| Abstract: |
Since the collapse of the Soviet Union in 1991, Belarus has maintained a
largely non-market economic system. This did not prevent rapid growth of its
economy over a sustained period up to 2011. However, the period of economic
growth in Belarus seems to be over. The factors that underpinned Belarus’s
growth, mainly the beneficial external environment, have gradually
disappeared. As a result, the country is confronted by the need to start the
far-reaching programme of market-oriented economic reforms and macroeconomic
stabilisation which it tried to avoid for so long. Reform will not be easy,
economically and politically. The potential hardship facing Belarus could be
at least partly cushioned by external assistance, in the first instance from
the International Monetary Fund and the World Bank. However, the IMF has
relatively fresh memories of the failure of its 2009-10 Stand-By Arrangement
(SBA) with Belarus, which provided substantial balance-of-payments support,
but which was derailed by its too-narrow focus on monetary and fiscal
quantitative performance criteria, and by insufficient reform commitment on
the Belarusian side. Other donors, such as the European Union, might be
reluctant to offer assistance as long as Belarus does not improve its poor
human rights record and start some political reforms. In this analysis, we
describe the characteristics of Belarus’s economic model, explain how the
Belarus growth ‘miracle’ was possible, why it cannot be continued, the reforms
that are needed and why they might be difficult to implement and, finally,
what the chances are, and what the conditions might be, under which Belarus
could obtain external support. Europe’s last non-market economy According to
the European Bank for Reconstruction and Development’s (EBRD) transition
indicators1 Belarus is among the least advanced of the former USSR’s successor
states in building a market economy. It is one of three reform laggards, the
others being Turkmenistan and Uzbekistan. This assessment relates to both
‘first generation’ reforms such as price, trade and foreign exchange
liberalisation and small-scale privatisation (Figures 1-3), and to more
sophisticated ‘second generation’ reforms such as large-scale privatisation,
governance and enterprise restructuring, and competition policy (Figures 4-6).
On average, all post-Soviet countries other than the Baltic states, lag behind
central and eastern Europe in the implementation of ‘second generation’
reforms, which makes Belarus even less advanced than Figures 4-6 suggest.
Price controls in Belarus have remained extensive, and have been reinforced
with each macroeconomic crisis. For example, in 2011 after a major devaluation
and its consequent pass-through to domestic prices, administrative price
regulation of ‘socially important goods’ reached almost half (49 percent) of
the consumer price index (CPI) basket. It subsequently went gradually down to
25 percent in 2014. However, after the devaluation of the Belarusian ruble
(BYR) at the end of 2014, a temporary ban on all price increases was imposed
(IMF, 2015a; IMF, 2015b) and stayed in force until April 20152. Use of such
broad price regulation has led to price distortions, which are particularly
evident in the utility sector. Electricity tariffs remain, on average, at the
level of about 50 percent of cost recovery. For natural gas, central heating
and water supply, the situation is even worse, with tariffs converging to 20
percent of the cost recovery level in early 2015 (IMF, 2015a). It is worth
remembering that Belarus is a net importer of energy resources (mainly from
Russia) and excessive energy imports contribute to trade and current account
deficits. Although in 2001 Belarus formally introduced current-account
convertibility of the BYR (as determined by Article VIII of the IMF’s Articles
of Agreement), it has never fully respected it. Various forms of
foreign-exchange restrictions have remained in place and in times of market
strain, for example in 2008-09, 2011 and 2014-15, exchange restrictions were
intensified, leading to the re-emergence of a ‘black’ foreign exchange market
and multiple exchange rates (see IMF, 2015c). The role of the private sector
remains limited. In 2010, according to the most recent EBRD estimate, the
private sector’s share of Belarusian GDP amounted to 30 percent only3;
probably it has not changed substantially since then. The activities of
private firms are administratively restricted in various ways and are often
the target of hostile government propaganda. Meanwhile, state-owned
enterprises must still meet mandatory production targets, as in the era of the
centrally-planned economy. If they fail to do so, their managers put their
careers at risk or even face criminal prosecution. Overall, Belarus retains a
largely non-market economy, which is business unfriendly (IMF, 2012). Not
surprisingly, the Heritage Foundation’s 2015 Index of Economic Freedom (IEF)
ranks Belarus 153 among 178 countries, making it one of the ‘repressed’
economies4. |