Why economic reforms in Belarus are now more urgent than ever

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Elderly couple at their home in Pinsk, Belarus. Photo: Dmitry Vechorko
Elderly couple at their home in Pinsk, Belarus. Photo: Dmitry Vechorko

 

 

 

 

 

 

 

 

 

 

 

 

 

At the World Bank, we have been saying for many years that Belarus needs structural economic reforms to accelerate economic growth. But today our message is quite different: Belarus urgently needs structural economic reforms to avoid economic instability.

Why the urgency, you may ask, especially given that Belarus has made significant strides in reducing poverty? Indeed, it is impressive how the share of people unable to spend more than $5.50 per day (in 2011 PPP) reduced dramatically from 38.3% in 2003 to 0.4% in 2014.

Well, the problem is that this progress was largely achieved with borrowed money. Belarus has been spending more than it earns, and borrowing to cover the gap is not as easy now as it once was.

So, where have these debts come from? Which parts of the Belarusian economy have been spending more than they earn?

The state-owned enterprise (SOE) sector is a big part of the answer. The overall cost of state support to public enterprises amounted to 9.5% of GDP in 2015, according to the IMF. In other words, the average Belarusian payed 10 kopecks from each ruble earned to support state-owned enterprises. 

 

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Belarus: Fiscal Support to state-owned enterprises and banks (% of GDP)

 

It’s encouraging to see that Government has reduced support for state-owned enterprises since 2015, including directed lending. Still, according to the National Bank, the loan liabilities of state-owned enterprises, which they may have difficulty repaying, are 14% of GDP. And, whenever an enterprise continues losing money, some kind of loan or subsidy or unpaid debt has to cover the difference. 

Low heating tariffs have also been another reason for public borrowing. Households pay only about one-fifth of the operating cost of heating. Low tariffs obviously benefit ordinary people, but they have added to Belarus’ borrowing and mean that investment is underfunded.

The size of Belarus’ debt challenge is public knowledge. The IMF predicts that, unless the country gets compensation from Russia for the “tax maneuver”, Belarus needs to identify a way to borrow $1.5 billion in 2021, rising to $2 billion for 2022. Public debt would rise from 55% of GDP to 70% over the period 2019-23. 

It is therefore likely that Belarus’ economy will adjust dramatically in 2020-22, in order to close the gap between spending and earnings. This adjustment will either be planned and structured, which will be tough, or it will be unplanned and disruptive, which will be even tougher.

During the recession of 2014-17, the share of households with consumption below the Minimum Consumption Budget rose from 19% to 35%. This proves how important it is – especially for everyday Belarusians – that the forthcoming economic adjustment is planned and structured.

 

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Why economic reforms in Belarus are now more urgent than ever

 

What’s the best way forward?

Most urgently, Belarus’ state-owned enterprise sector needs a comprehensive restructuring. And what would this entail?

  • First, either keep profit-making SOEs public or else privatize them in a transparent way at fair market prices.
  • Second, keep public service-providers and regulators public, but clearly define what they must provide in return for public funds.
  • Third, restructure loss-making SOEs that could quickly be made profitable, providing a good return on any extra investment.
  • And for all the rest: closure or privatization.

Sorting the enterprises into these categories should be done by independent experts, in order to get objective assessments of which businesses are viable or not.

Enterprise restructuring, unfortunately, means some job losses. But there are ways to support citizens who are impacted. First, Belarus should continue simplifying the regulatory environment for micro-enterprises and the self-employed, and second, Belarus should strengthen social programs.

Even if expanded five-fold, the Guaranteed Minimum Income program (GASP) would cost only 0.1% of GDP (95 times less than the amount of funds that Belarusians spent to support state-owned enterprises in 2015). An unemployment assistance program is also necessary.

Belarus’ Government will need to raise its revenues and reduce its expenditures to narrow the country’s financial gap. At the World Bank, we recommend eliminating tax exemptions and reducing subsidies on district heating, while increasing the Housing and Utility Subsidy program so that heating bills are bearable for families. 

Because the current public subsidies system allows richer households, on average, to receive more heating subsidies than poorer ones, the improved Housing and Utility Subsidy program should target the least well-off families, and not just those who own the most square-meters of property.

Meanwhile, Belarus is gradually creating a better environment for private business and the IT sector. One can now imagine a brighter future, with higher incomes, better public services, world-class education and renovated infrastructure, all ensured by a dynamic private sector through taxes paid by companies. These goals can be realized in the years ahead by addressing today the country’s structural economic challenges and pursuing the necessary reforms.

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Authors

Alex Kremer

Country Manager for Belarus, Europe and Central Asia

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