BEROC: In the last month before president elections Belarusian economy continues to disappoint

Although decline in GDP has slowed, the -3.5% growth has failed to impress. The Belarusian ruble continues to depreciate as oil prices plunge, writes Kateryna Bornukova.

The authorities have promised further liberalisation of the economy in the near future. For now the authorities are tightening the rules and raising taxes. But a relatively low inflation rates gives hope to the possibility of macroeconomic stabilization and future cooperation with the IMF.

Recession slows down

After a dramatic fall in July Belarusian GDP “recovered” in August where it slowed to a decline of -3.5 per cent. The decline of agriculture decreased to only -1.4 per cent in August, which helped to revive GDP. The rest of the economic sectors, however, have not shown any positive signs.

The only sector with a positive rate of growth is still the retail trade, but the future of this sector is murky, as real incomes continue to plunge, and the average wage in August was only $427.

The improvement in the financial state of enterprises represents a significant piece of good news. Outstanding debts to foreign companies declined in July for the first time in 2015. The same is true for received external loans. But this improvement in the accounts may stem from the devaluation of the Russian ruble only, and so not reflect any real improvements.

In September Alexander Lukashenka once again demanded that the level of foreign firm debt be decreased. Usually these debts arise when our exporters deliver the goods with deferred payments, underlining the importance of this problem for many state enterprises.

Liberalisation tomorrow, higher taxes and stricter importing rules today

At the end of September, the government pre-announced once again the new changes to Directive No.4 liberalising regulations for private entrepreneurship. The promises include equal opportunities for all types of enterprise ownership; stricter legal rules for the cessation of property rights; and a three-year moratorium on the negative changes to tax legislation.

But before the moratorium, the authorities have decided to have one last increase in taxes. Given the difficulties in tax collection, the tax authorities are looking to close all tax loopholes. The proposed changes to the Tax code increase personal income tax from the standard 13 to 16 per cent for those that can legally be caught evading taxes. There is also the introduction of a new tax on gambling winnings and a substantial increase in taxes on artisans.

At the same time the government introduced stricter importing rules. According to the hellishly numbered Resolution No. 666, almost all imported consumer goods have to go through the sanitary controls. This is true for each entire batch and not for only one specimen. As often happens with legislation in Belarus, the Resolution did not clearly define the rules and is still subject to change. But it will clearly have negative effects on importers and will raise the price of imported goods.

The national bank keeps inflation low

In August-September 2015 the Belarusian ruble suffered another blow, depreciating from 15,248 rubles per dollar on the 1st of August to 17,691 on September 30. The decline in the oil prices caused the depreciation of the Russian ruble, which eventually passed through to the Belarusian ruble. No wonder that the National bank struggles to revive the trust in the ruble.

However, despite another round of depreciation, inflation remains in single digits. In August 2015 prices increased 7.8 per cent compared to December 2014. This figure represents a big win for the National Bank. In the previous years half of the currency depreciation transferred into price growth.

Given the multiple currency depreciation episodes in 2015, we could expect inflation of at least 25%. But the new policies of the National bank managed to destroy the link between depreciation and inflation. The inflation rates in 2015 are so far lower than in 2014, when the exchange rate was stable (see Figure 1).

Of course, relatively low inflation comes at a price. The “expensive money” policy and high interest rates put enormous pressure on the economy, making investments very costly.

Recently the vice chairman of the National Bank Taras Nadolny confirmed that the National Bank is not going to decrease the refinancing rate this year. On the one hand this decision makes the inflation forecast of 16 per cent by the end of the year realistic. On the other, the real rate of interest in this situation would be too high to make any kind of investment affordable.

IMF negotiations: Will Belarus finally agree to reforms?

The first steps towards macroeconomic stabilisation in Belarus inspire hope for the future cooperation with IMF. On 26 September 2015 the head of IMF Christine Lagarde met with Alexander Lukashenka, presumably to discuss the possibility of a new $3.5bn loan.

Of course, the IMF loan will come with strings attached. Belarus will have to finally reform its economy. The main steps are macroeconomic stabilisation (through the decline in direct lending and money printing), the cancellation of universal utility subsidies and the introduction of proper unemployment insurance and other forms of social support for the labour market.

If the Belarusian government and IMF agree on the terms, after the election the economy will go through some painful reforms, which are, however, necessary for future development.

The analysis was originally published at BEROC