Belarus 1996: Economic results of the year

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Источник: "БЕЛАРУСЬ В МИРЕ" No.001 01-01-97

Belarus' economic development in 1996 was characterised by a desire of the leadership to keep the national economy within the 1995 parameters; gaining at the same time a small growth in GDP, and an aggregate increase of industrial and agricultural output. The government did not envisage any serious changes in investment, the requirement necessary to achieve economic growth has not been formulated. In general, the economy worked as expected, but a few problems arose, the most serious amongst these being the disequilibrium in the balance of payment, imports considerably exceeding exports. Also the appearance of multiple exchange rates, which created inadequate conditions for the activities of economic entities and crippled the price mechanism.

Exchange rate and inflation emerged in January 1996 as the core problem. It was not solved but was "successfully" passed on for solution in 1997. The leadership of Belarus has decided not to make moderate, but absolutely indispensable, devaluation and then to act according to a strategy previously worked out such as: keeping currency band, pursuing active policy to improve the competitiveness of national enterprises, to create favourable conditions for effective economic entities, restructuring industry and agriculture by means of privatisation and dismantling big state enterprises, some of which will have to be made bankrupt.

The economic cycle and the processes of macroeconomics dynamics shoed many contradictions within the year. They could be described as "one step forward and two steps backward". Industry performed unsteadily with large fluctuations of output.

To understand recent developments it is necessary to analyse the peculiarities of trends in the development of Belarus over the last five years.


Based on this economic data we can suggest that recession has been stopped and contraction of the economy has reached its limit. There is some slight chances for economic recovery and limited growth. It is important to point out that this type of recession is connected with the crisis of the entire economic system - not just with change in conditions of aggregates of supply and demand characteristic of "pure" market economy.

In macroeconomics terms the situation can be described as "inertial sustainment of unstable equilibrium and macroeconomics indices at the previous year level, absence of broad spectrum of special means and mechanisms for economic activity and dynamics stimulation".

Looking at quarterly changes of GDP during 1996, irregular and cyclical character of development are peculiar features of various sectors and branches of Belarusian economy.

A general trend can be observed only in the first half of 1996. It is connected with the increase of production output in each quarter. Then in the 3rd and the 4th quarters this trend was replaced by erratic changes caused by a deterioration of the general economic situation. Economic growth is becoming increasingly unstable. This is an illustration of the economic psychology of the leadership in the Republic of Belarus based on their desire to bring positive changes under administrative pressure and control.

Changes in the economic sphere are mainly connected with the multi-speed dynamics of branches. In economics this is considered, in the theory of aggregate supply, as economic performance at the "interim period" when both growth and fall of branch production output is observed. It has impact both on prices and GDP.

Production of goods and services has been arranged on the traditional basis. At the same time the volume of investment fell and then grew a little so that by the end of the year it stood 10% lower than the previous year (though a 14% drop was observed in some months).

The aggregate industrial output totalled 182tn Belarusian Roubles (BRB) in prices of that time, which is 3.2 greater than in 1995 in terms of quantity. Agricultural output was valued at 72.4tn BRB (a 2.4% increase).

Irregularity and a cyclical nature were inherent characteristics of a major part of Belarusian industry. The aggregate output of all branches provides a picture of considerable fluctuations within the year. This shows the instability of the situation for the entire industrial sector, as well as an absence of confirmed orders and customers. The dyna-mics of the industrial cycle shows this quite vividly.


The spring fall of industrial output indices totals almost 9.8%. This is followed by an increase of the indices by the Summer. But in September trend reverses and falls again.. In general, irregularity of performance of the industrial sector is very significant. These fluctuations provide an appalling signal for a government which has not been formed for "the team game". At the same time decision- makers still compared industrial aggregates with those of the previous year, a process which did not provide any information concerning short term dynamics. They were captured by the old stereotype: "it is better today than yesterday. We have got 1-2% more, but it is still something".

Besides GDP and industrial aggregate output, the second key element for out transitional economy is the level of inflation. We can also be quite optimistic about the officially declared consumer price index and levels of employment. Belarus saw hyperinflation in 1992-1994 when CPI was 1,070% (in 1992), 1,290% (in 1993), and 2,321% (in 1994). As a rule, people quickly tend to forget the not so distant past but considerable change of inflation rate is the most important economic event of 1996. December saw the customary monthly rate of 2-3% go up to 7.4%. At the same time prices for many imported goods increased due to growth of real exchange rate of USD. Inflation also had an impact on the behaviour of households and it unbalanced the price system in general. In the event, in terms of inflation November and December were dangerous months for all economic entities.

In general, the inflation spiral of former years turned into tamed "snake" (until autumn). Changes of the exchange rate and growth of inflation occurred against the background of strange expectations of the National Bank of Belarus (NBB) and financial institutions. It is in this sphere where algorithms of the past were repeated. Return of negative interest rates is evidence of this. It negated the few previous achievements of the banking sector. Deposit rates of major banks were 2.5% at an inflation rate of 3.9% in November and 7.4% in December. "Cheated depositors" losses amounted to about 400bn BRB for two months. This processes went along quite smoothly without any public unrest. However, it is absolutely necessary to take measures to correct the situation; This need is reinforced by the fact that inflation in January was higher than in December. An increase in deposit rates is ne- cessary to reduce pressure on the currency market. If the monthly deposit rate goes up to 8-10% it will provide a powerful stimulus for households to place money in the banks. It is clear that loan interest rates will also go up but these changes should be flexible. By the end of the year confidence was lost in BRB. This could cause severe consequences not only for the money market but for the eco-nomy as a whole in 1997.

Over time specific economic and political significance is attributed to relations between inflation and unemployment. Neither economic decision-makers nor the population realise what could happen if strict fiscal and monetary policies are applied. Russia is a vivid example but is viewed negatively because of the inability of the government and enterprises to pay wages. The problem is much deeper: low inflation is connected with high unemployment (as a rule) and it is very difficult to get other results for in an economy at transition. These indices are not a "litmus paper" as it were of the state of economy. Nobody thought to question the interrelation and interconnection inflation and employment and their qualitative aspects.

The unusually low unemployment figures conceal the real situation on the labour market. At the same time enterprises constantly use less than half of their production potential. The number of officially registered as unemployed - 186,400 would be acceptable if there were economic growth and an increase of production output in sectors and branches of the national economy. Of the 4.5m employed in the economy 640,000 people were made redundant within the year. Practically, one in seven lost his job. This is too much for one year for such a small country. Out of total number of people withdrawn from active employment only a small fraction (9%) lost their jobs due to staff reduction. Unemployment had a more threatening shape and size. 427,000 persons were employed part time (by the initiative of their economic entities) and 503,800 were on forced vacation. Summing up, about 1.0m people were part time employees and taken into consideration those made redundant the total number affected 1.5m people out of 4.5m. Every third worker was in the dangerous crisis zone of his existence. In a real competitive market economy they would be unemployed.

There was demand for labour in the transport sector (except air and automobile), utilities, education, and culture. The number of newly employed in these spheres exceeded the number of those discharged. Taking into consideration that wages in state financial sector are lower than in other sectors of economic activities. It seems probable, as a result, that there was a transfer of skilled labour force into commercial structures, real sector and financial institutions. Residence permit and existing formalities connected with reduction of the freedom of movement are increasingly becoming socialist relics.

The worst situation on the labour market is in Minsk and Grodno oblasts with 22 and 26 applicants for every vacancy. According to official statistics the best situation is in the city of Minsk (3 applicants for one vacancy). Minsk municipality can conclude that although the situation in the capital is better that in other regions, the capital can expect an inflow of unemployed. Any member of the labour force can reach the same conclusion if he has adequate information. Such inflow can be restrained either by the conservative behaviour of the unemployed or by an absence of information caused by secrecy of the problems in question.

The society does not deal with this social problem. Unemployment payments are about 12bn BRB a month, with an average unemployment allowance of 134,000 BRB (6 USD or 9 DM). According to Belarusian standards this is considered to be sufficient.

Anti-inflationary policy in Belarus was pursued mainly by means of monetary measures. This is because the central problem for us is the exchange rate, whose major fluctuations can initiate inflationary processes. Switching to a currency band was necessary but an absence of other macroeconomics measures to reform the economy made this scheme ineffective. A similar policy of currency bands application was pursued at various times in different countries. However, before setting real band a "surgical" operation to balance the exchange rate on a new basis had to be performed. The leadership of the Belarus did not decide to do this and further development in the situation showed that this mistake had a major impact on the entire financial sphere. A close "environment of policy-makers" received advantages from the difference between official and market exchange rates.

A rapidly growing disproportion of the trade and payment balance lead already in spring to big discrepancy in the currency rates. This provided a more advantageous situation for importers who could buy currency at the official exchange rate. A massive scale of imports took place. This became a threat by the end of the year. Unsatisfied demand for hard currency plus inflational expectations left no way out. The NBB on its own cannot get out of it if it sticks to the same policy.

Another feature of the monetary policy is the considerable credit emission of the NBB which for 3 quarters increased from 3.8tn to 7.5tn BRB, i.e. by 77% (after inflation is taken into consideration). Major part of the emission went to cover the budget deficit (1.9tn BRB), purchase of grain (3.3tn BRB), house construction, compensation of money deposits of war veterans, paying off wage debts. The total increase in the monetary base was 56.1%. Taking into consideration the GDP increase of 2.6% we can safely state that monetary policy was not rigid and was among the tools to provide financing for the decisions of the executive power. There is no question of the NBB failing to provide credits for the government though this rule is obligatory even for transitional countries.

The government met the expectations of the directors of state enterprises, providing considerable amount of money in form of subsidies and grants to the state sector. This year state support to branches and separate economic entities amounted to 9tn BRB. At the same time budget revenues from VAT amounted to 8tn BRB. Thus a considerable part of budget revenues went to keep afloat loss generating state companies. It constitutes 19.3% of expenditures of the total budget. It was the economic price for preserving social peace, the price for the absence of reforms, for the rejection of restructuring and, if necessary, bankrupting industrial and agricultural sectors.


Negative Results of Economy-96


The most dangerous trends in the development of the economy in 1996 are connected with a worsening of the balance of payments, an increase in the export-import imbalance and the simultaneous deterioration of the exchange rate of the BRB. By the end of the year (by December) the trade balance deficit was $1.38bn. About half of it was due to Russia ($690m). Traditionally, a negative trade balance with Russia turns into the inferiority complex of Belarusian economy. The values of the goods and services bought from non-CIS countries exceeded sales by $486m. Germany sold goods for $326m more than it purchased from Belarus. If we add up all these figures it becomes evident that these partners (Russia and Germany) require special attention not only in the economic but also in the political context.

A Customs Union and the declaration of the formation of a Union with Russia and Belarus have not resulted in "fate-determining" events in bilateral economic relations. Export grew at the expense of such items as vodka (4.6 times), tyres, flax fibres, milk and dairy products. These relative figures (absolute indices on these goods are in favour of Belarus) symbolically acknowledge the paradoxical advantages of the "strategic partnership" within the Commonwealth. Moreover, the real situation in the direction of flows of taxable goods gives evidence of growing tensions between the partners.

Economic cooperation with her closest neighbours (except Russia) was favourable for Belarus. We have a positive trade balance with Latvia, Lithuania, Poland, Hungary, Slovakia, and Hungary. Latvia alone purchased goods for $227m (by $45m more than Germany). However, our advantages in trade with the countries of the so-called "near abroad" were lost in trade with the Ukraine which "out-traded" us by $305m. It is important to mention that the trade balance with other partners of the fSU (except Russia and the Ukraine) is positive. Of course, Belarus should make trade with her southern partner more active.

Analysis shows that from the geopolitical standpoint and in terms of strategy of foreign trade our economy is purely regional and it is connected with changes in demand for Belarusian products on the markets of neighbouring countries. We are dependent on sales of our goods in the "near abroad". There have not been any breakthroughs in other directions of foreign economic trade though the markets of the Middle and Far East might be actively researched to expand Belarusian exports.


Forecast for 1997


Macroeconomics analysis gives evidence that the economic dynamics of Belarus is based on sustaining its own current rate of development which is not based on considerable institutional changes. Official bodies and institutions forecast nominal GDP growth by 32%, the deflator being 26%. Such indices tell us that the authors of the forecasts and policy- makers are eager to predict an optimistic scenario of economic development in 1997. At 2% monthly inflation they want to keep the decrease of the BRB exchange rate at the same level.

Optimistic estimates of the Government and the NBB will help leadership of the Republic of Belarus test the effectiveness and efficiency of applied economic measures which were outlined in the Program for Social and Economic Development of the Republic till the year of 2000. It is a matter of principle. In fact, the mid term strategy of the economic policy is quite vague and contradictory.

Our forecast is based on the proposition that directionless of economic policy of the leadership of Belarus (it has not identified itself either as some key figures in the government and members of the government have not been appointed) will create negative tendencies and phenomena the meaning and influence of which have not been taken into consideration by the official bodies. The first decrease of the BRB exchange rate proves that it is necessary to carry out a "surgical" devaluation in the beginning of the year. It should be at least 25-30%. After this, if the situation is normal and monthly inflation is kept within 2%, the total inflation rate will be no less than 50%.

Secondly, the political situation in the Belarus will be a disincentive to foreign investment in 1997. Only domestic investment and household and business savings can be counted upon. With the inflation rate of 50%, the nominal interest rate of the NBB will be at least 60-75%. Now it is 35% and the volume of investment fell down by 14%. The only option that remains is to increase output of production on the available technical and technological basis, i.e. goods with a low degree of competitiveness. There is still a market for such products in the fSU.

Thirdly, one aspect that will influence the situation in 1997 is the economic integration and unification processes within the Union of Russia and Belarus. Attempts to drag the economy of the Republic of Belarus into the Russian market will have different impacts on "them" and on "us". If the trends of 1996 persist and remain we can look forward not to shocks and shakes but to the sluggish process of meetings, consultations, and sittings. However, let us make a suggestion that sooner or later Russia's own principles of economic (latent) self-interest will cool down the fervent good intentions of Belarus. In this case the Government of the Belarus will have to apply "unpopular measures", reduce domestic consumption, increase control over resource allocation and revenues, and strengthen state paternalism. Taking into consideration existing traditions of pursuing economic policy and the demands of the whole population for social security, this scenario is most likely to be staged.

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© Leonid Zaiko, President of the National Centre for Strategic Initiatives "East- West" () Источник: "БЕЛАРУСЬ В МИРЕ" No.001 01-01-97

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