Economic Policy in 2011: choosing between the bad and the worse

2011 was the worst year in the last decade, in particular compared with 2010, the “golden year” for the country’s population. In 2010 the Belarusian authorities have actively used the money printing press to heat up the economy and to increase real incomes amid rising trade deficit. 

The day of reckoning for the economic mistakes did not keep Belarus waiting: the currency crisis hit the country two months after the Presidential elections and gradually translated into economic and management crisis by summer. Nine months after the elections real incomes of the population were cut in half.

Devaluation

The major macroeconomic failure of the year was the devaluation of the national currency by nearly 300%. The devaluation spiral and the currency crisis were triggered by the March report of the IMF, which proposed the Belarusian authorities to devaluate Br by 20%, or implement large-scale privatization and structural reforms against the backdrop of the substantial tightening of the monetary and fiscal policy as a way to solve the issue of having a huge external deficit. Nevertheless, the authorities chose to deny, suppress and delay resolving rapidly accumulating problems. Soon their policy resulted in a shortage of foreign currency, multiple exchange rates, and later a full-scale monetary and economic crisis.

Following six months of experiments and internal and external pressure, the authorities were forced to implement conventional rules of the game on the foreign exchange market. All the experiments with the printing press and administrative regulation of the currency market resulted in hyper-inflation, extensive devaluation, and a complete loss of confidence in the national currency, and severe losses in real economy and financial sectors.

At the same time, as anticipated by SBIO experts, the devaluation did not solve any of the problems of the Belarusian economy. The negative trade balance remained unchanged in 2011 and by the end of the year it will not change more than by 10% at best and will continue to exceed USD 5 billion. To repay the foreign debts of the past, the Belarusian authorities solve the issue of foreign currency inflows using old methods, i.e. via new borrowings and sales of the major state-owned assets. All attempts of the authorities to improve the country’s investment climate and business ratings failed. Moreover, the country’s ratings were assessed as hyperinflationary by the major rating agencies, which ended hopes for significant increase in the foreign direct investment and for the revival of privatization interests of Belarusian and Russian investors. The issue of improvement of Belarusian economic competitiveness has also not been solved, in fact, the growing hyperinflation has almost leveled the entire devaluation effect. Accordingly, having completed the cycle of “costs – prices”, exporters will soon be faced with a sales crisis. Domestic market supply, regardless of the significant rise in prices, is already unprofitable or marginally profitable. In 2011 major Belarusian enterprises, traditional fiscal and monetary donors, performed at a loss: significant losses by the end of the year will be recorded by Beltransgaz, oil refineries, petrochemical plants and banks.

Banks

In 2011, commercial banks have become de facto internal donors of the Belarusian economy: in fact, the banking sector is administered by the National Bank, banks face permanent pressure regarding the restructuring of debt, freezing of interest rates on loans for the population, purchase and sale of foreign currencies by major customers, purchase of the National Bank’s foreign currency bonds, etc. However the capacity of the Belarusian banking system is quite small and further draining resources from the banks creates conditions for a new economic crisis.

Privatization

An important achievement of 2011 was the sale of 50% of Beltransgaz and the signing of Russian-Belarusian gas agreements. However, the effects of cheap gas will not last long: in a few years Russia is planning to introduce equal profitability prices, i.e. it will raise domestic prices significantly. All in all, before the end of this year, Belarus will receive USD 3.9 billion from Russia: USD 2.5bn for 50% stake in Beltransgaz, a USD 1 billion loan from the Savings Bank and USD 440 million of the second tranche of the ACF of the EurAsEC. These funds will help to close the deficit of external financing in 2011, to increase the gold reserves to a minimally acceptable level, as well as to stabilize the currency market. At the same time, regardless of significant preferences obtained in the framework of the new gas contracts, the price Belarus paid by joining the Eurasian Economic Area was huge as well: it has to unify the principles of implementation of monetary, fiscal, agricultural and other policies, which significantly undermines the very base of the Belarusian model based on state support, emission loans, social orientation, etc. The equal access of Russian goods to the Belarusian market will increase Russian imports to Belarus, while the export of Belarusian goods to Russia will decline due to their non-competitiveness (the effect of devaluation has been almost “eaten up” and prices in USD terms are close to ones before the devaluation, while the cost-push inflation is still gaining momentum.)

Regardless of some expectations, there was no major breakthrough in the area of privatization in 2011: there were a few deals on small low-profit enterprises, mainly in favour of the domestic capital. Many auctions were canceled or postponed due to the lack of interest from investors. The only large-scale deal was the sale of 50% of the state-owned shares of Beltransgaz to Gazprom. At the same time a new trend is a so-called “delayed” privatization, which is implemented via loans secured by shares. In 2011 the USD 1 billion loan has been secured by the export earnings of Belaruskali, as well as by 51% of the shares of Novopolotsk refinery. Therefore next year the refinery has all the chances to become a Russian property. For 2012 the Russian Sberbank (Savings Bank) has a plan for a package of privatization projects in Belarus worth USD 10 billion. Attitudes and intentions of the Russians have been clearly expressed by the Head of the Russian Sberbank Mr. German Gref, “We will try to do our best in Belarus in order to facilitate overcoming of the crisis via privatization of the Belarusian state property”.

Belarusian authorities are definitely aware of the scale of the problems and the cause-effect relationships in the economy. However, the economy and decision-making in the economy have become hostages of the “big politics”, namely, of the personal decisions by Alexander Lukashenko. In autumn 2011 the Government and the National Bank proposed several options of the economic development in 2012. However, Lukashenko introduced his own vision and ordered the Government and the National Bank to adopt a set of figures from various scenarios. Mr. Lukashenko made the emphasis on the GDP growth of 5-5.5%. By using emitted Br 7 trillion, the government must keep the inflation under 20%, raise incomes by 5% and support the exchange rate (these figures come from a scenario where the GDP growth is limited to 1%). Those who “disagree or cannot do so” are openly invited to look for another job. Therefore Lukashenko ignored all the calculations made by the Government, tight monetary policy proposals from the National Bank and cut-downs on the state programmes in 2012 proposed by the Ministry of Finance, who is the main decision-maker in the country on economic issues. Under these circumstances the IMF loan becomes incredible and meaningless.