Belarus is gradually coming out of recession though its public sector reforms are too slow for some. This, combined with high dollarisation, could restrict its growth, writes Stefanie Linhardt.
After two years in recession, the Belarusian economy looks set to recover. But elevated external debt, high dollarisation and the sluggish reform of the large state-owned enterprise (SOE) sector could tarnish the positive outlook and contain growth, even though some progress has been made.
Heavily hit in 2015 and 2016, Belarus’s economy has grown by 1.6% in the first eight months of 2017 on year-on-year terms, according to official figures. Estimates by the International Monetary Fund (IMF) are more conservative, but forecasts for 2017 have been upgraded from a 0.8% contraction to a 0.74% increase in gross domestic product (GDP) at constant prices. This, however, will still keep Belarus’s GDP far behind 2014’s Rbs80.6bn at both current and constant prices (then $78.7bn).
Growth is expected to remain shy of 1% in the next two years and below 2% in 2020 and 2021, rising marginally above 2% only in 2022, according to IMF forecasts. At constant prices, the IMF’s 2017 GDP forecast is for Rbs76bn and it estimates that the economy will not surpass 2014’s level again until 2022.
Currency issue
Yet the picture is further muddied by the dynamics of Belarus’s currency. The exchange rate problem becomes evident when focusing on GDP at current prices in dollar terms: even by 2022 (the furthest projection the IMF calculates), GDP in dollar terms will not yet have caught up with 2014 levels.
In 2022, the IMF forecast for GDP at current prices equates to $64.4bn, estimated as Rbs156.3bn in local currency – showing up the large gap in the development between the Belarusian rouble and the US dollar.
“The economy has stabilised but for it to become more attractive as an investment destination, its growth potential requires unlocking by overhauling the state sector and adopting policies supportive of the private sector,” says Alexander Pivovarsky, country head for Belarus at the European Bank for Reconstruction and Development (EBRD).
“Belarus is a solidly middle-income country but has a way to go to enter the league of wealthy nations. It needs at least 4% to 5% growth for many years to catch up to EU standards,” he adds.
In the right direction
While Belarus still faces challenges from high dollarisation within the economy, a devaluation of the currency in July 2016 and a monetary targeting regime introduced by the National Bank of Belarus have reduced volatility.
Since July 2016, fluctuations in the exchange rate have varied from about $0.50 to $0.54 for one Belarusian rouble. Previously, between January 2012 and June 2016, 1000 roubles were worth between $0.46 and $1.25.
The monetary policy reforms, as Dmitry Kalechits, deputy chairman of the board at the National Bank of Belarus, points out, “are supported by the IMF”, and have also contributed to a significant reduction in inflation and the refinancing rate.
In the first eight months of 2017, consumer price growth reached 5.3%, compared with 10.6% in December 2016, he adds. “This is the lowest inflation value in the history of sovereign Belarus,” says Mr Kalechits. The reduction in inflation also saw interest rates declining from a refinancing rate of 18% at the beginning of the year to 11.5% in mid-September, he adds.
Over time, lower refinancing rates in local currency should entice both savers and lenders to bank in Belarusian rouble instead of the widely used US dollar (see article on the banking sector on page 40). Still, dollarisation – and its accompanying exposure to foreign exchange risk – is a problem for the whole economy.
Rising public debt
With a local currency capital market in its infancy, the Belarusian government mainly finances itself in foreign currency. Rating agency Standard & Poor’s says “more than 90% of government debt is denominated in foreign currency”, and this has contributed to an increase in the country’s debt burden by an average 6% of GDP in the past five years “primarily due to the depreciation of the local currency”.
Aware of these difficulties, president Alexander Lukashenko’s government has signed up to a local currency initiative with the EBRD aimed at developing local capital markets and has been tightening the country's fiscal policy. Mr Pivovarsky notes that the government is “aware” it is “already quite over-indebted” and is now “very careful when allocating fiscal space for public borrowing”.
“You can see that in many areas,” he says. “For example, directed lending programmes have declined from a peak of about 5% of GDP to some 0.5% of GDP, which is an enormous reduction. This reflects the consensus in the government that it would be unable to keep leveraging itself [as it has] in the past and providing favourable loans to the state enterprise sector.”
Yet despite these and other measures to tighten fiscal policy, general government debt increased from some 39.5% of GDP in 2014 to an estimated 58.8% in 2017, according to the IMF. The 2017 level, however, is forecast to be the peak indebtedness, with a reduction in subsequent years to some 44.8% of gross government debt to GDP in 2022.
Privatisation potential
Further fiscal consolidation would support growth, according to Tomasz Telma, director for Europe and central Asia at the International Finance Corporation (IFC), who points especially at the private sector and further SOE privatisation.
“As the country is trying to plan the fiscal needs for the future, greater admission that the private sector can take care of a lot of things has traditionally been missing in Belarus,” he says, adding that today, small and medium-sized enterprises only make up 23% of the country’s GDP. “There are a lot of things that can be done by bringing in the private sector rather than by just relying on a state budget to redistribute taxpayer profits,” adds Mr Telma.
But the topics of privatisation and accelerated structural reforms are especially sensitive ones within the administration.
The IMF, one of the Belarusian government’s sources of dollar funding, experienced some pushback in these areas lately, as negotiations between the fund and the Belarusian administration over a new IMF programme came to a halt earlier in 2017. The fund had required the government to accelerate the pace of structural reforms in the economy, especially by raising tariffs for communal services faster and by a larger amount than the administration was comfortable with.
“Even before the negotiation with the IMF about the programme, the president of Belarus made serious reforms to the pension system – he raised the retirement age [from January 2017 in increments over six years],” says Nikolai Snopkov, head of the presidential administration of Belarus. “This reform was more sensitive to the population than the reform relating to tariffs.”
Asked about the programme with Belarus during a press conference at the annual meeting of the IMF in Washington, DC, director of the IMF European department, Poul Thomsen, said: “We always stand ready to resume a discussion.” He added his impression was that “the more immediate pressures have eased”, likely pointing to the fact that Belarus has raised funds elsewhere in 2017 and might not require IMF financial assistance at this stage.
Funding secured
S&P estimates that even without an IMF support programme, Belarus “should” have secured sufficient resources to “allow the government to meet its debt repayments in 2018” – crucially $800m of Eurobond obligations due in January.
Already in March 2016, the Belarusian government signed a seven-tranche $2bn stabilisation credit programme with the Eurasian Fund for Stabilization and Development (EFSD). The tranches are supplied during 2016 and 2018, pending certain criteria, but some $800m has already been paid in both 2016 and 2017, leaving two tranches and a total of $400m outstanding.
Throughout 2017, the Belarusian government raised a total of $1.4bn through two Eurobonds (five- and 10-year maturities), $700m through a bilateral loan with Russia – once relations between the two states had recovered following a dispute over the price at which Belarus imports oil for its refinery – as well as the credit lines from the EFSD.
And there are other options. “In Asia, the Asian Infrastructure Investment Bank [AIIB] has been created recently and it has positioned itself in a way as a substitution for the World Bank and the IMF,” says Mr Snopkov. “It has a lot of money and a flexible approach in its negotiations,” he adds – hinting at the possibility of working with the AIIB instead of the IMF in future. “Everything will be fine, either with the IMF or without. Money is not that important,” says Mr Snopkov.
Steady reforms
International financial institutions such as the EBRD and the IFC point to the fact that even if there was no programme with the IMF, it seems the Belarusian authorities are working on transforming the state – if at a slower pace. A case in point is the National Bank of Belarus’s monetary policy strategy, which will move to inflation targeting in the medium term, as well as 2016’s pension reform.
“These steps say that the president of Belarus has an intention to make all these economic and social changes that are necessary for the future development,” says Mr Snopkov about the increase in retirement age. “This is the most important thing.”
The international community will be keeping an eye on developments in the country and will be keen to see how structural reforms to improve price stability and reduce government debt are progressing, especially the targeted privatisations of some of the state-owned banking sector. This is important, not just for the sake of promoting the idea of a market economy, but for Belarus’s overall fiscal position and economic development.
