Belarus: Selected Issues
Author:
International Monetary Fund
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Publication Date:
19 Feb 2002
eISBN:
9781451805062
Language:
English
Keywords:
ISCR; CR; Belarus; wage; subsidy; government; policy challenge; energy payment arrears; gas import subsidy; heating arrears; cost-recovery ratio; bill arrears; Government subsidies; Price controls; Tariffs; Electricity; Arrears
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This Selected Issues paper reviews the external competitiveness of the Belarusian economy, particularly in 2000–01. The analysis starts with an overview of developments in Belarus’ external current account. The paper then examines various competitiveness indicators, most importantly changes in external and internal real exchange rates, as well as labor cost measures. It reviews trade data by sectors to explain recent export performance. The paper also provides an overview of current wage policy and its macroeconomic effects.

Abstract

This Selected Issues paper reviews the external competitiveness of the Belarusian economy, particularly in 2000–01. The analysis starts with an overview of developments in Belarus’ external current account. The paper then examines various competitiveness indicators, most importantly changes in external and internal real exchange rates, as well as labor cost measures. It reviews trade data by sectors to explain recent export performance. The paper also provides an overview of current wage policy and its macroeconomic effects.

IV. Subsidies— An Overview1

A. Background

1. Belarus continues to operate a complex system of direct and implicit subsidies aimed at achieving social objectives, such as alleviating poverty and reducing inequality, as well as controlling inflation. While the system’s objectives have not changed, recently the authorities have introduced gradual changes in its operation. In September 2000, the authorities unified exchange rates, ending the multiple currency practice that had been in place since January 1996. In doing so, they also reduced sharply the overall subsidization of the economy. In 1998-99, the subsidies implicit in the multiple exchange rate system were the largest single type of subsidy in Belarus, amounting to 6-8 percent of GDP. After the exchange rate unification, they were eliminated. The Belarusian authorities have also improved the transparency of the process of granting direct subsidized credit to priority sectors. Since 2000, these credits (mainly for construction) have been provided by the budget instead of by the National Bank of Belarus (NBB). Despite recent improvements, Belarus still maintains an extensive system of explicit and implicit subsidies as well as cross-subsidies (Table 1).

Table 1.

Belarus: Explicit and Implicit Subsidies, 1997-2000

(As a percentage of GDP)

article image
Sources: Ministry of Economics, Ministry of Housing and Communal Services and IMF staff estimates. Note: Data for 1999 are the authorities’ estimates.

Excluding budgetary funds.

Including budgetary funds.

For gas, electricity and heating. There are also cross-subsidies for water supply, drainage, and waste removal, which are not captured here.

2. This chapter discusses the nature, size and impact of four broad groups of subsidies: budgetary subsidies, implicit import subsidies, consumer subsidies, and producer subsidies (Figure 1).

Figure 1.
Figure 1.

Belarus: Main Subsidies 1/

(As a percentage of GDP)

Citation: IMF Staff Country Reports 2002, 022; 10.5089/9781451805062.002.A004

1/ Estimates of the cost of different groups of subsidies are not additive. For example, the gas import subsidy is reflected in domestic consumer subsidies on electricity, gas, and heating, and some producer subsidies have cross-subsidizing elements, reflected in the corresponding consumer subsidies.

B. Budgetary Subsidies

3. Direct budgetary subsidies in the Republican budget amount to close to 2 percent of GDP (Figure 2). They encompass the following: (1) subsidies to state enterprises and various government organizations; and (2) special purpose subsidies (e.g., subsidies to various budgetary funds, agriculture, industry, and social assistance programs that account for almost 90 percent of the total).

Figure 2.
Figure 2.

Belarus: Largest Sector Recipients of Direct Republican Budget Subsidies, 2000

(As a percentage of GDP)

Citation: IMF Staff Country Reports 2002, 022; 10.5089/9781451805062.002.A004

4. Direct subsidies financed from the Republican budget capture only a part of total subsidies in Belarus. Numerous other explicit and implicit subsidy schemes distort the allocation of resources and put pressure on the budget, while failing to effectively target the truly needy. These include tax breaks, free provision of communal services to large categories of the population, and exemptions of customs duties granted to selected firms or sectors. These subsidies are more difficult to quantify.

C. Implicit Import Subsidies

5. Belarus receives large implicit import subsidies from Russia, mostly in the form of low prices for natural gas, a vitally important input for domestic electricity and heating. In 2000, Russia supplied natural gas to Belarus at a lower price than to other CIS importers—$30 per 1,000 m3, about a third of the world market price of about $103 per 1,000 m3 (Table 2).2 With annual imports of about 16 billion m3, the resulting gross gas import subsidy is estimated at about $1.2 billion, including transit fees paid by Russia to Belarus.3 Belarusian gas importing and distribution companies, as well as consumers, benefit from this subsidy. The Belarusian energy company captures a part of the subsidy, as it distributes gas to domestic consumers at $60 per 1,000 cubic meters, still substantially below the world market price. Consumer and other producers, in turn, benefit from the import subsidy because it allows Belarus to sustain lower electricity and heating prices, higher level of industrial output, and higher levels of heating and energy-related household consumption than would otherwise be possible. It also has allowed Belarus to limit the buildup of internal energy arrears that has plagued some of the other CIS countries.

Table 2.

Belarus: The Price of Russian Gas Paid by Some Importing Baltic and CIS Countries

(in dollars per 1,000 cubic meters)

article image
Source: Fund staff estimates. Note: Russian average export price for 2000 was $98 per thousand cubic meters. Prices exclude transit fees that vary from country to country.

D. Consumer Subsidies4

6. Consumer subsidies can be classified into three major categories. These are the subsides arising from: (1) various types of price controls; (2) underpricing of rent and utility services; and (3) cross-subsidies.

7. Large subsidies are implicitly provided to consumers through the imposition of price controls, reflecting the priority given to social objectives. While they are being gradually relaxed, price controls remain substantial. By the end of 2001, the share of controlled prices in the CPI basket had declined to about 20-22 percent from 50 percent in 1998.5

8. Price controls have proved ineffective, both as a mechanism for containing inflation and for assisting the poor. Despite extensive controls, inflation has remained high, averaging 179 percent per year in the 1998-2000 period. Moreover, price controls tend to benefit disproportionately the more wealthy since they spend more on goods and services under price controls.6 Also, price controls have reduced the supply and variety of goods and services, leading to sporadic shortages of specific goods, and have encouraged smuggling to neighboring countries.

9. Utility tariffs are also set largely with regard to social objectives. As a result, tariffs are systematically underpriced, providing a substantial subsidy to all households. Household expenditures on main utilities are limited to 15 percent of their income, a mandated ceiling designed to make utility bills affordable.7

10. Recent increases in rents and tariffs for communal and transport services have reduced the implicit subsidy granted to the population; at the same time, households utility bill arrears have increased. In 2000 and 2001, tariffs of communal services and transport services were adjusted at a faster pace than inflation. However, with the exception of heating, electricity and water, those adjustments were not sufficient to catch up with CPI inflation: since end-1997 the increase in the price index of consumer goods subject to price controls has been below that of the overall CPI (Figures 3 and 4). This is particularly the case for gas, rents, communication and local bus services. Despite the low prices, about 10 percent of all households incurred debts for utilities and other housing services. Households’ debt for housing services, while small, is increasing, reaching about $3 million in mid-2001.

Figure 3.
Figure 3.

Belarus: Changes in the CPI and in Utility Tariffs

(Dec. 1997=100)

Citation: IMF Staff Country Reports 2002, 022; 10.5089/9781451805062.002.A004

Source: Ministry of Statistics and Analysis.
Figure 4.
Figure 4.

Belarus: Changes in the CPI, and in Communication and Transportation Services Tariffs (Dec. 1997=100)

Citation: IMF Staff Country Reports 2002, 022; 10.5089/9781451805062.002.A004

11. Despite recent increases in utility tariffs, the authorities’ objective of reaching full cost-recovery for gas and electricity and a cost-recovery ratio of 40 percent for heating by end-2000 was not accomplished.8 On the contrary, between 1996 and 2000 cost recovery declined for most services (Table 3). The decline was particularly dramatic in 1999 and early 2000, reaching 20 percent or less for electricity, rent, heating and hot water. The tariff increases of 2000 and 2001 allowed a reversal of this trend, with an improvement in the average cost recovery rates for most services from 15 percent at the end of 2000 to almost 26 percent as of November 1, 2001 (Figure 3). Apart from low tariffs, another reason for low cost recovery lies in the exemptions granted to some categories of the population. For example, people living in state-owned apartments do not pay rent. In 1997, 12 categories of people (from veterans and disabled to heroes of the former Soviet Union) representing 6 percent of the population and 16 percent of households were exempt from payments for housing the communal services. At the end of 2000, most of these privileges remained in place.9

Table 3.

Belarus: Cost Recovery for Households (1995-2001) 1/

(in percent)

article image
Sources: Ministry of Housing and Communal Services and Ministry of Economy.

Cost-recovery represents the share of the cost of utilities consumed by households that is paid by households.

12. At the same time, the number of households benefiting from rent and communal services subsidy10 declined sharply from 1997 to 2000, but increased in the first half of 2001. As a result, the total cost of the rent communal services subsidy increased substantially in 2001, after declining by 80 percent over 1997-99 (Table 4). This subsidy is poorly targeted. For example, subsidies for rent and utilities are provided to practically all households, while only about half of all households are classified as poor.

Table 4.

Rent and Communal Services Subsidy (by region, 1997-June 2001) 1/

article image
Sources: Ministry of Housing and Communal services.

Data have been revised backward to reflect the redenomination of the ruble on January 1, 2000 which removed three zeros from the currency.

13. Budgetary subsidies and cross-subsidies compensate for the low cost-recovery from households. The 2001 budget projected that the population would pay for 20 percent of its utility consumption. The remaining 80 percent would be financed from direct transfers from the Republican and local budgets, extra budgetary funds, cross-subsidies, and income from the leasing of state facilities.

14. Cross-subsidies, originally introduced during the soviet times, are used to transfer resources from enterprises to the population. Enterprises currently pay for their consumption plus an additional charge aimed at partly offsetting the low tariffs paid by the population. For example, while electricity costs about 3.5 cents per kWh, households pay between 1.3 and 1.5 cents per kWh, while industrial enterprises pay 4.1 cents. In 2000, cross-subsidies represented 3.5 percent of GDP, of which about 90 percent was accounted for by gas, electricity and heating (Figure 5). For water supply, cross-subsidies covered about 52 percent of cost, while budget subsidies paid for 6 percent. For sewerage, those shares were respectively 41 percent and 7 percent.

Figure 5.
Figure 5.

Belarus: Cross-Subsidies on Gas, Electricity and Heating, 1999-2001

(In percentage of GDP)

Citation: IMF Staff Country Reports 2002, 022; 10.5089/9781451805062.002.A004

Source: Ministry of Economy.

15. The Belarusian authorities have stated their intention to gradually reduce cross-subsidies. As indicated in the authorities’ 1999 program, the aim was to increase tariffs over time so as to achieve 100 percent cost recovery by the end of 2000, paving the way for reducing cross-subsidies. That target was not met, but the objective has remained the same. In 2001, a new program was designed to raise average cost recovery from about 15 percent on January 1, 2001, to 80 percent by the end of 2004, in order to reduce the burden of cross-subsidies on enterprises.11 As a result of the increase in cost recovery from October 2001, few enterprises benefited from the recent cut in energy prices.

E. Producer Subsidies

16. Producers also benefit from various types of subsidies that are granted to selected enterprises or sectors, and, as a result, lead to major distortions. Producer subsidies are granted both at central (e.g., agriculture) and local (e.g., communal services) levels to support privileged sectors or enterprises. During the harvest campaign, for example, farms receive free fuel and implicit subsidies on various other inputs, such as fertilizers.

17. Tax preferences and preferential custom procedures have also been granted to selected producers. In 2000, tax exemptions granted on the basis of individual decisions of the President reached about 1 percent of GDP, of which customs duty exemptions were equivalent to 0.2 percent of GDP and VAT exemptions to 0.1 percent of GDP. These ad hoc exemptions do not include more extensive tax privileges for specific sectors and enterprises. For example, the total value of the main exemptions on the value-added tax is estimated to have reached about 1 percent of GDP in 2000. Another estimated 1-2 percent of GDP in exemptions is hidden in the system of import duties, excises and profit taxes.12

18. Until recently, the NBB also granted interest subsidies on directed credits for housing construction (frequently at 2 percent per year), agriculture and selected manufacturers (at half of the refinancing rate or less). This type of subsidy has been reduced substantially. Indeed, in 2000, the NBB shifted to a more transparent system whereby it lends to the government, who, in turn lends to priority sectors. Also, until April 2001, commercial banks continued to be instructed to provide subsidized credit to priority sectors. Since then, the government publicly committed to discontinue this practice.

19. Despite the subsidies, energy payment arrears are accumulating. The stock of domestic electricity and heating arrears reached about 3 percent of GDP and gas arrears totaled about 4½ percent of GDP at the end of 2000. Agricultural enterprises were the largest debtors, followed by housing and communal services, construction, and education entities. Domestic energy arrears increased further in 2001. As of end-October, the stock of electricity and heat arrears grew to about 4 percent of period GDP, while gas arrears remained at about 4½ percent of GDP.

20. The accumulation of domestic arrears has led, in turn, to the buildup of external energy arrears, despite the low prices paid on energy imports. These arrears may also be viewed as an implicit subsidy for Belarusian energy importers. At the end of 2000, Belarus’s external arrears amounted to $433 million (about 3½ percent of GDP). Of this, the largest part as accumulated arrears for energy, most of it related, to imports of Russian gas ($139 million) and electricity ($80 million). External electricity and gas arrears stood at $274 million by end-October 2001.

21. Other contingent liabilities such as government guarantees on bank credits to agriculture, housing and other priority sectors and privileged enterprises represent another form of implicit producer subsidies. For example, annual budgets include a special budgetary fund earmarked for the government’s payment of called guarantees. In 2001, these resources amounted to Rb1 862 million, equivalent to 0.01 percent of GDP.

22. In sum, Belarus continues to maintain a large net of subsidies and cross subsidies. While some progress has been made, more remains to be done to further reduce the remaining subsidies and ensure their greater transparency and better targeting.

References

  • Gupta, S. and others, (2000). Equity and Efficiency in the Reform of Price Subsidies: A Guide for Policymakers, International Monetary Fund, Washington D.C.

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  • International Monetary Fund (1998). “Code of Good Practices on Fiscal Transparency: Declaration of Principles,” IMF Survey, April 27, 1998, 122–24.

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  • Schwartz S. and B. Clements (1999). “Government Subsidies,” Journal of Economic Surveys, Vol. 13, No. 2, April 1999, 119–47.

  • Kopits G. and J. Craig (1998). Transparency in Fiscal Operations, Occasional Paper No. 158, International Monetary Fund, Washington D.C

1

Prepared by željko Bogetić and Jean-Jacques Hallaert.

2

This price has been in effect since January 1999. Previously, the price was about $50 per thousand cubic meters. Since early December 2001 Belarus has been negotiating with Russia on a new price for natural gas.

3

Due to the lack of reliable data on transit fees, estimates of these transit fees vary widely from 0.4 to 3.7 percent of GDP.

4

Consumer subsidies are defined as government assistance that results in purchases of goods and services at prices below cost, after a normal rate of return to producers. Producer subsidies are defined as government assistance resulting in producers receiving higher income than what would otherwise be dictated by competitive market outcome (Schwartz and Clements, 1998; see also Kopits and Craig 1998, and IMF 1998). Less explicitly, producer subsidies are also designed with an eye toward maintaining employment in targeted industries and enterprises (Gupta and others, 2000).

5

At the beginning of 2001, there were four main categories of goods and services under price controls: socially important goods, a large list of goods under “ministerial price controls,” goods produced by 25 “strategic” enterprises, and indicative ceilings on price increases. The first three imply direct price controls. The indicative ceilings were removed in 2001 under the Staff-Monitored Program (SMP). As part of the SMP, the list of 23 socially important goods and services was reduced by 10 items, and the ceilings on the mark-up on imported goods and services were removed.

6

For example, in 2000, the highest household quintile, measured by disposable income, spent about Rb1 3,000 of its disposable income on rent and utilities that are subject to price controls, compared with Rbl 2,000 paid by the lowest quintile.

7

Cost recovery in key utilities is affected by discretionary changes in tariffs, and by indexation. Utilities that are not affected by discretionary changes are subject to automatic indexation. Since 1999, the authorities announced and ostensibly pursued a strategy of raising cost recovery by way of discretionary tariff adjustments in those utilities where initial cost recovery was the lowest (heating, hot water, rents), while other utility tariffs have been automatically indexed to the industrial production index.

8

That target was part of a Program adopted in 1999 on “reduction of cross-subsidizing energy consumers.” The earlier target for end-1999 had also been missed.

9

These exemptions were estimated to amount 0.03 percent of GDP in 1997, but they are likely to be larger due to the use of controlled rents and tariffs in the calculation.

10

This is an implicit subsidy that arises from the limit on household cash payments on rent and communal services (15 percent of household income). Households receive an implicit subsidy equivalent to the difference between the cash payment to service providers and the actual cost of the service.

11

In the draft 2002 budget, it is envisaged that household cost recovery on housing and utilities would be raised to 40 percent from 20 percent in 2001.

12

Although not strictly classified as subsidies, as of September 2001, tax arrears owed by enterprises amounted to about 0.6 percent of 2001 GDP. These arrears also act as a subsidy to those enterprises, especially when the underlying tax liability is deferred for an extended period or cancelled. Moreover, as of July, 2001, wage arrears amounted to 16 billion rubels ($11.5 million or about 4.3 percent of monthly payroll), of which about 80 percent were accumulated by the agro-industrial sector. Insofar as a comparable private enterprise facing competitive market conditions would normally be forced to shut down when unable to pay wages to its workers, these arrears represent a forced subsidy by wage earners to state enterprises, implicitly in return for job security.

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Cover IMF Staff Country Reports
Belarus: Selected Issues
Author:
International Monetary Fund
Volume/Issue:
Volume 2002: Issue 022
Publisher:
International Monetary Fund
ISBN:
9781451805062
ISSN:
1934-7685
Pages:
120
DOI:
https://doi.org/10.5089/9781451805062.002
  • Figure 1.
    View in gallery
    Figure 1.

    Belarus: Main Subsidies 1/

    (As a percentage of GDP)

  • Figure 2.
    View in gallery
    Figure 2.

    Belarus: Largest Sector Recipients of Direct Republican Budget Subsidies, 2000

    (As a percentage of GDP)

  • Figure 3.
    View in gallery
    Figure 3.

    Belarus: Changes in the CPI and in Utility Tariffs

    (Dec. 1997=100)

  • Figure 4.
    View in gallery
    Figure 4.

    Belarus: Changes in the CPI, and in Communication and Transportation Services Tariffs (Dec. 1997=100)

  • Figure 5.
    View in gallery
    Figure 5.

    Belarus: Cross-Subsidies on Gas, Electricity and Heating, 1999-2001

    (In percentage of GDP)

Figure 1.

Belarus: Main Subsidies 1/

(As a percentage of GDP)
Figure 2.

Belarus: Largest Sector Recipients of Direct Republican Budget Subsidies, 2000

(As a percentage of GDP)
Figure 3.

Belarus: Changes in the CPI and in Utility Tariffs

(Dec. 1997=100)
Figure 4.

Belarus: Changes in the CPI, and in Communication and Transportation Services Tariffs (Dec. 1997=100)
Figure 5.

Belarus: Cross-Subsidies on Gas, Electricity and Heating, 1999-2001

(In percentage of GDP)