2009: A Failure

The year 2009 is coming to an end. Its results demonstrate failure in all the most important parameters of the forecast of the country’s social and economic development. And the most important reason of that is not the global crisis, but the policy of Belarusian authorities.

It is written by the former head of the National bank of Belarus Stanislau Bahdankevich in his “Economic review” at the web-site ucpb.org.

The actual volume of the GDP is expected at zero level, while the forecast was an increase by 10-12%. Among other things, industrial production is to decrease by 4% (these are estimated figures for the end of the year). Part of the production manufactured under the pressure of the authorities, about 6 trillion Br, included in the GDB, turned out to be unmarketable products because of their non-competitiveness. Growth of agriculture production had been planned at the level of 8.5-9%, and in fact it was about 1%. And it happens against the background of huge subsidies from the state budget, about 2 billion dollars ($220 per hectare of agricultural land, while the maximal European level is $150). 23-25% of increase of investments in fixed capital was planned, while in fact it is to be about 12%. Production of food products has decreased by 7%, while 11-12.5% of growth was planned. Export had been planned to grow by 17-18.5%, but it has decreased by more than 40%. The net adverse balance of foreign trade is expected to be more than $4 billion, while the forecast was $1.5 billion. Economy’s energy consumption has been decreased by just 5%, while the forecast was 8%. Real income of the population has grown by 2.5%-3%, while the forecast was 14-15% and decline in productivity was more than 1% (forecast of growth was 7.8-8.1%, and growth took place due to eating away foreign loans). At the same time, in the period of January-November 2009 ruble and foreign currency bank deposits of the population in Belarusian banks have grown by more than 4.4 billion rubles, or by 33.2%. This growth has mostly taken place due to devaluation of the Belarusian ruble by 31.5% since January 1, 2009. In December 2008 the exchange rate of the Belarusian ruble to the dollar was 2,190 Br, in late December 2009 it is 2,880 Br, it means that over the year the Belarusian ruble has devaluated by 31.5%. By the early December deposits of the population reached 17.67 billion Br. Deposits in the national currency were 7.84 trillion Br, and more than $3.5 billion in foreign currency.

Over the year the authorities artificially maintained a low level of unemployment. The number of the unemployed registered in the relevant authorities, was only 0.9% of the economically active population. It is a good index number, and the regime can justly be proud of that. However it should be kept in mind that an extremely low unemployment payment in Belarus, about 43,000 Br per month, or less then $16, as compared to $81 in Moldova, $82 in Ukraine, $91 in Kazakhstan, $158 in Russia. More than 9% of the average staffing number has part-time employment now. It obviously accounts for the extremely negative figures such as the general decrease of productivity of labor by more than 1%, and the growth of average pay which outruns the growth of productivity of labour by 4%.

The figures of housing production are undoubtedly an achievement of the government: about 5,000 thousand square metres of residential space would be put into service by the end of the year. Bank loans contributed to that. Concessional lending for housing production has increased. In January-September loans for a sum of 3.2 trillion Br have been issued to physical persons and agricultural organisations, which is 1.7 times more than the loans issued for the same period of the last year. Alongside with favourable credit facilities, the bank system actively gave credits for physical persons for construction and buying of houses on the usual terms. As of October 1, 2009, indebtedness of physical persons for these loans reached 2.45 trillion Br. It is 1.4 times more than for the comparable date of the last year.

Profitability of sold goods and services is very low, in January-September 2009 it was 10.6%, and profitability of sales was 6.2%. Every fifth enterprise is loss-making. With enterprises with low profitability, they make more than a half of enterprises.

In connection wit the crisis, the initially approved state budget was cut down by 11 trillion Br. In its reduced form it is expected to be fulfilled without a deficit.

The Republic of Belarus is among negative leaders according inflation rate. The average annual level of consumer prices growth is to make about 13.5-14%, more than 15% for food products (potatoes – 28%, tea – 27%, meat and poultry, sausages – 16%, fish – 19-20%, milk and dairy products – 20%, eggs – 18%, wheat flour – 22%, medicines more than 28%). Paid services to the population have grown by about 14-15%, including communal and housing services – by 20% (electricity – 29%, heating – 29%, water supply – 20%), suburban traffic – by 25%, tourism – 27%, sanatorium and health restoring services - 23%.

The main reason of our economic problems should be sought not only in the global crisis, but in the economic policy of the Belarusian authorities. Our Western partner, Poland, which implemented a so-called “shock therapy” in early 90ies: de- bureaucratization, economic liberalization and privatization, despite of the global economic crisis maintains positive performance in the most important spheres. They do not have serious problems in industry, financial and bank sector, as well as in foreign trade. At the same time, the economic crisis continues to deepen and grow in Belarus. Living beyond one’s means, on credits is widening, which promises negative consequences in the future. External deficit in goods in 2008 was almost $5 billion, and in 2009 it reached $6 billion, which is almost $1 billion increase. Country’s aggregate external debt is about $21 billion, or 43% of the GDP (long-term debts - $11 billion, short-term debts – $10 billion). The growth over a year is more than $6 billion. In the structure of the external debt, the external debt of state administration agencies is to make about 5 billion dollars, the National bank – 3 billion dollars, commercial banks – about 4 billion dollars, other sectors – about 9 billion dollars (including trade loans 5.5 billion dollars), indebtedness to direct investors - 0.8 billion dollars. The internal debt of the government is 3 billion dollars. So the total size of the state debt is 11 billion dollars, or 22% of the GDP. Indebtedness of economic entities to the Belarusian banks in he end of the year is about 65 trillion Br ($23 billion), or 46% of the GDP. Increase over the year is 33%, 16 trillion Belarusian rubles. Notably, this increase of debts has given the economy just status quo, with a little recession.

Rampant growth of debts is to a large extent caused by growth of the adverse balance in foreign trade in the Russian market. In January-October 2009 export deliveries to Russia have decreased by 42.6% as compared with the same period of the last year. Trade balance deficit in goods at this market over the year is to make about 8 billion dollars. This situation has shaped because of the policy of conservation of ties which had appeared while Belarus was the part of the Soviet Union; refusal to carry out structural reorganization in the industry and carrying out multiple-vector policy in the trade. It was one of the largest mistakes of our authorities. Amid the global crisis the policy of the Belarusian authorities expecting a rapid return of the same volume of exports to Russia is undoubtedly a mistake, instead of immediate implementing of structural transformation and radical market reforms, with the aim to increase competitiveness and profitableness. Hopes to restore its position in Russian markets in 2010 seem illusionary. It is futile to endlessly stimulate production by external loans and credits. In the Russian market increased competitiveness with Russian manufacturers and foreign enterprises opening assembly factories in Russia is expected. In order to increase one’s competitive power based upon effectiveness and innovations, technical re-equipment and restructuring of enterprises both due to internal sources (which demands decrease of taxation level, which is avoided by authorities) and participation of foreign capital (which needs preferences for access to the market) are needed.

As of December 1, 2009 the bank sector of the economy included 32 banks with 289 branches. 25 of banks are banks with the participation of foreign capital; 9 banks have 100% of foreign capital, two more banks have only one share belonging to Belarusian residents. However the share of foreign capital in the bank system of Belarus makes only 20%, including Russian capital – less then 9% (excluding the BPS-Bank sold to Russia). Since the begging of the year bank assets have grown by 21%. The share of doubtful assets is less then 5% according to the official data. According to our estimation it is about 10%. The funding base of the Belarusian banks is 79 trillion Br (about 28 billion dollars), it has increased by almost 24%, or 16 trillion rubles over the year. The ratio of the funding base to the GDP makes 52%. The main sources of its forming remain finances of physical persons and economic entities-residents.

8 representation offices of foreign banks of Russia, Ukraine, Lithuania, Latvia, Germany and Interstate bank are situated in Belarus.

The size of international reserve assets of the National bank fluctuates within the range of 3.5-5 billion dollars, which is extremely insufficiently ($0.9 billions of monetary gold, special drawing rights of the IMF – $0.6, foreign currency assets – $3 billion). For stability of currency circularization considering the size of the import its size should be minimum 10 billion Euros.

The World Bank estimates development of the Belarusian economy in 2009 more negatively in a number of aspects: the GDP decrease by 1% is expected, decrease in consumption by 6.3%, balance of the budget minus 1.7%, external debt – 41.4% of the GDP, the state debt – 27.5% of the GDP, the IMF net credit – 5.6% of the GDP.

The extremely difficult payment situation of economic entities of the country is proved by the following data (as of October 1, 2009). 4691 enterprises, or 44.7% of all enterprises under study, have lost their own circulating assets entirely. 1,646 enterprises or 13.8% have assets less then required by standards. Thus, more than 58% of enterprises do not have enough own working capital for production. The economy’s aggregate indebtedness over the year has grown by almost 38% with the growth of consumption prices by 11.7%. 57% of enterprises had overdue accounts payable, out of which 82% had overdue accounts for more than 3 months. With total overdue accounts payable of 8 trillion Br, almost 1 trillion is overdue accounts to banks. It has grown almost twice over the year.

Thus, the results of the year show that in the near-term outlook the priorities are to include foreign trade balance issues, inflation limitation, supplying economic entities with working capital, and increasing the level of ability to meet payments, as well as the levels of cost-effectiveness and competitiveness.

Being unable to cope with the crisis within the framework of centrally-controlled administration, keeping unitary state enterprises and total control, after long years of hesitation, in fact the authorities have chosen the line for the market economy model of development. Without admitting lameness and ineffectiveness of its policy, the state nevertheless is forced to give up on its key elements: the state monopoly in the economy, global administrative supervision and keeping enterprises in the unitary state property, administrative control in price formation, comprehensive licensing, bad system and high level of taxation, blocking small and average business and home market.

Unfortunately, these steps are made while the government does not have a well-grounded concept of reforms, a complex program of surmounting the crisis, clearly defined goals and priorities. It could be the reason why one of the main ideas of anti-crisis platform of the United Democratic Forces, profound de-bureaucratization and de-monopolization, giving up the Soviet system of administration – hasn’t been accepted. Reforms are not accompanied by a due optimization of organizational structure with a simultaneous radical reduction of bureaucracy and its financing from the budget. By reincorporating state enterprises as joint-stock companies, the government haven’t stopped setting obligatory gross data targets at the macroeconomic level and at the level of enterprises, and as a result wasteful use of resources is taking place. As before, targets are set and reports are demanded, consultations are held in the capital and so on. The practice of s preserving ineffective working places is continued, instead of creation of new ones, instead of attracting investments and motivating efficiency of labor. The economy is not freed from ineffective, highly loss-making and unprofitable dead wood. Loss-making projects of low priority are not mothballed. Unemployment payments are not increased at least to the level of subsistence minimum. Flagrant disproportions in pensions between state officials and other categories of workers have not been adjusted. A modern, proportional law on privatization hasn’t been adopted, as well as many other things haven’t been done.