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November 7 – November 13, 2011

Authorities preparing for a significant slowdown in economic growth in 2012

The situation has not changed
Authorities preparing for a significant slowdown in economic growth in 2012

The Government and the National Bank are preparing pessimistic forecasts of economic development in 2012. Belarusian authorities have to conduct tight monetary policy and the budget surplus. However, the country will pay with a significant slowdown or even recession and falling of real incomes for such a stabilization policy.

Presidium of the Council of Ministers of Belarus generally endorsed the pessimistic macroeconomic forecast, aimed at stabilizing the national economy, at the meeting closed to the media on Thursday. “This macroeconomic forecast is radically different from a traditional system of target macroeconomic indicators and it is exactly the forecast with absence of assignments on volumes of industrial and agricultural production”, said a representative of the Ministry of Economy. He emphasized that the primary purpose of forecasting the economic development of Belarus for 2012 is to reduce inflation to 19%. GDP growth is expected to reach 1-1.5%, while ensuring a positive balance of foreign trade of not less than 3% of GDP. It should be noted that the Ministry of Economy has recently insisted that GDP growth will not exceed 0.5% in 2012, but most likely, the Ministry faced with the pressure and the forecast has been raised. The government aims to ensure the attraction of not less than $ 3.7 billion in foreign direct investment on a net basis, including USD 2.5 billion from the state property privatization, in 2012.

“This macroeconomic forecast is radically different from a traditional system of target macroeconomic indicators and it is exactly the forecast with absence of assignments on volumes of industrial and agricultural production”, said a representative of the Ministry of Economy.

The next phase of matching the macroeconomic forecast is scheduled for November, 8 – the extended session of the Council of Ministers, which is also pending approval of the draft of main guidelines for monetary policy in 2012, connected with the new forecast. The National Bank has also prepared a draft of main guidelines for monetary policy in 2012, fundamentally different from a traditional one. Thus, the National Bank of Belarus disclaims from target exchange rate forecasts and declares the transition to the managed float of the Belarusian ruble. Also, there are no target forecast for the refinancing rate at the year end, parameters of money supply and indicative tasks for banks in terms of growth assets in the project. The National Bank of Belarus also emphasizes stringent monetary policy, whose main goal for the next year is to reduce inflation to 19%.

Comment

Belarusian authorities have to return to a rigid stabilizing policy of the early 2000s under internal and external pressure. This means holding tight monetary policy and the budget surplus. However, the country will pay with a significant slowdown or even recession and falling of real incomes for such a stabilization policy. It will be needed to spend potential revenues from the privatization on payment of loans taken earlier and the economy modernization. It will be possible to soften the shock only by increasing external borrowing substantially. However, the authorities reasonably fear the creditors’ demands, which will be also focused on structural reforms and a prohibition on life beyond means.

Some alternative is a continuation of the current emission policy, which allows maintaining production, employment and income in the short term, but ruins both the economy and population in the long run. Thereafter, a struggle behind the scenes between the “marketeers” and “inflationists” is possible till the end of the year, but supporters of the tough reforms will most likely win. Indirect evidence of this – preparing changes in tax policy (a reduction of profit tax rate from 24% to 18% has been announced).

Thus, 2012 will be a year of stabilization and economizing through long-postponed unpopular reforms; however, if the economy does not find healthy growth points, then A. Lukashenko may repeat more than once used policy of emission pumping of the economy.

In fact, it would mean a paradigm shift of the economy and conceptually new social contract between the authorities and population (the former was based on income growth and a guaranteed “stability”).

Thus, 2012 will be a year of stabilization and economizing through long-postponed unpopular reforms; however, if the economy does not find healthy growth points, then A. Lukashenko may repeat more than once used policy of emission pumping of the economy.

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