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End-of-year economic reports rarely differ from those seen in the first three quarters; key trends are already apparent and the behavior of key economic subjects is predictable. Companies are completing their business plans and the government and local authorities continue within their existing task framework. As Belarus has almost fully reconstructed a planned economy, its end-of-year results can be calculated by looking at the first three quarters.
The quality of economic processes in 2006
The key economic trends in Belarus in 2006 were laid down in late 2005, when Russia extended its generous energy grant for another year – worth about 13% of GDP. The Kremlin’s decision (lobbied by official Minsk ) gave Belarus 12 more months of a rapidly expanding GDP while allowing real monetary incomes to be significantly raised. Additionally, the agricultural sector could be further subsidized and construction projects could be invested in. As a result, exports and investment projects grew.
The Government has failed to focus on the quality of key economic processes. No incentives have been given to calculate the profitability of investment projects or assess the efficiency of budgetary expenditures, let alone create a competitive field or carry out structural reform. In 2006, the Government continued to delude itself that a planned economy is more efficient than a market one. It still believes that the Ministry of Economy is better suited to select investment projects than company directors and that price liberalization, small business development and investment have little affect on social stability or sustainable development.
Belarus suffers from the ‘energy curse’: a huge energy grant effortlessly provides the Government with funds, obviating the need for reform. Although Belarus has no oil of its own, its economy is skewed by cheap energy imports. Throughout 2006, the Government conspicuously failed to make plans for a future that might include the absence of a lavish energy grant. Few voices of dissent were heard. State companies, shielded from foreign and domestic competition and enjoying cheap credit and guaranteed domestic sales, were content with the current policy. They continued to secure privileges yet were still unable to utilize their resources effectively; ‘minor’ problems such as high taxes, costly bureaucracy and unpredictable legislation are accepted as part and parcel of state patronage. Private businesses, particularly small firms, failed to loudly voice their grievances although the first-ever Small Business Development Program did come into being. It is a welcome development but the dialogue with the state never entered an active phase in 2006. The number of anti-business legal acts, violations of property rights, huge fines imposed by numerous control agencies as well as administrative barriers was as significant as ever. Entrepreneurial hopes for lowered taxation and administrative burdens have not materialized. Their share in the overall employment, in the GDP and the value added allowed civil servants to ignore the economic and political interests of the business community.
Stimulation of consumption
Over the first three quarters of 2006, the monetary and fiscal policies of the National Bank and the Council of Ministers inspired consumption growth in the real sector and individual households. The Government re-distributed tax receipts to try and bring higher added value. ‘Unlimited spending’ was their catchword.
In 2006, the National Bank steadily reduced the cost of borrowing. From January-August, ruble loan interest rates fell to 8.8% from 10.3% (compared to the previous year). The National Bank’s agenda failed to include a banking reform or the creation of genuine stock and financial markets due to a lack of political will. The National Bank poured its energy into boosting gold and currency reserves and accelerating the growth of the money supply (M2). From 1st September 2005 to 1st September 2006, the M2 increased by 57% - higher than the year before. Free prices in Belarus are only seen at outdoor markets so money had to be channeled somewhere; the options offered by the authorities can be counted on the fingers of one hand.
By tradition, people’s savings were deposited at state banks as salary increases awarded by the Government exceeded the pace of labor productivity growth.. As of 1st September 2006, 7.1 trillion Belarusian rubles had been deposited in savings accounts: an increase of 28.5% over the previous 12 months. The growth of deposits and money supply in the first three quarters of 2006 was higher than in 2005. From 2004-2006, inflation rates of 5% and annual returns of up to 25% were seen within transitional economies’ stock markets worldwide. However, the Belarusian Government claims that savings rates of 12% and similar inflation rates are the only reasonable way of investing money.
The authorities realize that the financial stability of the state and the unreformed public sector largely depends on the consumer price index. Limitations on price rises, state-imposed restrictions on profitability and costs and complex procedures for obtaining official permission for each price increase distort market forces and inflation. However, as property prices have reached their peak and the cost of energy is bound to increase in 2007, excessive money supply should result in high inflation. In 2006, the Government reinforced this trend by ignoring Russia ’s stand on future oil and gas deliveries.
A steep increase in individual households’ consumption reduced the savings rate from a traditional 17%-20% to just 4%-5%. The stimuli offered by the Government eroded Belarusian natural thrift and caution. The lion’s share of the population’s income was spent on consumption: from January-August, spending on goods and services amounted to 24.1 trillion Belarusian rubles or 49.5% of the GDP – a rise of 24.2% on the year before. This buying spree would have been impossible without an increase of 17.8% in the population’s real incomes in the first eight months of 2006. This is the highest growth rate in the past four years – perhaps unsurprising in a year of parliamentary and presidential elections. Logically, consumption should be subject to restraint in years to come. Most individual households are unfamiliar with debt. With salaries constantly indexed and the labor market being stagnant, debt servicing is much easier than in a situation where the national economy has to adapt to structural shifts.
Budget
In 2006 Belarus ’s monetary policy was constrained by the government’s fiscal policy. Promises of lower taxation and more transparent and efficient budgetary spending came to nothing once more. State agencies tried to find ways to reduce investment and current expenditure while devising new longer term projects for national and local budgets to be spent on (keeping the budgetary status quo).
From January-August, consolidated budget revenues stood at 48.7% of GDP while expenditure reached 46.2%. 2006 consolidated budget revenues were projected at 46.1% of GDP with expenditure at 47.6%. The 2007 draft budget - based on gas prices of $60-65 per 1,000 cubic meters – takes little account of new oil delivery terms; it envisages a fall in consolidated budget revenue to 44% of GDP and a spending cut to 45.9% of GDP. In absolute terms, expenditure is expected to reach 41.7 trillion rubles or about US$19.3 billion. These projections will be hard to meet.
In 2006, the Government was not only unable to put the country’s finances in order but it exceeded the maximum budget deficit. As a whole, the national budget deficit was 570 billion Belarusian rubles higher than that allowed for in law. Belarus ’ taxation system continues unsatisfactorily; the World Bank ranks Belarus bottom of a list of 175 nations. The number of taxes levied rose from 113 to 125 annually.
Investment boom
With a projected rise in capital investment of 13 – 14% a year, actual growth reached 31.9% in the first three quarters of 2006. Although spending on equipment rose by 46.8%, technological modernization is far from underway. In fact, this has merely enabled the existing manufacture of outdated goods to be expanded, deepening structural deformations.
Investment in the agricultural sector jumped by 57.7% while production fell by 0.8% per cent; despite subsidies in excess of US$1 billion annually, the sector’s finances are as precarious as ever. As of 1st September 2006, agricultural enterprises’ outstanding debt stood at 915.3 billion Belarusian rubles. This would be twice as high if their taxes, electricity and fertilizers were charged at market rates. Net profit reached just 683 billion Belarusian rubles from January-August 2006. All state efforts to attract investors into the agricultural sector have proved futile. Accordingly, foodstuffs are more expensive in Belarus than elsewhere worldwide. Each year, the average household spends more than $100-150 on food than should be necessary.
Construction has also been free of budgetary constraints while seeing a 47.8% increase in investment. This provides a litmus test for the Belarusian economic management system. The authorities appear to discriminate against private companies in favor of state-run firms yet the private companies, having long maintained comfortable relations with state organs, clinch the most lucrative contracts. In fact, the state agencies often act as customers and investors.
Housing prices have rocketed due to market mechanisms being blocked: new companies are denied access and complicated administrative procedures continue. The construction sector continues to absorb the new money supply provided by the National Bank and funds deposited by the population. Nevertheless, the level of investment in this sector, 19% of total investment volume, still lags behind that of the industrial sector - which attracted 28% of all capital investments in the third quarter. Some funds were spent on technical retooling while the rest was frozen in unsold stock. As of 1st October 2006, 2.49 billion Belarusian rubles of stock remained unsold - a 17% increase on the previous year. More than $1 billion in locked capital represents a grave investment blunder. Moreover, unfinished construction projects account for even more. As of 1st October 2006, these included more than 16,000 construction sites. Of these, 55.1% are behind schedule and 4,300 have been mothballed.
The analysis of individual investment projects reveals their striking similarity. A total of 1,1613 kilometers of electricity transmission lines were put into operation in the first three quarters of 2006 up from 985.8 kilometers the year before. 15 oil wells came on line with only 10 drilled in 2005. 158.5 kilometers of main gas pipelines were completed as compared to 81.4 kilometers the year before. 68.3 kilometers of roads were built up from 39.3 kilometers in 2005. The new production facilities included: sausage production of 3.500 tons a shift, cheese production 7,200 tons a shift, and confectionery of 900 kilograms a year. Facilities for 165,900 hens (263.6 in the previous year), 11,700 of cattle (8.800 in the year before) as well as vegetable and forage warehouses were constructed..
The same investment projects - albeit with different parameters - feature in the 2003 and 2004 reports; high tech projects are conspicuous by their absence. Few can believe that raising the number of hens and cattle will help Belarus become competitive internationally. Sadly, misguided agrarians had the final say in the determination of macro-economic parameters for 2006.
Private investment was either crowded out or obstructed in 2006. The business climate saw no significant change – especially when compared to its neighbors. No headway was made in improving the quality of state governance.
In terms of political stability and absence of violence, Belarus is indeed ahead of 44.8% of countries; it is hard to take heart from this achievement though. The Baltic states are much closer to the best international standards; regarding state governance, Belarus ranks 191st. Over the past 10 years, almost nothing has been done to improve matters. The average state governance indicator throughout the rest of the CIS is 2.5 times better than in Belarus. In terms of quality of state regulation, Belarus ranks 199th, ahead of only 6.4% of countries; its indicator is 4.4 times worse than the CIS average. Belarus lags significantly behind Russia and Ukraine; the quality of service rendered by civil servants in the Organization for Economic Cooperation and Development (OECD) remains a distant dream. The Belarusian state heavily taxes its citizens without providing them with the kind of services seen in Scandinavia. A non-competitive environment and the absence of public control over civil servants mar the Belarusian machinery of state.
In terms of rule of law, Belarus is near the bottom of the list, ranking 181st - ahead of only 15% of other countries. Russia and Kazakhstan have similar ratings. Most CIS countries are in a similar position so it could be concluded that Soviet ideology and culture have done little to encourage people to be law-abiding.
Belarus’ 172nd position in fighting corruption is equally unimpressive, putting it ahead of only 19.2% of countries. This is particularly disappointing considering the funds allocated to law enforcers and control agencies. In 2000, Belarus was ahead of 54.4% of countries in this respect bit it’s becoming increasingly clear that the state’s economic and political monopoly counteracts anti-corruption efforts. Belarus has fallen behind other CIS countries in this field, a trend confirmed by Transparency International’s decision to downgrade Belarus from 107th position in 2005 to 151st in 2006. This is one of the steepest falls on record.
Business environment parameters in Belarus in 2006 in comparison with neighboring countries and competitors (values in US$)
Comparing Belarus’ governance system with that of other countries
Anti-recessionary administration
In 2006, the Belarusian leadership failed to effectively coordinate state agencies’ efforts to prepare for the new business cycle. This task will be even harder in 2007 as state policy is still inconsistent and shortsighted. The developments seen in the first three quarters of 2006 convincingly demonstrate that Soviet-style planning is becoming a thing of the past, a trend apparently lost on the Council of Ministers.
It became increasingly apparent in 2006 that an old management style would be insufficient in 2007; the authorities will be forced to create an anti-recessionary administration system. Liberalization, structural reform and privatization will probably be pushed onto the agenda by external factors and the financial stance of the public sector and banks. However, another option may emerge: tougher administrative measures, further monopolization of the economy and import bans to cocoon the economy from negative trends. An increasingly urgent need to pursue reform can be regarded as the main outcome of 2006. Next year marks the start of a new economic cycle for Belarus.
Macroeconomic Indicator Dynamics
Three quarters of 2004, 2005 and 2006
Qualitative Economic Indicator Dynamics in Belarus
Three quarters of 2002, 2003, 2004, 2005 and 2006.
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