Economic Developments

The Belarusian authorities appreciate the open and constructive discussions with the IMF team. Above all, this year marked a turning point in the discussions between the staff and the authorities on the magnitude and stability of economic growth in Belarus. The Fund’s Statistics missions have also contributed to achieving a professional convergence of views.

GDP growth of about 45 percent since 1999, 11 percent in 2004 and 8.9 percent in the first five months of 2005, confirm the ability of the Republic of Belarus to achieve high economic growth rates. At the same time, the 2004 budget has been balanced, inflation has been further reduced and the achievements in respect of social indicators have been remarkable.

In our previous buff statements, we have often pointed out that the actual growth outcomes in Belarus were 2–3 times higher than the staff projections. Due to these discrepancies, the authorities and the staff could not agree on the mix of policies to be pursued. Now, for the first time in the last ten years, in its note prepared at the request of the authorities, the staff has made an important attempt to study growth in Belarus.

The authorities are grateful for the analysis of growth factors made by the staff during the Article IV consultation mission. The staff’ s note “The Belarus Growth Process and the Growth Puzzle” was discussed at a seminar in the National Bank of the Republic of Belarus with broad public and government participation. This note has made possible a better understanding of the growth projection issues. Similar exercises in the future would be definitely welcome.

The Belarusian authorities agree broadly with the staff analysis. In the Selected Issues Paper, the staff has incorporated the feedback from the seminar and recognizes that external factors by themselves could not have generated the present level of supply response in the absence of strong internal factors, such as Belarus’ ability to restructure and increase the competitiveness of its industrial sector, its excellent human capital, improved management of monetary and fiscal policies, as well as export promotion activities.

Belarus has among the highest internal saving and investment rates in the region. In 2004, domestic investment was above 20 percent of GDP, about US 4.7 billion. The volume of investment grew further by almost 22 percent during January-April this year. As in the case of other non-oil exporting countries of the CIS region, FDI is still small. In Belarus, reinvestment of enterprise profits constitutes more than half of total investment, the rest, being financed mostly by local bank credit and state and local budget allocations. Net corporate profits, which grew by more than 60 percent last year, were the main source of finance for domestic investment.

The above was possible because of the improvement in the performance of the real sector in 2004. This was seen particularly in the growth of enterprise profitability to the present level of 17 percent in industry and almost 8 percent in agriculture; in the reduction of enterprise inventories from 59 percent of monthly production on January 1, 2004 to 54 percent as of January 1, 2005, the lowest level in the last four years; in the reduction of the level of inter-enterprise and bank arrears; and in the reduction of the share of loss-making enterprises from about 34 percent to 21 percent.

Improvements in macroeconomic policies facilitated further export expansion, from US$ 6.6 billion in 2000 to almost US$ 14 billion in 2004, with the share of non-CIS countries increasing steadily to the present level of 50 percent. This reflected the improved competitiveness of Belarusian export industries in international markets from a historically very low level. The 38 percent growth of exports in 2004, and an additional 29 percent growth in the first quarter of 2005, were the main cause of rapid GDP growth in Belarus in recent years. The country now leads the CIS region in economic openness and in the share of manufacturing in total exports. It is also among the top ten most open economies in Europe.

From a negative balance in 2004, the current account became positive in the first quarter of 2005. Other important external indicators, such as official reserves, foreign debt, and external arrears also improved.

According to the Staff Report, wage growth which substantially outpaced the growth of labor productivity in 2004, was another important factor stimulating demand and GDP growth. From an economic point of view, the ratio between the growth of wages and the increase in labor productivity seems unsustainable. The authorities are aware of the challenge this poses for restoring labor remuneration to a socially acceptable level which had been lost during previous period of high inflation. The large share of manufacturing in the Belarusian export product mix makes it necessary to maintain wage competitiveness with countries in the region. Nevertheless, the growing profitability in both industry and agriculture suggests that Belarus can afford some wage growth. In this context, the staff rightly points out that the rapid wage growth had limited consequences on measured competitiveness since key trading partners have experienced similar increases. The staff is also right that, if wage increases continue at the same rate, they would present substantial risks for Belarus. Therefore, in 2005 the government is refraining from the mandatory planning of wage growth in the state sector and is setting only indicative targets.

The staff assesses Russia’s forthcoming WTO accession as another negative factor impacting growth in Belarus. On the other hand, the analytical report prepared by the Belarus Institute of Economics of the National Academy of Science has concluded that this accession will not have any substantial negative consequences for Belarus’ trade with Russia.

Monetary and exchange policies

One of the main factors contributing to the growing competitiveness of Belarus in external markets is the exchange rate stability which has resulted from the continuation of the crawling band exchange rate regime. Coupled with declining inflation from a triple digit level in 2000 to 14.4 percent in 2004 and robust GDP growth, exchange rate stability has contributed to a significant improvement in the demand for rubels. In 2005, the demand for money has continued to grow faster than its supply, resulting in a further slowing down of inflation, which averaged 0.8 percent per month in January-April 2005. The share of local currency in total money circulation increased in 2004 from 56 percent to 61 percent, reflecting a healthy further decline in the dollarization of the economy.

The authorities have taken very seriously the recommendation made by Executive Directors in the last Board meeting, that a cautious approach be followed in entering into a currency union with Russia before closer macroeconomic convergence is achieved. Given the continued differences in the macroeconomic framework of the two countries, particularly in the taxation area, the authorities do not at present consider the previously targeted date of January 1, 2006 as being feasible for the introduction of the union.

The resource base of Belarus’ banking system rose by six times over the last four years. It strengthened further by 45 percent in 2004, mostly because of the 74 percent increase in local currency deposits of the population, which can be explained by the attractive interest rates in the environment of low inflation and expectations of real appreciation of the domestic currency. The trade surplus achieved in the first quarter of 2005 and the continuing weakening of the dollar allowed the National Bank to purchase the increased hard currency supply which resulted in almost a tripling of the level of net foreign assets since 2003 to the present level of more than US$ 1 billion. This in turn, caused an additional flow of domestic currency resources into the banking system.

As of January 1, 2005 Belarus had 32 banks. Of these, 27 had foreign capital participation and 8 were fully foreign owned. Almost all parameters regarding financial soundness of the banking sector, including capital adequacy, asset quality, liquidity, and foreign exchange risk have improved quite substantially during the last five years.

At the same time, the authorities are aware that the banking system is underdeveloped and needs major improvement. They believe that the 2004 FSAP missions will contribute positively to the design of the financial sector reform program. The authorities had voluntarily requested the IMF’s safeguards assessment in 2004 and are now implementing its recommendations.

Fiscal policies

The balanced consolidated budget of last year and the 7.1 percent surplus in January-March this year, confirm that Belarus has continued its record of fiscal discipline. Revenue collection in 2004 was good and the level of government obligations to the National Bank and commercial banks was reduced. The previous practice of National Bank financing of the budget deficit has been completely abandoned. The 2005 budget envisages tax cuts of about 0.5 percent of GDP.

Revenues from the VAT tax, the profit tax and taxes on foreign trade have exceeded initial projections for the first quarter of 2005.

With the help of IMF technical assistance, the Belarusian authorities have made significant progress in bringing the regulatory and supervisory framework of the fiscal system towards international standards. In recent years, there has been a significant reduction in quasi-fiscal activities. The Government recognizes that a further reduction of these activities is needed and is actively working toward it. For example, the inclusion of the Pension Fund (Fund for Social Protection) and of sector innovation funds into the framework of the state budget represents an important step towards reducing the quasi-fiscal activities.

When looking at the issue of quasi fiscal activities, one must take into account the specific conditions of a transition economy like Belarus, with a comparatively deep involvement of the state in economic management. The system of recommended credits and subsidized interests (compensated through the state budget) is used as an instrument for achieving certain national economic policy objectives. The authorities prefer this system because by channeling resources through the banking system, they can make their final repayment more likely, instead of simply financing through the budget.

Besides cutting back recommended credits in order to help reduce quasi-fiscal activities, the staff also recommends scaling back the housing construction program through better targeting. While considering carefully this advice, the authorities would like to point out that the comparatively high level of state expenditure on housing, as well as on education and health care, and substantial annual budgetary allocations to overcome the consequences of the Chernobyl disaster, stem from the social orientation of Belarus’ economic strategy. This explains the relatively high level of concentration of financial resources in the state budget. The economic efficiency of such a policy could be questioned. However, this policy has yielded a fairly robust growth in the living standards in Belarus together with overall economic stability.

Structural policies

Because of its choice of a gradual approach to reforms, Belarus may be more centrally managed at this stage of transition, than some other transition countries. In this context, the staff’s classification of Belarus as a centrally managed economy is somewhat put in perspective by the recognition in the Selected Issues paper that “structural changes experienced by the Belarusian economy over the past decade have been substantial.” A quarter of the Belarus economy is already in private hands.

The classification of Belarus as a transition economy, just as other transition economies were classified from the beginning of their reform process, would seem more realistic and would drive home an important message both to the authorities and to the international community.

Regarding structural reforms, we would like to point out that the movement towards harmonization of structural measures in Belarus with those in Russia has been continuing. Some further steps were undertaken in 2004 to improve the business and investment climate in the country. As a result, the average number of licenses required to operate a business was reduced from three to two. The staff overstates the negative role of the golden share in the Belarus economy. The share is applied only in limited circumstances, including anti-competitive conduct on the part of a company, possible liquidation, failure to pay taxes, and failure to pay employee salaries for a period of at least six months.

The new Investment Code of Belarus, which came into effect from January 1, 2005 includes measures to encourage the inflow of foreign capital along with the cancellation of previously existing key preferences for companies with foreign capital and the unification of conditions for foreign and domestic investments. The Code was adopted as part of the work for the creation of an even playing field for all types of enterprises.

Bank privatization continues to be one of the most important of structural reforms in Belarus. In addition to eight fully-owned foreign banks, the third largest bank in Belarus, “Prior Bank”, has sold 61 percent of its capital to an Austrian bank. IFC has recently increased its investment in Belarusian banks and in the manufacturing sector.

The Government has continued its efforts to rationalize the social support system with more reliance on a targeted social protection. It is also important to note that GDP growth in Belarus was achieved without any substantial increase in consumption of energy. In fact, the energy intensity of the production decreased by 8 percent in 2004 and a further decrease of 10 percent is expected in 2005.

Fund Relations with Belarus

The authorities view the economic results of the past year as a demonstration of their improved macroeconomic policy performance. They believe that since Belarus has exceeded quite substantially the macroeconomic parameters and the living standards of before the beginning of the transition process, and has also demonstrated for a number of years an ability to maintain stable economic growth, it does not need financial assistance from the Fund.

As for the pace of reform, the authorities have many times stated that the reason behind the gradual transformation to a market economy, is to minimize any negative social consequences. Given specific circumstances in Belarus, gradualism has proved to be conducive to economic stability and maintaining high social standards. Belarus has had an excellent track record of implementing the recommendations of the IMF’s technical assistance missions. The authorities are grateful for the technical assistance which was provided pursuant to the recommendations of last year’s consultation. For example, because of the substantial improvements made in the calculation of the industrial production index, the accuracy of GDP estimates has increased quite substantially. The recommendations made in the framework of FSAP and other missions have also had a very positive impact. Belarus is looking forward to maintaining technical cooperation and policy discussions with the Fund.

The Belarusian authorities are firm in their intention to continue the policies of monetary and fiscal discipline, and liberalization of the economy, in order to improve the business climate. They believe that their cooperation with the Fund will contribute to strengthening further the foundations of economic growth and prosperity of their country.