What reforms will Belarus run in exchange for the Eurasian credit?
The Belarusian government committed to conducting market reforms in exchange for a US $2 billion credit from the Eurasian Fund for Stabilisation and Development. By the end of 2017, for example, Belarusian citizens will need to pay 70% of utilities costs, instead of 40% paid today.
What other reforms did the Belarusian government promise and how will the Fund control their fulfilment?
Alisher Mirzoev, Director of the Project Group for Financial Credits at the EFSD, answers these questions.
Restraining salary growth
The reform programme envisions that the salary fund, including social insurance contributions, will grow at a lower rate in 2016-2017 compared to 2015 (17.5%) and won’t surpass average annual inflation that is expected to meet the inflation target as the end of the respective year.
The inflation target and the forecasted average annual inflation as at the end of 2016 are almost the same, standing at 12%. Therefore, the salary fund in the consolidated budget should not increase by more than 12%, which approximates RUB 9.3 trillion in the rouble equivalent.
If the inflation target is met in 2016, in 2017 the salary fund should not increase by more than 6% (RUB 5.3 trillion).
This condition is aimed, in the first place, to constrain inflation because high inflation is one of the fundamental barriers to long-term sustainable growth.
The success of the reform programme as a whole will also be measured, to a significant extent, in terms of progress in countering inflation.
By the mid-summer of 2017, the Belarusian government plans to bring its price regulations into compliance with the norms of the Eurasian Economic Union that require that the government exercise minimum control over pricing and strengthen antimonopoly laws. The latter envisions control over the profitability of a limited number of enterprises dominating the market.
According to the credit-supported reform programme, the share of state-controlled prices in the consumer price index basket should slide from 23% as at the beginning of 2016 to 11% as at the end of 2017. It should be noted that after the first stage of liberalisation in the beginning of the current year, this figure was already cut to 12%.
The Belarusian authorities will continue to regulate prices of some socially important goods over 90 days in a calendar year to counter price surges. Here we would like to emphasise that this is important not only to comply with the letter of the programme, but also its intent: the antimonopoly tools and policies should not become a mechanism to re-introduce to price control.
Reducing directed lending
Net loans for state-run programmes will be cut by 1% and 2% of GDP in 2016 and 2017, respectively. In the rouble equivalent this will be RUB 9.4 and 20.2 trillion in terms of nominal GDP, respectively.
As for the effects of reducing directed lending on businesses, the situation is more complicated. Directed loans have helped to maintain short-term economic growth but this seems their only advantage as the quality of growth is unsubstantial compared to the price paid for it.
At the same time, given the scale of directed lending in Belarus and its short-term effect on economic growth, liquidating this type of lending instantaneously would be unrealistic and inadvisable – the economy should adapt to changes. For this very reason, the reform programme envisions a gradual decrease in directed lending. With reduced domestic demand, this will help to lessen pressure on the balance of payments and inflation and achieve a reasonable balance between public and private investments (as regards the long-term effectiveness of cumulative investments).
In fact, reducing directed lending suggests a decrease in non-efficient investments, not all investments.
However, delays in this process are extremely undesirable since the continuation of the practice of directed lending will aggravate consequences and require more painful corrective measures in the future.
Stimulating privatisation involves, in the first place, the removal of respective barriers.
There are a host of them, including the volatile macroeconomic environment with chronically high inflation rates, as well as inflation and devaluation expectations, the business environment that is not totally favourable for the development of the private sector, and problems with determining fair prices of privatised property.
The Belarusian government’s measures aimed at liberalising prices and markets, including the lifting of price control, the abandonment of directed targets for state-owned enterprises, a reduction in directed lending, and the provision of the banks’ resources as market loans, will help to determine the market value of enterprises.
In addition, the reform programme envisions simplification of the privatisation process and market evaluation of privatised property.
The programme does not include a list of enterprises to be privatised, but we believe that it can be compiled in the course of its fulfilment.
Enhancing business initiative
The credit-supported programme also aims to improve the business climate and promote private sector development.
To achieve this, respective regulations should be adopted, including the presidential directive on additional measures to enhance business initiative and promote business activities.
The draft directive prohibits cancellation of private property rights without a court order, or re-nationalisation, on expiry of a certain period, of property that was privatised earlier. It also provides for speeding up privatisation of small and medium-sized state-owned enterprises and the transfer of low-profit and loss-making state-owned enterprises into trust management with private businesses. In addition, state-owned property that has been leased by private businesses for more than three years may be bought out.
To ensure better protection of private business rights, it is proposed to appoint a commissioner for entrepreneur protection.
Social protection for vulnerable groups
In particular, the government plans to introduce non-cash housing subsidies for households where payments for utilities exceed a certain portion of the family budget as established by the government.
It also expects to raise certain social benefits extended as part of targeted government assistance.
In addition, we discussed with the government of Belarus the need to raise unemployment benefits, which are extremely small at the moment. This issue is still being considered by the government, but we would recommend that it should be solved as soon as possible because adequate support for the unemployed is very important in the context of structural changes.
Control over reforms
The results of the first credit extended by the EFSD to Belarus in 2011-2013, which was not a great success, were a good lesson for us as well as the country’s government. The current programme was devised with this experience taken into account.
In particular, we agreed with the Belarusian side on the mechanism for making necessary adjustments in the course of the programme. This means that if there is a risk that the reform targets will not be achieved the thresholds of some indicators will be toughened. For example, if inflation speeds up, monetary indicators or growth rates for the budget salary fund may be toughened.
Also, taking into account that the previous programme’s failure to achieve its targets was largely due to the fact that the indicative targets had not been met, in the current programme we may change the status of a failed indicative target to ‘control’ on our own and give a respective notice to the Belarusian side. As distinct from indicative targets, failure to achieve control targets will be a reason to not provide a tranche.
We understand, however, that the key factor for reducing risks and ensuring the programme’s success will be Belarus’ commitment to programme objectives.
This programme endorsed by the Prime Minister and the Chairman of the National Bank of Belarus is based on programmatic documents of the government and the National Bank. Some measures envisioned by these documents have already been fulfilled and this makes us confident that the programme can be a success.