition or construction of housing for workers. Although capital purchases are not included in “material costs”, up to 50 percent of investment outlays may be deducted (see below). There are no provisions for carrying forward losses from previous periods.

The standard rate is 30 percent. In March 1996, Parliament eliminated the 60 percent rate (applying mainly to casinos) and the 40 percent (applying to income from lotteries), but rejected the Cabinet of Ministers’ proposals to eliminate the following preferential rates:

  • 10 percent for profits of engineering and transportation enterprises of the agro-industrial complex;

  • 7 percent for profits of construction enterprises of the agro-industrial complex.

For certain types of activities determined by the Cabinet of Ministers, fixed amounts of profits taxes may be set by local governments.

The enterprise income tax is set at:

  • 15 percent, applying to dividends and similar incomes, as well as to “small” enterprises (i.e., those with under 200 employees in the industrial sector, under 50 people in construction, under 25 people in most other sectors), except retail trade, whose profit is less than 5,000 times the MMW.

The main exemptions in the profit tax law are listed below. In addition, local governments may grant supplementary profit tax concessions (except to traders) within the limits of the taxes attributed to local budgets:

  • collective, state and peasant farms;

  • profits used to clean up Chernobyl after-effects or to provide environmental protection and fire safety (up to 50 percent of profits);

  • new enterprises, which are provided with a three-year tax holiday starting from the year in which taxable profit is first declared; a reduction of profit tax by 50 percent for an additional three years may be granted by the Cabinet of Ministers;

  • up to 50 percent of profits used for capital investments (including nonresidential and housing construction, acquisition of buildings, structures, equipment, and vehicles) and for repayment of bank credit used for investment purposes;

  • 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 of enterprises operated by educational organizations to provide practical training for students;

  • profits 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 owned by war veterans and honored comrades;

  • 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;

  • profits from transactions in government securities;

  • profits of newly-established pharmaceutical enterprises selling essential medicines (on a list approved by the Ministry of Public Health) are tax exempt for a period of two years.

For 1996, the following specific exemptions apply:

  • profits from additional export sales (relative to those in 1995) are taxed at 50 percent of the normal rate;

  • profits from the sale of fur are fully exempt;

  • profits from publishing school textbooks;

  • corrective labor institutions and occupational therapy facilities approved by the Ministry of Internal Affairs are exempt.

In April 1996, the following exemption had been proposed but not yet agreed by Parliament and the President:

  • profits earned on the subsidiary productive activities of state and collective farms.

In addition to legal exemptions, the Government accords ad hoc exemptions to specific enterprises (not just for profit taxes, but usually for customs duties, excises, and VAT as well). In 1995, 22 such exemptions were given and 73 tax credits were accorded. A further three exemptions were granted in the first quarter of 1996.

3. Value-added tax

VAT is levied on enterprises (legal entities) and other entities whose monthly turnover exceeds 250 times the monthly minimum wage. In most countries, VAT is charged on commercial invoices, 1/ payable at the time the invoice is issued. In contrast, in Belarus VAT is calculated using the subtraction method, i.e., value-added is assessed on the difference between the value of sales and eligible “material costs of production and acquisition.” In general, material costs are estimated by the taxpayers themselves. Depreciation of fixed capital is not considered a material cost. VAT is levied on imported capital goods, although VAT reimbursement may be obtained once such equipment is put into operation.

Tax liability occurs at the time of the transfer of goods and services. Legal entities pay VAT monthly, based on daily transactions of the preceding month. For large firms (i.e., those where VAT liability exceeds 5,000 times the MMW), payment is made no later than the third day of the new month. Smaller firms have up to one month to pay.

Since January 1994, the standard VAT rate has been set at 20 percent. A reduced VAT rate of 10 percent is levied on certain consumer services (production and repair of clothing, footwear, watches, hi-tech household appliances and electronic equipment, hairdressing, public baths, and laundry services). In March 1996, Parliament rejected the Cabinet of Ministers’ proposal to eliminate the reduced rate for these services but approved the levying of the 10 percent rate on imported food products and children’s goods that are on a list approved by the Cabinet of Ministers (these goods were previously exempt).

There are widespread exemptions, including:

  • sales of state, collective and private farms (outputs and most inputs;

  • domestically-produced children’s articles (e.g., clothing, books, bags, bedding, toys);

  • pharmaceutical products and medical equipment;

  • newspapers, magazines, stamps;

  • sales by religious associations;

  • mass transportation;

  • fuels (coal, gas, firewood, peat briquets) sold to the public;

  • housing and municipal services (e.g., rents, telephones, heating, electricity);

  • services provided by physicians, veterinarians, lawyers, child-and elderly-care institutions, fee-based educational services, entertainment industries, undertakers;

  • theaters, circuses, concerts, where the number of seats does not exceed 2,000; sports events, museums and children’s attractions;

  • enterprises employing disabled people and retirees accounting for at least 70 percent of employees;

  • proceeds from the sale of state securities;

  • domestic and foreign currency banknotes and securities;

  • free aid (procedure determined by Cabinet of Ministers);

  • imported technical equipment used exclusively for disabled people;

  • imported equipment and instruments used for scientific research;

  • imported property of nonresidents for authorized foreign investments (if goods are resold, specified procedures apply);

  • imported items for the production of cars, buses, tractors, and agricultural machinery;

When the countries of the former U.S.S.R. introduced a VAT in late-1991, the so-called origin principle was applied to trade within the formerly 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 Belarus a certain hybrid system existed, but revisions to the VAT law were made by Parliament in early 1996, putting the country unequivocally on an origin basis with respect to CIS countries and a destination basis with respect to non-CIS countries, i.e., VAT is levied on exports to CIS countries, whereas exports to non-CIS countries are exempt; imports from non-CIS countries pay VAT, whereas those from CIS countries are exempt. Since Belarus is also a member of a regional customs union, the VAT on raw materials and intermediate goods imported from Russia (with which borders have been removed) accrues to Russia, since Russia also imposes VAT on its exports. For raw materials and intermediate goods imported from non-CIS countries whose final destination is Belarus (or Russia), arrangements are made for VAT to be paid to the Belarussian (or Russian) budget before the goods enter the common Belarussian-Russian customs space; these advance payments on VAT are deducted when the goods are sold at the next stage of production.

4. Excise taxes

Excises are levied on 20 domestically-produced items, including various types of alcohol, tobacco, automotive gasoline, domestically-produced oil, fur and leather products, and jewelry (Table 67). Effective April 1, 1996, the rates on gasoline were raised considerably, and excises were imposed on diesel and gas for automobiles for the first time. At the same time, the fuel tax, which was a gasoline tax earmarked for the Road Fund (see below), was abolished.

Table 67.

Belarus: Excise Taxes on Domestically-Produced Goods, 1992-96

(In percent)

article image
Source: Belarussian authorities.

For enterprises producing less than 5 million liters per annum a lower rate of 25 percent was applied.

Rates are for large fur items (e.g., coats); smaller items have lower rates (15 and 10 percent).

In the context of the customs union agreement with Russia, Belarus adopted the excise taxes on imports prevailing in Russia (Table 68). With the exception of alcoholic beverages and tobacco, excise taxes are not imposed on goods originating in other CIS states, i.e., in general, excises are imposed on an origin basis. 1/ In contrast, excise taxes are imposed on goods originating in non-CIS countries, i.e., the destination principle applies. Since the removal of the border between Belarus and Russia in May 1995, arrangements are in place to ensure that revenue from excises accrues to the budget of the country of final destination.

Table 68.

Belarus: Excise Taxes on Imported Goods, April 1996

article image
Source: Belarussian authorities.

Rates applicable to nondiesel, new cars. Slightly higher minimum rates apply to new diesel vehicles. Somewhat lower minimum rates apply for used cars. The ad valorem rates are identical in all cases.

A reduced rate of 10 percent applies to plates smaller than 15 cm2.

The tax base for excise taxes is: (i) sales value for domestically-produced goods; (ii) customs value (exclusive of import tariffs), for imports when the tax is on an ad valorem basis; and (iii) volume, for several imports with specific excise taxes (usually in ECU per unit).

Although the tax law contains no exemptions, in practice, ad hoc exemptions (to all taxes) have been granted to specific enterprises, usually on presidential authority. For example, in 1995, the Belarussian company, Torgexpo, Belsportobespechenie (a sporting foundation) and the Makhmuhd Esambayev Cultural Foundation, were given the right to import a wide range of products duty-free. Such importers are reported to have become prominent importers of alcoholic beverages.

5. Trade taxes

a. Import duties

In the context of the customs union, Belarus abolished customs borders with Russia and adopted Russia’s import duty system in mid-May 1995. Import duty rates for goods subject to minimum rates (plants, seeds, individual foodstuffs, raw materials, ores, petroleum, spare parts) range up to 5 percent; the highest import duty rates are for goods such as weapons, ammunition, precious metal products, carpets, motor vehicles (40 percent to 100 percent). Some exceptions to the common external tariff, e.g., cars for personal use, have been implemented by Belarus without agreement with Russia. There are also the standard exemptions (diplomatic privileges, foreign aid), as well as ad hoc exemptions for particular enterprises (e.g., those mentioned in the above paragraphs on profit taxes, VAT and excise taxes).

Regular import duty rates apply to countries that have been granted 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. On the other hand, for developing countries covered by Belarus’ system of preferences, import duties are either halved (for 104 countries or territories) or zero-rated (for 44 least developed countries).

Revenue from import duties for goods destined for Belarus (Russia) is allocated to the budget of Belarus (Russia) in the same way as revenue from excises and VAT on imports, i.e., before the goods can enter the common customs territory the importer must provide a financial guarantee that all taxes will be paid by the importer’s bank. In the absence of such a guarantee, customs officers on the Belarus border with third countries prohibit the entry of the goods into the country.

b. Export duties

In mid-May 1995, Belarus also adopted Russia’s export duty schedule. A wide range of exported goods including fish, meat, grains, crude petroleum, natural gas, gasoline, fertilizers, wood products, inorganic chemicals, leather, various metal products, were still subject to ad valorem or specific rates throughout 1995. In January 1996, some of these export duties were removed. In April 1996, the authorities stated their intention to eliminate all export duties, following Russia’s elimination of all non-petroleum export duties on April 1, 1996 and the planned mid-year elimination of the export duty on crude oil.

6. Other taxes

a. Property tax

This tax is imposed on the value of capital assets, i.e., structures and equipment. The tax is levied at 1 percent for legal entities and 0.1 percent for residential dwellings belonging to individuals. Numerous exemptions apply, including: privatized apartments; social, cultural, and residential facilities owned by local councils; assets owned by organizations of disabled people; fixed assets of communications enterprises; structures designed to protect the environment; residences owned by old-age pensioners, certain disabled persons, families of military personnel killed in action; and unfinished new housing construction.

b. 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 for agricultural lands and land in villages. Certain categories of citizens are exempt (including war veterans, pensioners, victims of Chernobyl). The tax schedule varies from Rbl 609 per hectare on poor soils to Rbl 3,550 per hectare on rich soils. Local governments can raise the rates to up to twice these amounts. Beginning on April 1, 1996, the previous schedule of rates was increased by amounts ranging from 1.6 percent for rural land to 19.1 percent for land in Minsk.

c. Natural resource tax (environmental tax)

The tax is imposed on: (i) resources extracted from the natural environment, (ii) refined oil and petroleum products (since April 1, 1996), and (iii) the amounts of pollutants emitted into the environment, within prescribed limits. Tax rates for (i) and (iii) are set by the Cabinet of Ministers. Penalty rates of 15 (10) times the normal rate are imposed if emission of pollutants (resource extractions) exceed the established limits. For (ii), a tax of 1 ECU per ton is imposed for processing oil or petroleum products. The tax is not assessed on water used for certain purposes, and sand and gravel mixtures used for highway construction.

d. State fire service levy

A fee is imposed on enterprises for maintaining a state fire service. The tax base is the value of capital assets, including stocks of materials. In early 1996, the rate was reduced from 0.0125 percent to 0.005 percent per month (adjustment factors of 0.3 to 3 apply, depending on the degree of fire resistance of the structure). At the same time, numerous exemptions were introduced.

7. Social security contributions

Two extrabudgetary social funds, the Social Protection Fund (SPF) and the Employment Fund, provide pensions and other social assistance benefits to individuals. Employers pay 35 percent and employees 1 percent of wages to the SPF. Agricultural enterprises pay a reduced rate of 30 percent of their wage bill. Entrepreneurs that do not form a legal entity pay 15 percent of their income. The Employment Fund is funded exclusively by employers; the payroll tax is 1 percent.

8. Chernobyl payroll surcharge

The emergency tax for eliminating the after-effects of the catastrophe at the Chernobyl nuclear power plant is levied on all enterprises, except collective and state farms, peasant farms, and law firms. In 1994, the payroll tax was reduced from 18 percent to 12 percent. Effective April 1, 1996, the tax was further reduced to 10 percent.

9. Road Fund

The extrabudgetary road fund was created in 1992 to finance the construction and maintenance of roadways. During 1992-95, the Road Fund has been financed by fuel taxes, motor vehicle sales taxes, road user fees and duties, transit taxes, and revenues of specialized road cleaning enterprises. The most important revenue source is the road user fees (72 percent of 1995 revenue). This “fee” is levied as a 1 percent turnover tax (0.5 percent for agricultural sales, 0.3 percent for wholesale and retail trade). The transit tax was changed to a “transit” duty in July 1995 and is an entry tax imposed on vehicles registered in countries other than the customs union. Rates vary according to vehicle type and weight. The 10 percent fuel tax was abolished and the transit duty is no longer earmarked for the Road Fund.

10. Fund for the Support of Agricultural Producers

In February 1995, Parliament introduced an extrabudgetary Fund for the Support of Agricultural Producers. Revenue is raised from a 1 percent turnover tax on enterprises; agricultural enterprises and state farms are exempt.

11. Fund for the Support of Exporters

A 10 percent fee on certain purchases of foreign exchange in the auction was introduced at the beginning of 1996. The fee provides financing for the newly established Fund for the Support of Exporters. There are numerous exemptions, especially purchases of foreign exchange for imported energy payments, and for most imports of raw material and inputs used to produce products for exports.

12. Other Extrabudgetary Funds

Enterprises pay additional turnover taxes (up to 2.5 percent) to finance maintenance of kindergartens and housing, as well as to finance scientific research (“Innovation Fund”).

APPENDIX II Belarus: Social Safety Net

Belarus has a well-developed system of social protection, which attempts to provide asistance to all those who have been exposed to severe falls in real incomes. Nevertheless, there is now increasing evidence of poverty, particularly in rural areas, despite high expenditure on social protection (15.5 percent of GDP is budgeted in 1996) and a very heavy burden on enterprises to finance these outlays. 1/ Although there is a plethora of benefits, they are poorly targeted and are not rationalized. Only family benefits and housing cost subsidies are income-tested. A key challenge is to reduce the cost of universal benefits of a social insurance nature (viz., pensions), while ensuring that there is adequate government provision of social assistance benefits aimed at clearly identified groups of poor people.

a. Poverty 2/

The number of poor has increased dramatically. According to a survey in early 1995 about 35 percent of all people were counted as poor. 3/ However, many of these people experienced short spells of poverty, in part related to the seasonal nature of in-kind income derived from subsistence agriculture. Only 7 percent of the population is estimated to be in “permanent” poverty. 4/ Those suffering the most are large, less-educated families with children, single parents, and one-worker families. Segments of the population are turning to subsistence agriculture to satisfy daily needs. This increase in poverty is almost entirely due to the fall in real incomes over the past few years, rather than a sharp rise in income inequalities. 5/ Nonetheless, there has been a widening of income differentials.

b. Pensions and other universal benefits

Pensions are disbursed through the Social Protection Fund (SPF), which is not funded by contributions linked to benefits and is unsustainable in its present form. A 35 percent payroll tax on enterprises provides the main revenue source of the SPF. Employees only contribute 1 percent. Every citizen over the legal retirement age (60 years for men, 55 years for women) is eligible for a pension. Eligibility for the regular pension is also extended to those with a full work history, i.e., 25 years for men and 20 years for women, so in practice there are many pensioners under the legal retirement age. In 1995, some 0.4 million early retirees were amongst the 2.5 million people (one fourth of the population) receiving a pension. The regular pension amount is based on years of service and on previous income (averaged over 5 years); in 1996, the average regular pension is expected to be US$30-35 per month. If the pension formula produces a potential pension that is too low (for example, for low-income agricultural workers who are retiring), a minimum pension is paid to those with a full work history. In April 1996, the minimum pension amounted to approximately US$20 per month. Social pensions are paid to those without a full work history; in early 1996 social pensions varied from US$2.50 to US$13 per month. Military pensions 1/ have a separate regime; in 1996 an average military pension is expected to be about US$100 per month, i.e., about three times higher than regular pensions.

In 1995-96, there were a number of changes in pension rules, including: (i) the phasing out in January 1996 of the Rbl 50,000 per month pension supplement introduced in January 1995 to compensate pensioners for the elimination of food subsidies in 1994; (ii) the lag for increasing pensions subsequent to rises in the average wage index was reduced from three to two months in April 1995; and (iii) the ceiling on the maximum pension was raised from six to seven times the minimum wage. However, pension amounts for those previously earning more than four times the minimum wage are limited and effectively capped at 5.2 times the minimum wage. In September 1995, following a decision by the Cabinet of Ministers, certain pensions received by some categories of working pensioners were reduced by 50 percent, but on November 1, 1995, this decision was revoked.

The SPF also provides disability benefits, sickness benefits, maternity benefits, birth allowances, child benefits, funeral benefits, and health-related benefits, all of which are universal, except child allowances. Disability benefits for work-related accidents and sickness benefits (both requiring doctors’ certificates) are provided at 100 percent of previous wages for most employees. 2/

While some proposals for fundamental reforms such as raising the retirement age, tightening eligibility for early retirement, lowering the effective pension (e.g., by changing the pension formula; lowering maximum pensions; reducing military pensions), or raising contributions by those with preferential rates of payroll tax (e.g., the agricultural sector contributes 30 percent instead of 35 percent), have been recommended, at present they are not being seriously considered.

Unemployment benefits are paid to around 50 percent of the officially registered unemployed. Only those who have been laid off receive benefits; voluntary quitting is not remunerated. Basic benefits, which last for up to six months, are generally set at two times the minimum wage, but are lower for those previously earning less than this amount and for first-time job-seekers (the latter receive the minimum wage).

The Employment Fund, which administers unemployment benefits, also provides retraining benefits and money to institutes for retraining people. In 1995, the Fund recorded a surplus, despite the fact that the contribution rate is low (1 percent of wages, paid entirely by enterprises). This mainly reflects the low level of official unemployment. If hidden unemployment were to become open, the financial situation of the Employment Fund would deteriorate significantly.

A variety of benefits are paid to the victims of the Chernobyl disaster. These include allowances for those living in the contaminated regions; health care for children taken from contaminated regions; and food programs, income tax relief, etc., for certified “victims.” Chernobyl-related outlays are financed by a special wage tax on enterprises as mentioned above.

c. Income-tested benefits

Child benefits, once children are over 3 years of age, are the only income-tested cash benefits, being linked to household income. The benefit level for each child is linked to the minimum wage and age. If a child is under 3 years (not income tested), the benefit is 120 percent of the minimum wage. For children 3-16 years, the income-tested child allowance is 50-70 percent of the minimum age depending on age. 1/

In 1995, child benefits were received by about 35 percent of all households, at a total cost of about 0.5 percent of GDP. Over the past three years, there has been a steady erosion in the number of families receiving benefits, since increases in the minimum wage have not kept pace with increases in family income. Despite a narrowing in the number of recipients, the poverty survey indicates that it is particularly those with large families who are most likely to experience bouts of poverty.

Noncash subsidies for housing costs were introduced by Parliament in late 1994. This was in response to the decision to increase rents and charges for utilities, with the aim of augmenting cost recovery from about 9 percent at end-1994 to 100 percent by end-1996. The Government wished to ensure that the poorer segments of the population would not fall into poverty. Consequently, the amount that households actually pay for rent and utilities is mandated not to exceed 15 percent of household income. The following utilities are included: heating, hot and cold water, sewage, gas, electricity, and, in some cases, TV antennae, radio, and telephones. The subsidy covers the difference between the cost of providing these services and 15 percent of family income.

Tariffs for rents and heating charges are based on the size of apartments, whereas the tariffs for hot and cold water, sewage, and gas depend on the number of occupants in each dwelling. Since nearly all households are metered, electricity bills are based on actual consumption. Either local governments or enterprises administer the scheme, depending on who owns the dwelling.

In 1995, Rbl 489 billion (0.4 percent of GDP) was budgeted for the compensation scheme. This amount incorporated the official estimate that over 50 percent of the population were already paying over 15 percent of income for housing and utilities. However, based on Family Budget and Expenditure Surveys, the World Bank staff estimated that only 1-2 percent of the population would be eligible, even at a 60 percent cost recovery ratio (the latter estimate included in-kind income, such as imputed income from subsistence activities). In the event, outlays in 1995 were negligible. This outcome confirms that only a small number of households are eligible. However, the main reason is that cost recovery ratios were not increased as planned, with only two increases in tariffs for utilities (July and October 1995) until May 1996. It is also likely that applications were limited because administrative requirements (income declarations, verifications by officials, etc.) are cumbersome.
1/

The Fund supported these reform efforts through a second purchase under the Systemic Transformation Facility (STF) in January 1995 and a first purchase under a stand-by arrangement in September 1995. A first purchase under the STF had been made in mid-1993.

2/

While there has been an improvement in statistics since 1991, weaknesses remain in several key areas, in particular in national account and trade data. Recently price data have also become less reliable. Thus macroeconomic indicators need to be interpreted with some caution.

3/

A detailed description of economic developments in 1994 and early 1995 is available in IMF Staff Country Report No. 95/99, “Belarus-Recent Economic Developments” (October 1995), or SM/95/194 (8/11/95).

4/

This was due both to low voter turnout and a very divided vote.

1/

Nonetheless, Belarus still benefits from preferential import prices for gas from Russia.

1/

The exchange rate band had a lower limit of Rbl 11,300 and an upper limit of Rbl 13,100 per U.S. dollar.

1/

Price liberalization, together with a substantial increase in imported prices and relatively loose financial policies, contributed to the high level of inflation of over 2,000 percent a year in 1993-94.

2/

Such regulations relate to amongst others, registration and reporting requirements and licensing procedures.

3/

Official statistics on profit and losses are based on Belarussian accounting standards, which are not comparable to international standards and are subject to serious measurement problems. For example, certain costs are paid out of profits and the accounting system does not adequately reflect depreciation. Therefore, it is likely that the data significantly overstate actual profits and understate the number of loss-making enterprises.

1/

In many joint-stock companies the state continues to hold 100 percent of the shares.

1/

On a cumulative basis this sector recorded the largest drop in output volume since 1991, as refining activities were reduced sharply. However, output grew quickly in 1995 as several new contracts with Russian oil companies were signed. Substantial investments by Russian firms in the refineries are planned.

2/

For selected enterprises, this rate was reduced to 25 percent in early 1996.

1/

Data on changes in inventories were provided by the Ministry of Economy. National accounts data for 1995 provided by the Ministry of Statistics and Analysis show a zero change in inventories (both in volume and in value terms), which is highly improbable.

2/

Under international accounting practices, most of these enterprises would probably have recorded losses.

1/

In the early spring, financial requirements have typically been associated with planting operations, and have arisen in the form of needs for fuel, pesticides, and fertilizers. During the summer, financing has been provided mainly to state procurement agencies for the purchase of parts of the cereal harvest. In the fall, financing is required for the procurement of autumn crops, such as sugar beets and sunflower seeds.

2/

The decline in the share of agriculture is mainly attributed to restrictions on agricultural prices despite agriculture’s better-than-average (compared to other sectors) output performance.

1/

State-owned land can be given for lifetime leases, with the right to inherit in the case of individual farming without payment. Decisions on leasing agricultural land are made by local governments. The upper limit for leasing is 50 hectares of arable land.

1/

Credit to agriculture was extended at rates at, or only slightly below market rates, in contrast to earlier when all credits were extended at rates significantly lower than market interest rates.

1/

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

1/

In value terms gas imports were higher due to adjustments of prices.

2/

At end-1995 enterprises paid Rbl 440 per Kwh of electricity use, while households paid Rbl 280 per Kwh.

1/

Since early 1996 the Ministry of Statistics and Analysis frequently changes the index weights. This makes interpretation of monthly inflation figures difficult.

2/

Although utility tariffs are adjusted in discrete intervals, they are also subject to indexation. The formula used is a function of the industrial component of the wholesale price index and provides for adjustment in tariffs when the monthly increase in the index is higher than 5 percent. However, cumulative monthly increases do not trigger an adjustment. Thus, despite the inflation exceeding 5 percent, there has not been an indexation adjustment of tariffs since October 1995.

3/

A cost reduction of 20 percent had been ordered by Presidential decree.

1/

Based on the methodology to calculate average wages, the practice of enterprises forcing workers on unpaid leave influences the average wage. This was particularly evident in November when nominal wages declined relative to October as many workers were “temporarily” let go.

2/

In 1995 unit labor costs (in U.S. dollar terms) increased considerably faster than in Russia, Kazakstan, or Ukraine. On average, in domestic currency terms real wages did not increase faster than in those countries.

3/

This was achieved mostly through short-term borrowing from the banking system or the accumulation of other forms of arrears.

4/

This replaced the wage structure consisting of 23 grades, with a ratio of the highest to the lowest grade of 6.6.

1/

According to the existing labor law an enterprise can fire only up to 6 workers at a time without a comprehensive social plan. The worker, as well as the trade union and the Employment Service, have to be notified one to two months in advance. A worker cannot be fired if somewhere in the enterprise there is a vacancy. A worker, if fired, has the right to appeal to the Union Committee. Almost 50 percent of workers who appealed in 1995 were reinstated.

1/

The State budget is the principal component of government finances. It comprises the budgetary operations of the republican (central) and local governments, the latter being mainly 6 oblasts (regional governments), the city of Minsk, 38 smaller cities, and 141 rayons (districts). In addition to the State budget, there are several extrabudgetary funds, the most prominent being the Social Protection Fund, the Employment Fund, the Road Fund, and the Fund for the Support of Agricultural Producers. The State budget and all extrabudgetary funds are consolidated into General Government Operations.

1/

See sections on profit taxes and excises in Appendix I.

2/

VAT is assessed by the subtractive method: firms identify sales and deduct allowable costs by themselves. Belarus is one of the few countries that does not use the invoice method, which facilitates cross-checking by the State Tax Inspectorate of tax statements of suppliers and purchasers.

3/

Table 28 shows that the increase in tax arrears was particularly sharp for VAT.

4/

These items provided 15 percent of excise tax revenue in 1994.

1/

The EU loan is to the NBB, which onlends the money to the Government, i.e., it is classified as a domestic loan from the NBB to the Government.

2/

For a detailed description of the major features of Belarus’ tax system see Appendix I.

1/

This tax was established after the accident at the Chernobyl nuclear plant in 1986. It is an emergency payroll tax levied on all enterprises, except collective farms and a few other groups, and is earmarked for expenditures to deal with the after-effects of the accident, including certain benefit payments to victims (see Appendix II), medical treatment, relocation, etc..

1/

Some of the proposed lending to agriculture took place through the banking system.

1/

At end-March 1996, contribution arrears amounted to Rbl 1.4 trillion (0.8 percent of GDP).

1/

Besides being an integral part of the treasury system, in the 1996 budget, Parliament requested the development of a new classification system before mid-1996.

1/

The increase in the NBB’s NDA in June-July accounted for 43 percent of the NDA increase for the whole year.

2/

In the first half of 1995 net lending in foreign currencies by commercial banks increased by Rbl 2,328 billion. In the second half it increased by only Rbl 40 billion.

1/

Lending to commercial banks includes placement of NBB foreign exchange holdings in term deposits. At end-1994, 84 percent of the outstanding credit to banks was in the form of foreign currency term deposits (US$52 million). By end-1995, the share of foreign currency deposits had declined to 54 percent (US$39 million), although during the year NBB foreign currency deposits at commercial banks were as high as US$120 million.

1/

These figures include reserves in nonconvertible currencies. Excluding nonconvertible currencies and Russian rubles net foreign assets (as defined by the NBB) amounted to minus US$1 million, US$214 million, US$92 million and US$38 million on these dates, respectively.

1/

Lending to Government remained at the low rate of 6.5 percent annually throughout 1995. In January 1996, the NBB started charging the Government the refinance rate.

2/

Moreover, the ceiling has made it difficult for banks to make adequate provisions for bad loans, inducing them to engage more actively in open market operations and to develop fee-based activities.

3/

The interest rate margin (1-3 percent monthly) on NBB directed credit channeled through commercial banks remains in effect.

1/

The funds that are subject to reserve requirement include general public deposits, central and local government deposits and other funds that can be classified as money market instruments. Only general public and local government deposits are included in the definition of broad money, the remaining “deposits” are netted out in commercial banks’ NDA. The size of the “deposits” excluded from the broad money definition relative to the general public deposits is significant which is why the ratio of actual reserves kept at the NBB to deposits under the broad money definition changes its value throughout the year and, at times, is much higher than the legal 12 percent.

2/

Sberbank’s required reserves have been remunerated since August 1994 and required reserves on foreign currency deposits remain unremunerated.

3/

The NBB allows banks to choose between two methods of calculating the required reserves on their deposit: (i) based on end-period balances, or (ii) based on average weekly balances. The banks would choose the method that results in less reserves although the difference usually is not large. Therefore, the actual reserve ratio will always be slightly lower than mandated even if the regulation is enforced strictly.

1/

Agroprombank, Promstroybank, Businessbank and Vnesheconombank. Sberbank remained as a savings bank, fully owned by the state.

1/

A bank’s capital or “own fund” calculation is based on a definition which includes amortization, depreciation, revaluation reserves and other “reserve” funds, which tend to overvalue the bank’s true equity.

2/

The importance of directed credits diminished in 1995 especially in the second half of the year. However, the practice of allocating directed credits resumed in early 1996 (see section IV.1).

3/

Banks’ risk-weighted assets are derived by applying risk weights to different classes of balance sheet assets.

1/

Under existing regulations, risk weights are based not on loan arrears but on the type of collateral on various assets.

1/

In late 1995, the NBB was unable to close a small bankrupt bank, as the court blocked all NBB attempts pending a final resolution on a legal challenge against the NBB submitted by the bankrupt bank.

1/

It is estimated that the share of this type of trade declined from about 45 percent of total trade in 1993 to 12 percent in the third quarter of 1995.

1/

The maximum transaction size for off-auction trading was set at US$1,000 for dollars, DM 1,000 (equivalent to about US$670) for Deutschmarks, and rub 100,000 (only about US$20) for Russian rubles.

2/

This practice stopped temporarily after the imposition in late January 1996 of surrender requirements and the 10 percent fee on purchases of foreign exchange at the auction, but resumed in May.

3/

Numerous exemptions apply to both the surrender requirement and the 10 percent fee, including on purchases of foreign exchange to finance imports of energy, and for enterprises in sectors that are considered important or produce commodities for exports.

4/

Until that time the Interbank Currency Exchange was jointly owned by the commercial banks and the NBB.

1/

The signing on January 6, 1995 of a customs union agreement with Russia (which Kazakstan signed some weeks later) was the continuation of a series of accords on economic integration between the two countries. See Chapter I for more details.

2/

Differences remain between the members of the customs union in the areas of exemptions, quantitative restrictions, and certain features of the VAT and excise tax regimes.

1/

Changes are usually initiated by the union member countries, in particular Russia, individually. There is no functioning coordination mechanism.

2/

In April 1996, Kazakstan introduced import duties on a number of commodities, including cars, that were much lower than the common tariff.

1/

In addition, there are ongoing revisions of data before 1995, and retroactive price adjustments are frequently substantial. Comparisons of levels of imports and exports across years are particularly problematic.

1/

The large increase in value figures for both exports and imports in 1995 compared to 1994 is entirely a reflection of price movements.

2/

In contrast, as noted earlier, there are no payments for transit of natural gas.

1/

In May 1996 an agreement was signed with a major U.S. car company to assemble a small number of passenger cars and vans in Belarus.

1/

Efforts are currently under way to correct this lacuna and aggregate price indices for both CIS and non-CIS trade are now being compiled. It is as yet unclear whether these series will be extended backward to clarify the picture for the period from independence to the present.

1/

The average gas import price in 1995 was up by 7.4 percent over 1994, while the price of imported oil fell by about 2 percent.

2/

Since dollar prices of non-energy commodities trade between Belarus and the rest of the CIS are believed to have risen little in 1994, it does not seem plausible that the triple-digit increases seen in 1995 reflect a continued adjustment of prices toward world levels. One possible alternative explanation is that traditional trading relationships are such that much of Belarus’ intra-CIS trade is effectively insulated from competition from the rest of the world. If the prices at which such trade is conducted are set in local currency terms, and rise broadly in line with local inflation, prices in dollar terms will rise rapidly whenever local inflation exceeds the depreciation of the local currency vis-à-vis the dollar. This was the case for Belarus in 1995.

3/

Since dollar GDP, when calculated using the official exchange rate, actually increased by 112 percent in 1995 (notwithstanding the 10 percent decline in real GDP), the ratio of debt to GDP declined from 25.9 percent at end-December 1994 to 14.7 percent a year later.

1/

For more details see Section II.4 of this report.

2/

Except on some selected products on the grounds of public health and safety.

3/

The authorities consider that the number of monopolistic producers or monopolistic providers of services is close to 1,000, taking into account regional barriers.

1/

As of January 1, 1994 the number of republican and communal enterprises subject to privatization was 4,423 and 4,114, respectively. Within the overall privatization program annual programs are to be approved that specify the enterprises that will be denationalized in a given year.

2/

The term “transformed” is used since the main vehicle for denationalization is transformation into joint-stock companies, which are frequently still 100 percent owned by the state.

1/

At the local level other forms of denationalization can continue to be used.

2/

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

1/

The April 1996 revision raised the highest marginal tax rate from 40 to 50 percent, and eliminated the previous 35 percent and 40 percent marginal rates, but left all other rates unchanged.

1/

Under this 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 method are ease of administration and facilitation of invoice cross checking, thereby discouraging underinvoicing.

1/

In practice, excises on alcohol and tobacco applies only to imports coming from Ukraine, since imports from Russia are exempt from excises.

1/

Total payroll taxes on enterprises to finance the various benefits are typically around 50 percent of wages: 35 percent for the Social Protection Fund; 1 percent for the Employment Fund; 10 percent Chernobyl tax (12 percent prior to April 1, 1996); and 2-3 percent for local government kindergarten and housing maintenance funds (up to 5 percent prior to April 1, 1996).

2/

This section is based on World Bank research.

3/

The definition of poverty is based on the cost of a minimum basket of food and nonfood items.

4/

Defined as being below the poverty line for more than 9 months of the year.

5/

Like in most transition economies, official income statistics do not fully capture the emergence of income inequalities.

1/

Including internal security services.

2/

Disability benefits are less than 100 percent of previous wages if the number of years of service is less then eight.

1/

A full child benefit is received if household income is less than two times the minimum wage; 50 percent if household income is between two and three times the minimum wage; and, no child allowance is provided if household income exceeds three times the minimum wage.

Same Series

Other IMF Content

Other Publishers

  • Collapse
  • Expand
Cover IMF Staff Country Reports
Belarus: Recent Economic Developments
Author:
International Monetary Fund
Volume/Issue:
Volume 1996: Issue 099
Publisher:
International Monetary Fund
ISBN:
9781451805017
ISSN:
1934-7685
Pages:
168
DOI:
https://doi.org/10.5089/9781451805017.002
CHART 1

BELARUS GDP in States of the Former U.S.S.R.
CHART 2

BELARUS COMPOSITION of GDP

(In percent)
CHART 3

BELARUS Industrial Production
CHART 4

BELARUS Inflation
CHART 5

BELARUS Inflation and Wages in Selected Countries
CHART 6

BELARUS Fiscal Indicators

(In percent of GDP)
CHART 7

BELARUS Monetary Aggregates
CHART 8

BELARUS Composition of NBB Credit

(In percent)
CHART 9

BELARUS Composition of Commercial Bank Lending

(In percent of gross lending)
CHART 10

BELARUS Foreign Assets of the NBB
CHART 11

BELARUS Monetary Ratios
CHART 12

BELARUS Ratios of Foreign Currency Deposits to Broad Money 1/
CHART 13

BELARUS Real Interest Rates

(In percent per month)
CHART 14

BELARUS NBB: Monthly Interest Rate Spreads
CHART 15

BELARUS Nominal Bank Deposit and Lending Rates

(In percent per month)
CHART 16

BELARUS Share of CIS Countries in Total Trade of Belarus
CHART 17

BELARUS Exchange Rates
CHART 18

BELARUS Foreign Direct Investment, 1995