Belarus Awaits Financial Crisis

"The trigger for the worst crisis in the country's history has been pulled.

The authorities assure us that the economy succeeds, taxes have been collected to a record high. Therefore, there are no problems with the budget. At the same time, commuter and local trains have been cancelled, and the timetable for public transport has deteriorated. Money for additional payments to state employees is taken from the special fund.

Is it all so smooth with the public purse? Will the authorities be able to fulfil the budget with the deficit increased one and a half times in the spring (before the introduction of the main packages of sanctions)? The Belarusians and Market newspaper looked for the answers to these and other questions together with the experts.

A record big hole with tax collections

The law on the national budget for the year 2021, passed in a rapid mode in December, expected the state treasury deficit of 4.047 billion rubles. However, the planned hole in the budget increased by one and a half times to 6.006 billion rubles in the spring. In August, the Ministry of Finance adjusted the figure, slightly worsening the figures - the deficit increased to 6.052 billion rubles.

It is growing unevenly, and recently it seemed that the alarmist forecasts should not come true. According to the results of the first six months, the deficit was "only" 1.6 billion rubles. Moreover, the deficit reduced by more than a billion during July, and it was only 498.1 million rubles by August 1. It would seem that all is well to a layman in the intricacies and schemes of the budget money movement. What 6 billion could we talk about? On the contrary, the budget deficit is revised downwards. What are the reasons for such fluctuations? This question Belarusians and Market addressed to Vladimir Kovalkin, head of the Kosht Urada project.

"The sharp reduction of the budget deficit for the last seven months was due to the tax payment for the first half of the year and the second quarter. Legal entities "brought into the budget" VAT and profit tax, which together make up the basic item of budget revenues. It is a seasonal factor and always has a positive impact. However, one should realise that three out of the four quarterly tax periods have already been paid, and the end of the year will be much more severe, among other reasons. As a result, the budget deficit will grow at a much faster rate. Provided that the government does not start cutting back on spending," the economist explained.

In the draft budget for 2021, the estimated state budget revenues have been cut by almost 5% compared to the pandemic year 2020, reaching 23.3 billion rubles. In January - July, the National reports the VAT raised Br8.9 billion (64.1% of the annual plan), income tax - Br2.9 billion (85.3%), excise taxes - Br2 billion (60.6%). Revenues from foreign trade amounted to 2.8 billion rubles (70.5% of the annual plan). The situation looks very rosy and there is no need to worry - targets are being met and even exceeded: republican budget revenues amounted to 15.9 billion rubles or 66.4% of the amended annual plan.

How realistic are the Ministry of Finance's intentions today? Journalists asked Professor Boris Zheliba, an economics scientist and doctor of economic sciences, to answer this question.

"I think the revenue plans will be fulfilled. The foreign trade is a big plus for our budget. We are favoured by the world prices and the fact that the world economy has started recovering from the coronavirus, as the demand for our traditional export goods has been increasing. And not just for raw materials. A clear trigger is that stocks of finished goods have decreased. And often those for export. It not only helped to fill the budget through tax payments and revenues from foreign economic activity but also made our trade balance noticeably better than in previous years", said Boris Zheliba.

Are sanctions a trigger?

Vladimir Kovalkin believes that by the end of 2021 the plans of the Ministry of Finance for revenues will be achieved: "Prices for oil, timber, construction materials and other important items of the Belarusian export have increased significantly. The ill-fated BMZ, banks voluntarily and forcibly borrowed money to it not so long ago, will certainly feel better. After all, metal prices have also skyrocketed."

But the Kosht Urada project manager stressed that one should remember the sanctions. They could lead to a financial collapse and a large-scale crisis "from the last century".

"The three sub-sanctioned state-owned banks are in dire straits. On the one hand, it is difficult for them to borrow. On the other hand, the withdrawal of deposits continues. Therefore, they face the task of paying back loans to businesses, which today means the destruction of state-owned enterprises. The situation is extremely challenging, and state banks will find it extremely difficult without an external boost.

This is another new tension point in the Belarusian economy, which may cause a financial and banking crisis that is much more severe than the one caused by the devaluation and falling revenues. That crisis will involve non-payments and economic stagnation, a situation similar to the 90s," Vladimir Kovalkin outlined the gloomy prospects.

The budget was initially built with a decent deficit. However, it was increased one and a half times in the spring, although at that time, no one even thought of large-scale sanctions. Why is this deficit growing, if tax collection is so high and exports are breaking records?

"The main reason is the government, which is trying to support economic growth with increased spending. How will this huge six-billion-ruble deficit be financed? It is a good question. The authorities believe they have accumulated enough reserves in previous years. But there is a nuance associated with the situation deterioration in the financial and banking sector," warned Vladimir Kovalkin.

According to him, the fact is that today part of the government assets is frozen in the state banks in the form of providing them with liquidity to carry out current activities and maintain their condition. Why was such an infusion needed?

"People do not trust Lukashenka's policy. They do not trust the government's policy and withdraw deposits. Accordingly, these withdrawing deposits are being replaced by other deposits, in this case by the reserves of the Ministry of Finance, including those in the accounts of the state banks. Given the widening sanctions, the situation will not improve but only worsen. And the big question is whether the Ministry of Finance will be able to get its reserves from the state banks without thereby destroying the banking system," the expert concludes.

Every little bit helps to patch up the budget

There is another option for patching up the budget hole - spending cuts. As far as one can see, it is already in use this year. Socially important expenditure items are being cut: schedules and routes of commuter trains and buses are disappearing, even the schedule of urban public transport in Minsk has been severely cut; some buses do not commute for hours. Besides, the latest session of the Minsk City Council decided to cut down expenses on the infrastructure by Br8 million. Would such a practice help?

"In the short run, yes, but in the long run, it will create problems. If we discuss investments, they dropped by almost 20% in the country - a huge drop, and the budget cuts in the capital are a drop in the ocean against this background. As for cuts in the transport sector, it is logical: if one looks at the National Bank's surveys of the industry sentiments, the transport sector is second to last, and only the construction sector is worse off. It indirectly proves that the expenditures on investments and budget support of the transport activities have been reduced drastically and the money has been reallocated to patch up the current holes.

The cuts in construction, landscaping and infrastructure are the first things that will go under the knife. Because, among other things, these measures are not evident to the average person and become conspicuous when the pipes start bursting and the bridges collapsing en masse. The Belarusian authorities have to live for today. They want to pay minimum wages, patch up what they have and keep afloat," Vladimir Kovalkin said.

In this situation, do the authorities have a lever that can help if not to eliminate problems, then at least curb them?

"Everything depends on their ability to find the money. Russia is the only chance for the official Minsk today. Even China already does not want to get involved with sub-sanctioned enterprises and projects. Therefore, everything is now in the hands of Putin, who, in my opinion, will use this card. As of today, there is practically no economic solution to this difficult situation, only short-term options, and everything lies in politics", Vladimir Kovalkin believes.

What should one expect from the last months of the year? Will one be able to fulfil the plan and make the hole in the budget not more than 12 times bigger in four months?

"The situation is complicated. It is not easy to make forecasts for more than a quarter. The sanctions are in force, but it is not clear how they work: the data on major items are classified. Secondly, it is not clear what Lukashenka's possibilities are to re-borrow money from Putin and the Eurasian Fund. That is, the number of unknown variables is great. It is hard to make predictions. It is also great for the Ministry of Finance, which does not know whether these or those initiatives will succeed or not. That is why it has not reduced the deficit plans. In addition, every week, certain events affect the situation, sometimes significantly, both positively and negatively," Vladimir Kovalkin said.