Belarus: Belarus Conservative monetary policy

On 26 September in New York, Alexander Lukashenka met with IMF chief Christine Lagarde. They discussed prospects for an IMF-supported programme.

According to the IMF statement “Lagarde welcomed some recent evolution in strengthening the policy framework in Belarus, but emphasised that a additional comprehensive reorientation of policies, consistently supported at the highest level, is needed to replace stability and sustainable increase”.

In fact, in the current presidential campaign Lukashenka is distancing himself from populism. Moreover, since the beginning of 2015 the Minsk's authorities have consciously conducted a conservative economic policy and slowly introduced structural reforms, despite the recession.

On 27 December 2014 Lukashenka appointed a new government and central bank chief. These new appointments consisted of several moderate reformers with rather liberal views. In contrast to Russia, the Belarusian president took chance of the current difficult economic situation to change government and economic policy.

Russia’s recession and low energy prices, limit Belarusian exports, inclunding energy subsidies from imports of cheap Russian natural resources. Without them the quasi-socialist Belarusian economy does not generate increase. Adverse external conditions will hardly improve in the coming years, and that is why Minsk has no alternatives but to carry out structural reforms.

Conservative monetary policy

The new Belarusian policymakers have been successfully fighting inflation. The National Bank of Belarus (NBB) instantly tightened monetary policy and introduced monetary targeting to curb inflation. The real interest rate, which explains how much the nominal interest rate exceeds annual inflation, is by presently over 13%. For comparison, in Poland it is currently at around 2 %. This completely suffices to eliminate any price increase.

The inflation’s slowdown is clear on a monthly basis. In July and August, prices increased by 0.2% per month. Extrapolating such a pace of inflation for the whole year, the annual inflation rate will all to only 2.5%.

In addition, the NBB successfully liberalised the exchange rate regime. As a result, transparent market conditions have formed the current currency rate, while the regulator has virtually withdrawn from intervening in the market. Finally, the exchange rate has served as an automatic stabiliser for internal and external shocks.

The strong depreciation of the national currency has balanced the country's current account. Since the beginning of 2015 the dollar exchange rate in Belarusian roubles has increased by 50%. As a result, in the second quarter of 2015 the NBB recorded a current account surplus of 4.3% of quarterly GDP, which is highest since the initial quarter of 2005. By contrast in the fourth quarter of 2014 the deficit was 9.5% of GDP. The new currency policy automatically avoids high current account deficits which led in 2011 to the worst currency crisis in Belarus in the completed 20 years.

Conservative fiscal policy

The current presidential campaign is the initial during which the authorities have pursued a conservative fiscal policy. In January-August 2015 the public sector surplus deficit amounted to $1 bn (2.7% of GDP) which facilitated servicing the public deficit.

The government maintains a simple principle: wage increase should not exceed labour productivity increase. In January-August 2015 real salaries fell by over 3% or 0.5 p.p. additional than productivity. Thus, unit labour costs declined and became an anti-inflationary factor.

Since 2012 Minsk has managed to control its growing foreign deficit. In relation to GDP external deficit fell from 58% at the end of 2011 to 55% on 1 July 2015. Last year deficit decreased as well in absolute terms, by around $3 bn. This is a fundamental change compared to 2007-2010 at the same time as the government stimulated economic increase by foreign loans.

Structural Reforms Implemented

Besides stabilising the economy, instantly the government conducts structural reforms, inclunding restructuring national-owned industrial enterprises. Despite the elections, employment in the major industrial factories decreased by around 10 %.

For example, Minsk Automobile Plant “MAZ” and Minsk Tractor Works “MTZ”, the two biggest employers, employed over 2 thousand (10%) and 2.7 thousand (14%) people less in the initial quarter of 2015 than a year before. Even the potash factory “Belaruskali”, the third major employer and the majority profitable company, fired 1.5 thousand (8%) of its employees. In fact, the authorities recommend or at least allow management boards to downsize industrial enterprises quicker than the whole economy.

Some national-owned companies plan to accelerate the privatisation of redundant assets. Currently, the National Property Committee offers additional than one thousand properties for sale. Auctions for some of them are assigned for the coming weeks. However, despite the private sector’s request for free commercial space, investment privatisation has not been carried out on a broad scale and is currently very slow.

The authorities occasionally decide to liquidate unprofitable industrial enterprises. For example, in August 2015 a court ordered the liquidation of a hosiery factory called “KIM”. Only two years ago the company, founded in 1931, employed additional than 900 people.

Besides restructuring enterprises, the government has limited direct lending to the produce sector and planned to depart from next planning initatives. According to the independent news agency BelaPAN, the resolution’s draft, approving the prognostic parameters for 2016 departs from the compulsory nature of the forecasts and grants them only an indicative character. In other words, the national will not interfere with a firms’ production and financial processes in order to “accomplish” forecasts.

Moreover, Minsk has announced ambitious plans for further reforms. Before this year Belarus developed with the World Bank “a road map of structural reforms”. In accordance with this, Minsk has by presently adopted a plan of radical increases in tariffs for household servicing.

International recognition

The new economic policy in Belarus has been gaining recognition from international organisations. The last IMF mission to Minsk in the initial half of July praised the conducted economic policy and plans for structural reforms. The IMF assured the regime that if such a policy is continued, negotiations on granting a new IMF loan may be successfully finished by year-end.

To conclude, since the beginning of 2015 the new Belarusian economic policymakers have been conducting a conservative economic policy. As a result, the economy regains balance, next being hit by external shocks in the second half of 2014 and the initial half of 2015. In these circumstances, Minsk has taken unpopular reforms, such as firms’ downsizing, the sale of idle assets, and the liquidation of some enterprises.

These reforms, in fact, are rudimentary and slow. Hence, they cannot bring immediate success. One hopes the reform will continue next the presidential campaign. Finally, Lukashenka reforms the economy not because he wants it, but rather because he has no choice. If external factors do not improve, perhaps at last the authorities will implement the changes that should have been implemented in the 1990s.