IMF demands reforms from Belarus

On October 29th, the IMF mission to Belarus issued a statement.

The authorities’ Joint Action Plan did not succeed in misleading the IMF. The existing economic imbalances require more drastic measures and economic reforms. Belarus’ reckoning on the new loan programme negotiations has proved wrong, as Belarus is not ready for structural economic reforms.

The new Joint Action Plan of the government and the National Bank has been criticized immediately after its publication due to some heavy-handed proposals. The main criticism was of the plan’s proposal to limit lending without a differentiated approach to the borrower. The IMF welcomed several elements in the plan. For instance, they supported the objective to transfer all directed and subsidized lending to the Development Bank and the intention to push ahead with privatization efforts. However, in the IMF view, more was needed to address the economic imbalances challenges, the main one of which was wage growth over labour productivity. In January – August 2013 real incomes increased by 18.8 % (initially projected at 6.5 %), and labor productivity by 2.2 % (initially projected at 9.3%).

The IMF proposed to embark on deep and fast economic reforms. For instance, the mission proposed to initiate ambitious time-bound plans for bringing utility and transport tariffs to full cost recovery, for reducing the role of the state in the economy—including decisive privatization and a rapid phase out of the system of mandatory targets for enterprises. The government comprehended the need to carry the IMF proposals. For instance, it has announced railway tariffs rise up to 43% as of November 10th. On November 1st, electricity and gas tariffs for the population went up. Prices on some socially important goods have been liberalized. Privatization lists have been drafted. The Belarusian ruble was weakened against the U.S. Dollar by BYR 100 in October.

Despite demonstrating the desire to embark on a reform path, negotiations about a new loan programme with the IMF will not start in the near future. There is no real political will to implement economic reforms. The government will not abandon full control over economy. The outlook for GDP growth for 2014 was revised from 2.4% to 3.3 %, inflation decreased from 14.5 % to 11%.

Belarus has demonstrated imitation of reforms, and the IMF has not fallen for this attempt to mislead and has not given any signs of hope for new loans. Belarus will implement some IMF proposals, but will not take a comprehensive approach, which is already overdue.

Belarusian economy not in a position to justify government’s inflated forecasts

The main reasons for why 2013 forecast indicators were far from being met include the low quality of the so-called ‘forecast’ as well as significant changes in key external markets for Belarus. However, for political reasons, Belarusian authorities are not prepared to give up ambitious ‘growth rates’ for next year. They risk not only repeating past mistakes, but also continuing along the dangerous path of unbalanced economic development.

On October 31st the first vice-prime minister, Semashko, spoke at Belarus’ parliament and announced a potential two-percent fall in the volume of industrial production by the end of 2013. (According to government plans, the yearly growth in the industrial production index was expected at 7% based on 2012 prices).

In the first nine months of 2013, industrial production fell by 4.6%. Two of three of the most tangible industries – chemical industry and oil refining – show a significant fall in the same period of 2012. Only the food industry noted some growth in production, however, this dynamic is far from the parameters forecast. Of 15 subsections of industry, six recorded drops in production and only 3 peripheral branches exceeded the projected growth of 7%.

The main reasons for the failure to fulfill forecasts include the low quality of the so-called ‘forecasts’ as well as significant changes in key external markets for Belarus. Ensuring significant paces of growth in 2013 seemed dubious from the outset due to the extremely high risk of the comparative base shaped in 2012 thanks to famous schemes for producing “solvent”, “lubricant” and “biodiesel”.

By late 2012, it was already clear that it was not possible for new schemes of a similar scale to emerge in the near future. However, such reasoning was ignored by experts compiling the forecasts, who set parameters for industry which were clearly unrealistic. The fall in demand on external markets for the production of machinery and problems in selling potash fertilizer as a result of the conflict concerning the Belarusian Potash Company merely worsened the situation. The overloaded warehouses and manipulation of statistical data also did not help in fulfilling these optimistic plans. Inflated parameters for industrial production also led to an entire series of corrections, above all, in budgets. Far from fulfilling the annual income tax plans, a shortfall of income from foreign trade may be observed. This meant that additional income sources needed to be identified.

Meanwhile, organizations and agencies specialized in producing forecast parameters for 2014 attempted to avoid past mistakes and compiled a much more modest and realistic plan for the paces of growth. However, Belarus’ senior management, for political reasons, is unlikely to give up their ambitious ‘development plans’ for the year preceding the presidential elections. This approach has already made itself clear; last month, the parameter forecast project for 2014 was corrected in a more ‘optimistic’ manner. It is evident that plans which do not correspond with the realities of the current situation (for example, totally unjustified rises in the volume of production and sale of potash fertilizer for export) will once again not be fulfilled in terms of many parameters.

And so, by rejecting realistic evaluations of the economic situation, Belarus’ senior political leadership will continue in 2014 along the dangerous path of unbalanced economic development.