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.

V. Belarus-Russia Monetary Union1

A. Background

1. The intention to establish a monetary union between Russia and Belarus preceded the recent debate about the optimal exchange rate system and is also motivated by noneconomic considerations. Already in 1993—shortly after the breakup of the Soviet Union—the two countries drew up an agreement to establish a joint monetary system. According to the draft, Belarus would adopt the Russian ruble as legal tender. While disagreement over the conversion exchange rate postponed the implementation of these plans, Russia and Belarus continued to express their intentions to integrate economically and to lay the foundation for a monetary union. At the end of 1999, the two countries agreed to create a union state, providing, inter alia, for the adoption of common tax and customs policies. At the end of 2000, as a step toward this monetary union, Belarus and Russia agreed to introduce a common currency and to adopt measures to create the appropriate conditions for the single currency (see Table 1 for a chronological review of the integration efforts). These agreements were ratified by the parliaments of Russia and Belarus in March and May 2001, respectively. However, there is still no agreement on the procedure for the issuance of the common currency.

Table 1.

Russia-Belarus: Chronology of Monetary and Economic Integration Process

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2. According to the current timetable, the monetary union would be established in several steps. As a first step, Belarus adopted a crawling peg vis-à-vis the Russian ruble from the beginning of 2001.2 In 2005, Belarus would adopt the Russian ruble as legal tender. From 2008, the two countries would introduce a new joint currency. As part of these agreements, during the transition period the Central Bank of Russia (CBR) would provide support to stabilize the Blr/Rub exchange rate.3

3. This chapter reviews the economic aspects of the monetary union from the point of view of Belarus. Section B analyzes the key benefits and costs of the monetary union. Section C addresses some of the transitional issues in light of European country experiences during the run-up to the EMU. Section D discusses the choice of an appropriate anchor in Belarus. The chapter concludes with a summary.

B. Economic Costs and Benefits of the Union for Belarus

Impact on trade and income

4. The introduction of a common currency is associated with a reduction in trading costs, which is expected to lead to higher levels of trade, income, and consumption. A number of studies have attempted to quantify the economic impact of a monetary union. For example, based on data covering economic and geographic variables for more than 200 countries and regions, Frankel and Rose (2000) suggest that the creation of a monetary union could boost trade with the country whose currency is adopted by a factor of three, without diverting trade away from other trading partners. They estimated that an increase in trade by one percent relative to GDP would be associated with an increase in income per capita by one third of a percent of GDP over a 20-year period.4 The positive impact on trade and output from a monetary union between Russia and Belarus is likely to be substantially less than suggested by these numbers. In contrast to cases where a union is newly established, trade relationships between the two countries still reflect “old” trade ties stemming from the Soviet Union times. Because Belarus and Russia are natural trading partners due to the geographic closeness, common language, and historical, cultural and economic ties, the current direction of trade flows is skewed toward Russia. Finally, Belarus currently receives direct and indirect subsidies from Russia in the context of barter arrangements, arrears’ financing (especially in the energy sector), and trade financing. While the establishment of a monetary union would reduce trading costs, some of the subsidies could be eliminated as a result of further progress in Russia to reform and privatize enterprises companies in the energy sector, which would lead to profit-maximizing behavior.

Asymmetric shocks and flexibility of labor markets

5. The literature on optimal currency areas suggests that countries that are subject to asymmetric shocks and that lack flexible factor markets are not good candidates for a common currency (for example, Mundell, 1961). This is indeed the case for Belarus.

6. Supply shocks are likely to affect the two economies in very different ways. Belarus’s economy relies heavily on agriculture. In 2000, agriculture and fishery accounted for percent of GDP and total employment. While Belarus is not a significant producer of fossil fuels, Russia’s economy depends heavily on the production of petroleum and gas. In 2000, fuel and gas production accounted for 5 percent of Russian GDP (and almost percent of industrial production) while the contribution of agriculture was limited to 7 percent of GDP. Adverse weather conditions and a bad harvest can affect Belarus significantly while having a relatively small impact on Russia. 5 Russia, in turn, is vulnerable to large and sustained changes in international oil and gas prices.

7. Economic developments in Russia since the beginning of 1999 illustrate the challenges faced by policymakers in a country subject to “Dutch disease.” In the case of a union, Belarus would be directly confronted by these challenges as well. Largely as a result of a surge in oil and gas prices, Russia experienced a substantial improvement in its terms-of- trade (the external current account turned from a deficit of about 1 percent of GDP in 1998 to a surplus of 18 percent of GDP in 2000). Despite a continued high level of capital flight, the CBR was able to increase the import coverage of reserves from less than 2 months in 1998 to 5½ months in 2000. The CBR intervened heavily to offset pressures for a nominal appreciation. However, since these interventions were only partially sterilized, the real exchange rate appreciated somewhat (Figure 1). As a result, profit margins in the nonenergy sector have decreased, reducing growth prospects for the sector.6

Figure 1.
Figure 1.

Russia: Real Effective Exchange Rate and Oil Prices

Citation: IMF Staff Country Reports 2002, 022; 10.5089/9781451805062.002.A005

An increase in the REER index implies a real appreciation.

8. By joining the monetary union, Belarus would import Russia’s policy challenges without profiting from high world market prices for oil and gas. Despite a loss in competitiveness in the non-oil and nongas sectors, Russian citizens have benefited from the improvement in the terms of trade.7 In the absence of a fiscal transfer mechanism from the Union, the Belarusian economy would import oil and gas-related supply shocks. As a result, exporters would lose competitiveness but Belarusian citizens would not profit from the improvement in the terms of trade.8 In addition, these supply shocks could undermine the credibility of the crawling peg arrangement envisaged during the run-up to monetary union.

9. The literature on optimal currency areas also emphasizes that factor mobility should be a key determinant in the decision to adopt a single currency. In the case of the Belarus-Russia monetary union this would require, for example, flexible labor markets. While labor markets both in Russia and Belarus reflect the legacy of state ownership and lifetime employment, developments in both countries have diverged over the past ten years.9 Russia has moved forward with the rationalization of labor markets (for example, by bringing hidden unemployment into the open during the privatization process), while the Belarusian economy continues to be dominated by public employment and state ownership. In effect, functioning labor markets are largely absent in Belarus. As Figure 2 shows, in Belarus changes in output have almost no impact on unemployment. This contrasts with Russia, where changes in demand have been associated with substantial changes in unemployment.

Figure 2a.
Figure 2a.

Belarus: GDP growth and unemployment, 1993-2000 1/

Citation: IMF Staff Country Reports 2002, 022; 10.5089/9781451805062.002.A005

Figure 2b.
Figure 2b.

Russia: GDP growth and unemployment, 1993-2000

Citation: IMF Staff Country Reports 2002, 022; 10.5089/9781451805062.002.A005

1/ Each data point represents one year in the 1993-2000 period.

Seigniorage

10. A major disadvantage for any country in giving up its currency is the loss of seigniorage. According to the current legal framework for the Belarus-Russia monetary union, no provisions for the sharing of seigniorage have been made. With the planned adoption of the Russian ruble in 2005 and a single emission center located in Russia, Belarus would forego the seigniorage. The net present value of this loss would depend ultimately on future average inflation and discount rate in Belarus, but could be significant.10

Monetary policy implementation

11. The monetary policy of the Union is likely to be driven by Russia rather than by Belarus; especially if Russia issues the common currency, but also due to the relative size of the two countries. The implication is that interest rates and monetary targets would be determined by Russia. This could lead to volatility of money supply in Belarus, especially given the likelihood of asymmetric shocks, as elaborated above.

Financial intermediation and financial market integration

12. The high level of taxation and government spending in Belarus demonstrate that the government continues to be heavily involved in the allocation of resources. Furthermore, the ownership of banks by the government (either fully or partially), the virtual absence of foreign banks, and the “hands-on” relationship between the government and bank management imply that market-based resource allocation is still very limited. Financial intermediation through the banking system is very low—total bank assets amounted to less than 30 percent of GDP in 2000. The past tendencies by the authorities to encourage and, in the case of some sectors like agriculture, to direct credits to nonprofitable industries, have contributed to a large share of nonperforming loans and a weakening of banks’ financial position.

13. The envisaged move toward a monetary union is likely to affect the banking system in a number of ways. The authorities’ current intermediate exchange rate system before the introduction of the common currency, i.e., the crawling peg, is likely to put too much emphasis on monetary policy. Without supporting fiscal policy and an acceleration of structural reforms, there is likely to be a bias toward monetary policy tightness in order to maintain the credibility of exchange rate policy. This reliance on tight monetary policy would tend to put pressure on banks, contributing to a further weakening of the sector and, potentially, to a liquidity crisis. To minimize this problem, an effort to restructure the sector would need to be made during the transition period.

14. Once the common currency has been adopted, the ability of the National Bank of Belarus (NBB) to provide liquidity support to the banking system would be reduced, since any future participation in the decision-making process of the joint central bank would be subject to Russia’s interests as well. However, the introduction of a common currency could increase competition among Belarusian banks. The use of a single currency would reduce information costs and reveal more clearly existing inefficiencies in the banking system by allowing savers and borrowers to compare lending and deposits rates with those offered by Russian banks. While this would increase the ability of Belarusian enterprises and banks to borrow funds in Russia and therefore alleviate the shortage of funds for viable Belarusian enterprises, it could contribute to a further weakening of the Belarusian banking system.

15. Under these circumstances, a well-functioning capital market could act as a safety valve and as an alternative means, especially for the private sector, to raise funds. For the time being, however, the market for bonds is extremely underdeveloped. Currently, the government is the only issuer of securities, which are limited mostly to short-term instruments, i.e., GKOs with a maturity of up to one year. Moreover, a corporate debt market does not exist, since under current legislation only open, joint-stock companies are allowed to trade at the Belarusian Currency and Stock Exchange (BCSE). Given that most large enterprises are still publicly-owned and not incorporated, the debt market will only develop once enterprises are privatized. The same applies to the equities market—there are currently no actively traded companies listed on the BCSE.

16. The introduction of a common currency is likely to have a positive impact on the development of capital markets in Belarus. It would also facilitate borrowing in international capital markets. The development of bond and equity markets between the two countries would help establish capital markets in Belarus and contribute to its integration with Russia. Private enterprises and the Belarusian government would be able to obtain resources at lower cost. This in turn would foster growth and allow the government to lower the level of taxation. After the introduction of a unified currency and elimination of exchange rate risk, securities issued by both the public and the private sectors in Russia and Belarus would become closer substitutes. The potential for a rapid integration of these markets is rather large, given their historical links and the lack of language barriers. Of course, the harmonization of accounting standards, shareholder’s rights and the respective corporate tax systems would be required for the corporate bond and equity market in Belarus to fully take advantage of the lack of exchange rate risk and for investors to be indifferent between investing in Russia and Belarus.

C. Credibility Problems During the Transition

17. According to the current framework and timetable, Belarus would move toward a monetary union by first pursuing a crawling peg. Therefore, during the transition period Russia and Belarus would be faced with an incomplete union. To some degree, this transition period is similar to the European Exchange Rate Mechanism (ERM) in the run-up to the Economic and Monetary Union (EMU).13 The recent experience with soft pegs and the ERM suggests that a relatively flexible system should be pursued, focusing on the adoption of policies that lead to convergence in macroeconomic aggregates, institutions, and factor markets. The greater the convergence in these areas, the smoother the transition to a monetary union.

18. Credibility problems may arise during the transition period. While the government has announced a crawling peg system, market participants may question whether the authorities will be willing or able to implement the financial policies and structural reforms needed to make the peg viable. If the potential political cost of a devaluation is perceived to be less than the political cost of pursuing tight policies, market participants would have an incentive to speculate against the currency, with an adverse impact on inflation, economic growth, and employment.

D. The Question of the Anchor

19. The choice of an optimal anchor in Belarus is complicated by a number of factors. As noted earlier, Belarus’s natural trading partner is Russia, for geographical and historical reasons. This is reflected in the large share of trade with Russia—65 percent of imports and 51 percent of exports in 2000. Since Belarus is a very open economy (the ratio of exports and imports was as high as 125 percent of GDP during the same year), trade with Russia is crucial for economic performance. At the same time, however, Belarus shares a border with Poland and Lithuania, which are in the process of joining the European Union. The geographical closeness to the European Union could imply more trade opportunities with Central and Western Europe in the future and therefore an increased role for the euro. More importantly in the short run, however, is the fact that market participants in Belarus focus on the Rb1/$ exchange rate rather than the Rbl/Rub rate. As a result of high and variable inflation rates over the past ten years, the dollar is widely used as a store of value. A large share of financial assets is held in dollars—at the end of September 2001, 68 percent of all banking deposits were denominated in foreign exchange (mostly in dollars). Despite the large share of trade with Russia, an estimated 50 percent of all import transactions are valued in dollars rather than in Russian rubles. In addition, barter trade continues to play a major role in transactions with Russia.

20. The downside risks of prematurely pegging the Belarusian currency to the Russian ruble in such an environment are high. The announcement of a peg vis-à-vis the Russian ruble would not fully be credible as long as the dollar continues to be the key exchange rate in Belarus. In case of substantial movements of the Russian ruble vis-à-vis the dollar—for example, as a result of changes in international energy prices—the Belarusian authorities would face a dilemma. To keep exchange rate stability, they might be forced to maintain a peg vis-à-vis the dollar rather than to the Russian ruble. However, by doing so the crawling peg system could lose credibility, which in turn would jeopardize the government’s objective to move toward a monetary union with Russia. The dilemma could be resolved by using a monetary anchor during the transition period in order to gain and maintain macroeconomic stability, instead of relying on an exchange rate anchor. As inflation declines and macroeconomic stability takes hold, the role of the dollar would diminish and the economy would experience re-monetization. At the same time, structural reforms leading to improvements in competitiveness would have started to show results. Pegging the Belarusian rubel to the Russian currency at that stage would be credible.

E. Summary

21. Belarus is currently confronted with the double challenge of stabilizing its economy and creating an environment that would foster sustainable long-term economic growth. In this context, questions related to the benefits and costs of creating a monetary union, which currency to adopt, and what path the country should embark on to get there, become relevant. While the ultimate decision to join Russia in a monetary union is also driven by geo-political considerations—as was the case in the establishment of a monetary union in Europe—it is important to analyze both the benefits and costs of such an arrangement in order to encourage reforms. Even if the monetary union objective is taken as a given, it is important to determine the best way to get there.

22. Regarding benefits, the potential boost of income and trade for Belarus is likely to be substantially less than suggested by the recent literature on currency unions because the two countries already enjoy longstanding trade relations. Benefits are likely to arise from the reduction in barter trade and the elimination of exchange rate risk—which should reduce the cost of borrowing and encourage the development of capital markets in Belarus. This in turn would contribute to a better allocation of resources and increased opportunities to tap into Russia’s capital markets. On the negative side, the biggest challenges originate from the marked differences in economic structure in the two countries. While convergence in the institutional framework could minimize the impact of demand shocks, Russia’s strong reliance on oil and gas exports and the price volatility in such markets would make Belarus extremely vulnerable to exogenous supply shocks. Such policy challenges could be reduced through structural reforms in Belarus, notably efforts to reduce state ownership and improve labor market flexibility. In addition, in principle adverse implications for Belarus could be minimized if the union were to allow for fiscal transfers. However, the current framework does not envisage such arrangements.

23. If Belarus and Russia pursue their plans to adopt a monetary union, EMU experience would suggest that Belarus should avoid pegging its currency prematurely to the Russian ruble and instead focus on the convergence of macroeconomic indicators. That is, during the transition period, Belarus should allow for a rather flexible exchange rate in form of either a free float or a peg with sufficiently wide bands around the central parity. Flexibility during the transition period is even more warranted in view of the fact that for the time being market participants continue to focus on the Rb1/$ rather than the Rb1/Rub exchange rate. A peg vis-à-vis the Russian ruble could therefore create a policy dilemma and undermine the credibility of the economic policy.

References

  • DeGrauwe, Paul. 2000. Economics of Monetary Union. Oxford (University Press).

  • Frankel, Jeffrey and Andrew Rose. 2000. Estimating the Effects of Currency Unions on Trade and Output. NBER Working Paper 7857. Cambridge, MA.

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  • Kallaur, P. V. 2001. Monetary Union of Belarus and Russia: Economic Prerequisites and Consequences. (Ph.D. Dissertation).

  • Mundell, R. 1961. The Theory of Optimum Currency Areas. American Economic Review 51. 4: 657665.

APPENDIX I: Status of the Tax System1

As of July 1, 2001

A. Individual Income Tax

1. Taxable income includes cash income in domestic and foreign currencies and in-kind income earned in Belarus and abroad. There are several types of income which are not taxed, such as the following: (i) certain gifts (material incentives) received from an enterprise in an amount of 30 monthly minimum wages (MMW) per year; (ii) free or discounted health resort treatment, and other support of social protection nature; (iii) all forms of social benefits (pensions, benefits under state social insurance and state social welfare (except temporary disability benefits), benefits paid by the state to citizens who suffered from the Chernobyl accident, and scholarships for students; (iv) proceeds from the sale of private property (once every five years for real estate and once a year for vehicles); (v) income from sale of products from private plots; (vi) interest and gains on deposits with banking institutions and on government securities; (vii) income received by inheritance and income received as a result of a gift from close relatives, regardless of the amount; and (viii) income received as a result of a gift from other individuals whose permanent residence is located on the territory of Belarus, up to two hundred times the MMW per gift, but not to exceed five hundred times MMW in a year.

2. The income tax on physical persons is collected on a progressive rate scale. Tax rates are differentiated depending on taxable income expressed. The rate scale below became effective on January 1, 1999. Dividends and similar income, if earned, are taxed at a rate of 15 percent.

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3. Members of kolkhozes (or of agricultural entities with a collective form of ownership formed out of former kolkhozes) pay income tax on the basis of the same procedure as all other tax payers.

4. Deductions for children and dependents are:

  • 2 MMW per child up to age of 18 and for each dependent.

5. Deductions amounting to 10 MMW per month (120 MMW per year) are allowed for the following taxpayers:

  • persons who fell ill and suffered radiation sickness from the consequences of the Chernobyl disaster, and persons who participated in disaster recovery efforts;

  • veterans of various wars; and

  • categories I and II of disabled persons with all types of disability.

B. Tax on Income and Profit

6. The income and profit tax is levied on legal entities, including enterprises with foreign investments, foreign legal entities, subsidiaries, representative offices, branch offices, and other structural subdivisions possessing an independent (separate) balance sheet and a settlement (current) account, as well as parties to a joint operating agreement, who have been assigned responsibility for overall management of these operations.

7. The income tax is paid on dividends and income treated as dividends under the law; the tax rate is 15 percent.

8. The profit tax is paid on balance-sheet profit. Balance-sheet profit is defined as the total profit from sale of products, goods (work, services) and other assets (including fixed assets, commodity stocks, intangibles, and securities) and income from operations unrelated to sales, less the expenses of these operations. Profit from the sale of products and goods (work, services) is defined as the difference between total receipts and the costs of business and commercial activity. The tax rate is 30 percent. Enterprises with balance-sheet profit for the year not exceeding 5,000 MMW and having an average annual number of employees, as listed below, are taxed at a reduced rate of 15 percent: in industry—up to 200 people; in science and scientific services—up 100 people; in construction and other productive sectors—up to 50 people; in nonproductive sectors—up to 25 people.

9. The profit of enterprises, scientific associations, and other organizations of the agro industrial complex received from production, technical, transportation, and scientific services, material and technical support, and repair and manufacture of equipment, as well as profit received from rendering these services to enterprises and organizations of the agroindustrial complex, is taxed at a rate of 10 percent. The profit of construction, repair-and-construction, and other organizations of the agroindustrial complex received from construction and repair of productive facilities of the agroindustrial complex is taxed at a rate of 7 percent.

10. Fixed amounts of profit tax may be set for enterprises conducting types of activity determined by the Council of Ministers. Such activities currently include retail sale of goods through small retail outlets, stores (on the condition that the total trading space of stores belonging to a single owner does not exceed 25 square meters), public catering enterprises, and at markets, fairs, and sales exhibitions.

11. Tax concessions with reduced rates are defined legislatively. They include: (i) profits used for disaster recovery at Chernobyl in accordance with the republican program; (ii) profits used for environmental and fire protection, scientific research, experimental design, and experimental engineering; and (iii) other uses of profits in selected enterprises and sectors, as defined by law.

12. Profit-tax exemptions are granted to six categories of enterprises including: (i) enterprises employing certain percentage of disabled workers and retiree-age workers in their workforces; (ii) enterprises with foreign investments in which the share of foreign investment is more than 30 percent of the authorized capital; and (iii) other exemptions, as specified by law.

C. Value-Added Tax

13. Effective from January 1, 2000, the value-added tax (VAT) is paid by legal entities, including enterprises with foreign investments and foreign legal entities, and subsidiaries, representative offices, and other independent subdivisions of legal entities possessing a separate balance sheet and a settlement account, participating parties in joint ventures, enterprises and physical persons that engage in transit of goods via the territory of Belarus in accordance with the customs regulations of Belarus, and individual entrepreneurs if their turnover of goods and services exceeds 3,000 MMW in the last accounting period.

14. As of January 1, 2000, in accordance with the Law on changes and additions to the value added tax (Law No. 324-3), the authorities implemented the invoice method of calculating the VAT. Taxpayers’ VAT liability (T) is calculated as the product between the tax base (B) and the tax rate (t). The tax liability is determined as the difference between the total tax liability and any tax credits calculated for a given tax period. If the latter exceeds the former, the tax payer is not obliged to pay VAT and the difference is carried over without penalty and deducted from tax liability in the next period or refunded to the taxpayer.

15. In accordance with current legislation, VAT is not levied on the following categories of goods and services: (i) goods and services used by foreign diplomatic missions and associated representative offices and for personal use of their diplomatic and administrative personnel and their immediate family members living in the same households. This exemption takes the form of a tax return to diplomatic missions and representative offices; (ii) receipts of certain authorized organizations performing certain services (customs, all forms of licensing, registration, patents, fee collected by government agencies, including local governments and other authorized agencies), payments for the use of natural resources, tax earmarked for the environmental protection fund, forestry tax, other payments to the budget, budgetary and extrabudgetary funds; (iii) property of enterprises in the form of deposits in the statutory fund in certain proportions; (iv) value added on primary sale of government securities; and (v) budgetary revenues from privatization and rentals of government enterprises.

16. Value added tax is levied at the following rates:

  • Zero (0) percent on exports of goods; labor and services of transit, loading, shipment and transshipment and other similar labor and services directly related to the sale of exported goods; exports of construction goods, transport services, and services arising in the production of raw materials; and goods and services directly related to the transit via the territory of Belarus.

  • Ten (10) percent on value added of enterprises and individual entrepreneurs in farming (excluding flowers and decorative plants), animal breeding (excluding fur animals), fishery and honey bee production; enterprises producing goods for children according to a list determined by the Council of Ministers; producing enterprises using new and high technologies according to a list determined by the Ministry of Finance; household services; and imports of consumer goods for children according to a list determined by the Council of Ministers.

  • Twenty (20) percent on other goods and services not listed above. In addition, the law determined the rates of 9.09 and 16.67 percent, respectively, which are levied on goods and services subject to regulated prices (tariffs).

17. A number of goods and services are exempted, including medicine, medical equipment, tools and machines, medical and veterinary services (excluding cosmetic services), services for sick, handicapped and elderly, services for pre-school childcare, child education in local, music, and sport schools and facilities, education services, culture and arts services, financial and insurance services, communication and media services etc.

18. In accordance with current legislation, the VAT is levied on the basis of the destination principle in foreign trade relations with the following Commonwealth of Independent States (CIS): Ukraine, Kazakhstan, Moldova, Kyrgyz Republic, Tajikistan, Uzbekistan, Armenia, and Azerbaijan and in trade with non-CIS countries. That is, the VAT is collected when goods are imported from CIS countries, while goods exported to CIS countries (except Russia, Turkmenistan, and Georgia) are not taxed. Belarus maintains country-of-origin principle with Russia, Turkmenistan and Georgia.

19. According to the Resolution No. 842 of the Council of Ministers of June 6, 2001 “On some particulars of payment to the budget of the value added tax,” the VAT is calculated by the taxpayer, and paid to the budget on due dates depending on the amount of the tax: (i) every five days when the amount of the tax for the preceding month was over 5,000 MMW; and (ii) every 10 days when the amount of the tax for the preceding month was from 3,000 to 5,000 MMW.

D. Excises

20. A new version of the Law of Belarus ‘On Excises’ went into effect on January 1, 1998, in an effort to harmonize the legislations of Belarus and Russia.

21. According to the law, uniform excise rates are effective throughout all of Belarus both for goods produced by payers of excises and for goods carried into the customs territory of Belarus and (or) sold in the customs territory of Belarus by payers of excises.

22. Excise rates on goods are established as an absolute amount per physical unit of measurement of excisable goods (firm, or specific, rates) or as percentages of the value of goods (ad valorem rates). Excise rates are set by the Council of Ministers in coordination with the President.

23. To permit unification of legislation of Belarus and Russia, excises on goods carried in from CIS countries are offset. Thus the amount of excises payable on excisable goods originating and carried in from CIS states is decreased by the amount of excises actually paid in the country of their origin. This provision is applied on the conditions of reciprocity by a procedure determined by the Council of Ministers.

24. The list of excisable goods may be redefined by the National Assembly at the request of the President.

25. As of June 2001, excise rates apply according to the schedule in the table below:

Table 1.

Belarus: Excise Rates (as of June 2001) 1/

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Except for wine materials and cognac spirits.

Except for spirit-containing solutions with ethyl spirits share up to 12 percent.

Mini-buses include vehicles for carrying not more than 17 people (including a driver), as well as trucks with capacity of no more than 1.25 tons, including those re-equipped from mini-buses.

E. Import Duties

26. In accordance with the Agreement on the Customs Union, customs borders were abolished between Belarus and Russia, and customs rates were changed so as to be similar. Import duty rates were revised in December 1997 and May 1998. Customs duty rates effective in Belarus and Russia are now almost completely the same.

27. Import duty rates set by government Resolution No. 72 of February 10, 1997 (revised and amended) apply to countries that have been granted most-favored-nation treatment by Belarus. Articles entering from and originating in developing countries enjoying preferential treatment are subject to import duties amounting to 75 percent of those set by the Resolution (for 104 countries), while articles entering from and originating in least developed countries enjoying preferential treatment by Belarus are not subject to customs duties (for 47 least developed countries). For articles originating in all other countries, or articles for which the country of origin is not established, the customs duty rates are doubled.

28. When articles entering Belarus under the conditions of free circulation are declared, import duties are paid before or at the moment of customs clearance of such articles.

F. Real Estate Tax6

29. Real estate tax is paid by legal entities, including enterprises with foreign investments and foreign legal entities, as well as the subsidiaries, representative offices, and other structural subdivisions of legal entities possessing an independent (separate) balance sheet and a settlement (current) account, and also by participants in joint ventures that generated gross revenues from such activities, and by individuals. The tax levied on the value of productive and nonproductive fixed assets owned or possessed by the taxpayers, on the value of unfinished construction projects, and on the value of buildings belonging to individuals. The annual real estate tax rate is set at 1 percent for legal entities. The annual real estate tax applied to the value of residential buildings, garden sheds, and garages belonging to individuals, of buildings belonging to garage construction cooperatives and gardening partnerships established with private contributions from citizens, and of buildings used by unincorporated by entrepreneurs for their own activities is set at 0.1 percent.

30. Tax exemptions are granted to 17 types of assets including social and cultural facilities, productive assets of organizations belonging to societies for the disabled, facilities used for environmental protection, privatized apartments in apartment houses, dwellings and buildings belonging to old-age pensioners and certain categories of disabled persons etc.

31. Since January 1, 1997, the real estate tax has been transferred in its entirety to budgets of the oblasts and the city of Minsk. Local Soviets of deputies have the right to grant concessions, and to set and change the due dates for the payment.

G. Land Tax

32. The tax is levied on land plots, possessed, used, or owned. The tax is paid by legal entities and individuals (including foreign ones) to whom land plots are granted for possession, use, or ownership.

33. The amount of land tax is determined depending on the quality and location of the land plot, and it does not depend on the results of the business or other activity of the landholder, the land user, or the landowner. The tax on land zoned for agricultural use is determined from data of the land cadastre. The tax is established in the form of annual fixed payments per hectare of land area.

34. Certain categories of citizens are exempt (including war veterans, old-age pensioners, disabled persons, and citizens who suffered from the disaster at the Chernobyl Nuclear power station).

35. Pursuant to articles 8 Law of Belarus “On the Budget of the Republic of Belarus for 2001,” in 2001, land charges are credited in their entirety to the budgets of the oblasts and the city of Minsk.

36. In 2001, in accordance with Article 8 Law of Belarus “On the Budget of the Republic of Belarus for 2001,” local governments have the right to increase (decrease) rates, grant concessions, and set and change the land tax payment due dates.

37. Land tax on plots of land for temporary use, plots of land not returned on time, and illegally occupied land, as well as land plots exceeding the space norms established and in effect since January 2001 is levied at the rate 10 times higher than the standard rate.

H. Tax on the Use of Natural Resources

38. The tax is paid by legal entities, including enterprises with foreign investments and foreign legal entities, their subsidiaries, representative offices, and other structural subdivisions of entities with separate (individual) balance sheet and settlement (current) account, partners in a joint-venture agreement who are authorized to conduct joint business or who received a gain from said venture prior to its allocation, and individual entrepreneurs.

39. The tax on natural resources is levied on: (i) the volume of resources extracted from the environment; (ii) the volume of refined oil and petroleum products; and (iii) the volume of discharges (releases) of pollutants into the environment.

40. The tax consists of payments for exploitation of natural resources and for discharges of pollutants into the environment within set limits, for excessive exploitation of natural resources and for discharges of pollutants into the environment beyond approved limits, and for refining of oil and petroleum products.

41. The rates of the tax on the extraction of natural resources and on discharge of pollutants into the environment are set by the Council of Ministers of Belarus. For the refinement of 1 ton of oil product, the tax is levied at the rate of 1 euro. A tax of 15 times the base rate is levied for discharges of pollutants into the environment above the established limits. A tax of 10 times the base rate is levied for exceeding the established volumes of the extraction of natural resources.

42. Legal entities funded by the budget of Belarus are tax exempt. The tax is collected at preferential rates: (i) for water released for the commercial, drinking, and fire-fighting water supply of the public, and employees of enterprises, institutions, and organizations; (ii) for a sand and gravel-sand mixture for use in road construction; and (iii) for water used by fish breeding facilities and reservoirs, released to legal entities and individuals for the production of livestock-breeding and agricultural production.

43. Since January 1, 1997, the tax on use of natural resources has been transferred in its entirety to the budgets of oblasts and the city of Minsk. Local Soviets of deputies have the right to increase (decrease) rates, grant concessions, and set and change payment due dates of this tax as established by the Law of Belarus “On the Tax for the Use of Natural Resources (the Ecological Tax).”

I. Contributions to Social Security

44. Contributions to the Social Protection Fund of the Ministry of Social Protection of Belarus are made by legal entities and individuals.

45. The following mandatory payments of social security contributions from the wage bill were established for employers and for cooperatives, enterprises, and companies under a collective form of ownership paying mandatory contributions on behalf of employees working under a labor contract:

  • for public associations of disabled persons and pensioners, and for enterprises holding full title to such public associations—4.7 percent; for residential, housing construction, and garage construction cooperatives not deriving income from their activity, and from gardening partnerships—5 percent;

  • for the bar association—5 percent;

  • for employers for whom disabled persons account for not less than 50 percent of the average listed number of employees—20.4 percent;

  • for economic agents engaging predominantly in agricultural production—30 percent; and

  • for all other employers (including with foreign investments and for citizens of Belarus)—35 percent.

46. Mandatory contributions are set in the following amounts for individuals and legal entities:

  • for entrepreneurs—15 percent of income;

  • for members of peasant (owner-operated) farms—15 percent of income;

  • for creative workers—15 percent of income;

  • for enterprises with foreign investments (for foreign citizens)—5 percent of the wages of foreign citizens; and

  • an insurance premium amounting to 1 percent of earnings is set for working citizens.

J. Payroll Contributions to the Chernobyl Fund

47. The emergency tax for recovery from the Chernobyl accident has been collected since 1991. The tax is of a temporary nature and is established by laws of Belarus on the budget for each calendar year. Since 1992, the base for the tax has been the payroll fund. In the Law on the Budget of Belarus for 2001, the emergency tax and mandatory contributions to the Employment fund were unified into a single tax at the rate of 5 percent of the wage bills with a single schedule of exemptions.

48. The taxpayers of the emergency tax are all legal entities, including foreign ones, their subsidiaries, representative offices, branch offices, and other structural subdivisions possessing a separate (individual) balance sheet and settlement (current) and other accounts, and partners in joint ventures agreements who are authorized to conduct joint business or who received a gain from said venture prior to its allocation, regardless of form of ownership, carrying out business activity.

49. Eight categories of enterprises and organizations are fully exempt (and three groups of organizations are partially exempt) from the payment of the emergency tax and mandatory contributions to the State Employment Fund. These include enterprises and organizations of certain categories of disabled citizens, collective farms, state farms, peasant (owner-operated) farms, interfarm enterprises and organizations, agricultural cooperatives, general-education schools, social and cultural enterprises and institutions, etc.

K. The Road Fund

50. The following are earmarked for the road fund:

  • the tax on the acquisition of motor vehicles, which are subject to mandatory registration;

  • user fees for motor highways;

  • deductions from profits from the operation of motor vehicles;

  • travel charges for heavy and oversized transportation vehicles on public-use highways;

  • tolls collected on the M1/E30 highway Brest—Minsk—border of the Russian Federation; and

  • unrequited capital receipts.

51. In accordance with the Article 23 of the Law on the Budget of Belarus for 2001, legal entities and their affiliations and subdivisions that have separate balance sheets, current accounts or an account abroad, participants in joint ventures that realized gross revenues from their operations are obliged to pay a single tax for the agricultural support fund and the road fund at the rate of 2 percent of sales of goods, labor and services (in the case of banks, non-bank financial organizations, excluding the National Bank of Belarus, this tax is on income net of expenditures on interests and fees and other banking expenses; in the case of trading, catering and service companies, the tax is paid on gross income, while insurance and reinsurance companies pay this tax on balance sheet profits). Each of the two funds receives 50 percent of collected revenues from this single tax.

52. Fees on income from operating motor transportation are paid by motor transportation enterprises and organizations regardless of form of ownership and business conditions, and by enterprises and organizations (except agricultural enterprises) possessing automotive departments and lease motor vehicles, in an amount of 2 percent of income from operating motor vehicle transportation.

53. The fee on owners of light motor transportation resources and private owners of trucks was introduced in 1997 in accordance with the law “On the Budget of Belarus for 1997 and for 1998 in accordance with the Law on the Budget of Belarus for 1998.”

L. Fund for the Support of Agricultural Producers

54. The Republican Extrabudgetary Fund for Support of Agricultural and Food Producers has been in operation since 1995. Since 1998, the fund has been a state earmarked budgetary fund. The income of the fund is formed by deductions made by all legal entities of Belarus and their structural subdivisions, regardless of the form of ownership, that have distinct (separate) balance sheets, settlement (current) accounts and other accounts, and certain parties to joint venture contracts in the amount of one percent of the proceeds from sales of products, work, and services. Budgetary appropriations for the payment of subsidies and price differentials are not taken into account when the amount of deductions to the above fund is determined. As mentioned above in the section on the road fund, the 2001 Law on the budget merged taxes for the road fund and the agricultural support fund into a single tax at the rate of 2 percent.

55. Several groups of organizations are exempt from paying the single tax earmarked for the road fund and agricultural support fund. These include budgetary organizations, housing organizations, and enterprises engaging in construction, repairs, and maintenance of public-use highways.

M. Earmarked Budgetary Funds of Local Governments Used to Fund the Expenses of Maintaining Departmental Housing

56. On January 1, 1998, earmarked budgetary funds were created by local Soviets of peoples’ deputies to fund the expenses of maintaining public housing. As of January 1, 2001, according to the Law on the budget (Article 11), the tax earmarked for this purpose was unified with fees for earmarked budgetary funds of local governments for the stabilization of agricultural production, as well as the fees for the maintenance and repair of the housing fund. The unified tax was levied on all legal entities of Belarus and their structural subdivisions, regardless of forms of ownership, possessing an independent (separate) balance sheet and a settlement (current) account, and engaging in business. The tax was levied at the single rate of 2.5 percent of the sale of products, work, and services.

57. Collections from this fund are distributed as follows:

  • 40 percent to the earmarked local funds for the stabilization of agricultural production;

  • 20 percent to the earmarked local housing-investment funds; and

  • 20 percent earmarked fee for maintenance and repair of public housing.

58. Exemptions and preferences on this tax are analogous to the aforementioned single tax earmarked for Republican budget funds—the road fund and the agricultural support fund—levied at the rate of 2 percent on sales of goods, labor and services.

59. In accordance with the Decree No. 19 of the President of the Republic from July 19 to December 31, 2001, foreign legal entities carrying our entrepreneurial activity on the territory of Belarus are also subject to the taxes earmarked for the republican road fund and agriculture support fund, and local earmarked tax for local housing investment funds, maintenance and repair of public housing and local funds for stabilization of agricultural production.

N. Other Funds

60. Enterprises also finance scientific research and industrial development by paying a tax on costs to branch ministries. This tax was fixed at 3 percent of the turnover by the Ministry of Industry.

Table 1.

Belarus: Gross Domestic Product by Sector, 1997-2001 (Q2) 1/

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

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

Table 2.

Belarus: Gross Domestic Product by Expenditure, 1997-2001 (Q2)

(At current prices)

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

Includes residential investment.

Provisional data, not fully consistent with recently revised balance of payments data (Table 43).

Table 3.

Belarus: Growth of Gross Domestic Product by Expenditure, 1997-2001 (Q2)

(At comparable prices) 1/

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

The use of comparable prices denotes the comparison of output of the current period with output for the previous period based on prices for the previous period.

Includes residential investment.

Provisional data, not fully consistent with recently revised balance of payments data (Table 43).

Table 4.

Belarus: Growth of Gross Domestic Product by Sector, 1995-2001 (Q2)

(At comparable prices) 1/

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

The use of comparable prices denotes the comparison of output of the current period with output for the previous period based on prices for the previous period.

Table 5.

Belarus: Capital Investment by Sector, 1995-2000 1/

(In comparable prices)

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

Some figures may be inconsistent with the national accounts tables, as the data are based on surveys of industrial projects by branches of the economy.

According to national accounts data.

Table 6.

Belarus: Industrial Production, 1996-2001 (Q2)

(Percentage change in comparable prices)

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

Compared to the same quarter of 2000.

Table 7.

Belarus: Inventories of Final Products in the Warehouses of Industrial Enterprises by Subsector, 1996-2001 (Q2) 1/2/

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

End-of-period stocks.

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

Table 8.

Belarus: Agricultural Production, 1995-2001 (Q2)

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

End-of-period stocks.

Table 9.

Belarus: Production and Consumption of Energy, 1995-2001 (Q2)

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Sources: Ministry of Statistics and Analysis; and Fund staff estimates.
Table 10.

Belarus: Change in Consumer and Producer Prices 1997-2001 (November)

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

The Consumer Price Index (CPI) uses weights from the previous year’s Household Expenditure Survey.

Industrial Production Price Index (IPPI) data are based on a corrected index formula (Laspeyres) using the weights derived from the structure of output of products by branches of industry in 1993.