IMF will not grant Belarus an unconditional loan

Minsk, Belarus (ermakov, CC BY-NC-ND)

Belarus urgently needs a loan to meet its obligations. It is counting on aid from the International Monetary Fund (IMF). In September, experts from the IMF made a review of the reforms implemented by Minsk.

A mission of the International Monetary Fund visited Belarus, tasked with conducting consultations regarding Belarusian economic policy. Barely several months earlier – in June – a previous visit took place and resulted in concrete recommendations. The experts recommended an acceleration of reform of the state enterprise sector and the introduction of regulations to facilitate the operations of private enterprises. The IMF also encouraged Minsk to stop subsidizing utility payments – today Belarusians pay only 40 per cent of the price.

Economy based on loans

The arrangement of another visit after such a short time is related to Belarus’s application for a loan of USD3bn. This loan is needed because of the constantly growing state debt and falling value of exports. The situation is serious and there is no doubt that the country is in need of deep structural reforms but loans should be treated only as an ad hoc solutions. However, the Belarusian authorities are resistant to such thinking and stubbornly reject the possibility of carrying out reforms which could change the economic model that has existed for over two decades.

Kamil Kłysiński, expert of the Centre for Eastern Studies, writes in an article with the telling title “How to get out of a crisis without reform?” that, “Alexander Lukashenko, fearing the dismantling of the authoritarian system of government and growth of social discontent, categorically rejects the proposals of even the partial reforms presented by that part of his circle that realizes the need for an immediate transformation of the anachronistic, and as a result, very expensive economic model which is still based on quasi-Soviet management principles.”

In this situation, the only way to prevent economic collapse is to base the economy on loans from international sources. In March, Belarus signed an agreement with the Eurasian Fund for Stabilization and Development which is an institution existing within the framework of the Eurasian Economic Union, steered by Russia. The subject of the agreement is the payment of seven tranches of a loan of a total of USD2bn. The first part was paid in March, and the last will be transferred in 2018.

Although the agreement includes the commitment to implement economic reforms during the next three years, it is likely to remain a dead letter. Russia, which plays the leading role in the Eurasian Economic Union (although theoretically it is a union of several equal partners), has no interest in Belarus modernizing itself and becoming an independent, competitive entity. From the point of view of Russia, it is better for Belarus to remain dependent on Russian aid which is never provided for free.

Typical concessions that Belarus is forced to agree to are the sale of key enterprises. In this way, Beltransgaz was sold several years ago –the gas transit company, recognized in its time as the pearl in the Belarusian crown.   

Looking for an ad hoc rescue of the economy, Belarus is therefore falling more and more under Russian control. The money obtained does not have a real bearing on the state of the economy, because almost immediately it is allocated for the payment of already existing liabilities. Practically the whole of the first two tranches were used for the repayment of the foreign debt.

This debt is running at a very high level of 85 per cent of GDP – journalists from Belsat TV network calculated that since the beginning of 2000 it has increased almost 20-fold. The state is not capable of regulating the existing debt on an ongoing basis, therefore it has to take on more debt (and also limit investments), and so the debt spiral tightens itself. In February it was announced that the foreign reserves had fallen to a record low level of USD4bn. At the same time the minister of finance Vladimir Amarin estimated that in 2016 the country would assign approximately USD3.3bn to debt repayment and servicing.

Faced with this situation, the president of Belarus not only obtained a loan from the Eurasian Fund for Stabilization and Development, but also issued a decree in which he defined the ways to increase the efficiency of the economy. The president imposed on state enterprises the obligation to increase efficiency and create new jobs.

It is a document without any great significance, serving mainly to show that Lukashenko is in control of the situation and is capable of reacting on an ongoing basis. The fact that the authorities are still shirking responsibility for the dreadful state of the economy can be shown by the reasons for the collapse listed in the decree: the poor condition of global markets, the fall in demand in Belarus’s traditional export markets, the sharp fall in oil prices. The authorities feel no reason to blame themselves, and since they do not want to correctly diagnose the source of the problem, they cannot resolve it.

Recommendations: reforms are necessary

The loan from the Eurasian Economic Union is insufficient to regulate all the liabilities, so Minsk must also seek support from other institutions. The International Monetary Fund is prepared to grant a loan on strictly defined terms. In September, under the statutory annual review (the so-called article IV reviews) the IMF published a report which described the current economic situation in Belarus and contained many recommendations.

Analysts are calling on Lukashenko to stop putting off the reforms. They have criticized him for his inconsistent response to the economic collapse. While the authorities have been able to apply counter measures (mainly a restrictive fiscal policy, reduction of wages in state enterprises and a more flexible exchange rate), when they have been forced to by the situation, once these circumstances eased or it was possible to solve the problem with money from loans, the government departed from the undertaken measures.

The failure to carry out the reforms that the IMF is demanding means that economic growth will not be observed until 2018, and then it will be at a negligible level – in the range of 0.5 per cent. In turn, the implementation of reforms will result in a temporary fall in GDP, but in the years 2020-2021 it will grow. 

Undercapitalized banks

In the assessment of the experts from the IMF the stability of the banking system is threatened. They observed a dangerous rise in the default rate and a growing share of non-performing loans in the total number of loans.

“The results of stress tests of banks show their vulnerability caused by the weakness of the state-owned enterprises sector, which borrowed money,” said Peter Dolman, head of the IMF mission, at a press conference on September 21st.

He added that it is important to understand the scale of the problem. “To this end, an independent diagnosis of the quality of assets of the Belarusian banks has been conducted this year, the results of which will soon be made public”. Dolman also pointed out that a solution to the problem will not be possible without the implementation of deep reforms. “This is not only about the implementation of the reforms, but about their targeting,” Dolman said, explaining the IMF’s position.

The central bank of Belarus also carried out stress tests on the banks, but it reached diametrically opposite conclusions. According to the stress tests it conducted in spring this year, the banks have at their disposal adequate reserves. “In the long term the question of recapitalization of specific banks may arise, but in principle it should be stated that our financial sector has sufficient safety margins,” said Dmitry Lapko, Deputy Chairman of the Board of the National Bank of the Republic of Belarus.

In September the authorities of the central bank were already more restrained and admitted that three banks (Belagrompbank, Belinvestbank and Alfa-Bank, which is a branch of a Russian bank) might have difficulties in meeting the capitalization requirements.

Pension reform to be amended

The IMF called on the Belarusian authorities to continue the reforms of the pension system. In 2015 the decision was taken to raise the retirement age by three years. Under the new regulations women would retire at the age of 58 and men at the age of 63. Although the authorities were considering the variant 60/65 and 60/63, ultimately they adopted the one that seemed less socially sensitive.

The calculations of the IMF experts indicate that the variant that would be beneficial for the economy is one in which men and women retired at the age of 65. Such an option was not even considered by parliament and the government.

Leaving the retirement age at the current level will result in the system running out of money to pay the pensions. According to the IMF experts, the date after which the effects of such a reform will be felt is the year 2022. Surprisingly, the Belarusian Ministry of Labor and Social Welfare shares this view and is calling for the adoption of new legislation. Faced with criticism of the new law, President Lukashenko said that the last year’s changes in the retirement age are only the first step in the reform of the pension system and that an increase in the retirement age in 5-6 years cannot be ruled out. 

Moreover, the IMF forecasts that from 2023 the budget for the payment of pensions will be reduced by 0.15 percent of GDP per year. The IMF also proposes the valorization of pensions based on the rate of inflation rather than a wage growth.

Currently, pensions account for 10 per cent of Belarusian GDP. In view of the establishment of the retirement age at such a low level, Belarus is among the countries with the highest number of pensioners. At the same time, it is a nation with a relatively young population. According to data of the National Statistical Committee, the average age of men is 37.3 and of women 42.5. The average life expectancy is 73.9 years, so statistically women will be claiming their pensions for almost 16 years. 

Another of our authors, Aleś Alachnovič, Vice President at CASE Belarus, posted several comments to the article because, according to him, some parts of the article do not reflect facts:

  1. „Belarus urgently needs a loan to meet its obligations.”, „In this situation, the only way to prevent economic collapse is to base the economy on loans from international sources.”

Negotiations with the IMF concerning the stand-by stabilization loan has been going on since March 2015. Usually, when such a credit is urgently needed, negotiations are rather quick. This was the case of Ukraine which obtained the loan from the IMF in May 2014, over two months after the Maidan and at the beginning of its conflict with Russia. Belarus negotiated for over a year and a half.

  1. „This loan is needed because of the constantly growing state debt”.

This is not entirely true. First of all the foreign state debt of not only public finances but also the whole economy decreased in the last two years by more than USD2.5bn, from USD40.8bn in 2014 to USD38.2bn in July 2016. During the same period public finances deficit decreased from USD13.9bn to USD13.6bn. It looks a bit different when compared to GDP. Due to a devaluation of the Belarusian ruble in 2015 and at the beginning of 2016, the value of Belarusian GDP, in terms of USD,  dramatically dropped. This is why foreign debt, as a percentage of GDP, increased from 55.4 per cent in July 2014 to 76.7 per cent in July 2016. However, this increase is not a result, as it may be understood from the article, of a constantly growing state debt. Not to mention the SFP state debt is not such a burden for the economy.

Secondly, in reality Belarus has a budget surplus (without taking into account expenses for debt servicing). In 2015 the structural fiscal surplus of SFP (not only of the government) was 1.5 per cent of GDP (around USD1bn). In January-August 2016, the surplus was 2.5 per cent of GDP (around USD0.8bn). And the planned surplus for 2017 is 1 per cent of GDP. The structural surplus is used for debt servicing and/or repayment. This is why in absolute terms the foreign debt of Belarus is not increasing in the recent years.   

  1. „ Lukashenko (…) categorically rejects the proposals of even the partial reforms”, “the Belarusian authorities are resistant to such thinking and stubbornly reject the possibility of carrying out reforms which could change the economic model that has existed for over two decades.”

These statements are faulty because Lukashenko approved partial reforms, and only the partial ones as he doesn’t agree on the implementation of the full reforms package. I wrote about it http://financialobserver.eu/cse-and-cis/reforms-in-belarus-are-underway-despite-the-recession-and-the-elections/ a year ago. Since then several partial reforms have been implemented in different sectors. Even the IMF representatives confirmed in their report https://www.imf.org/external/pubs/ft/scr/2016/cr16298.pdf : „Executive Directors welcomed the measures taken by the authorities since early 2015 to stabilize the economy and begin implementing institutional and structural reforms, in a context of difficult economic conditions”.

  1. The article quotes a report prepared by The Centre for Eastern Studies (OSW) stating that Belarusian authorities “categorically rejects the proposals of even the partial reforms presented by that part of his circle that realizes the need for an immediate transformation of the anachronistic, and as a result, very expensive economic model which is still based on quasi-Soviet management principles.”

Once more this is partially true, and only in the case of a public sector, which is the dominant sector in Belarus. For the whole economy this is not true. Belarusian economy has a dual character. On the one hand there is an anachronistic public sector and state-owned companies, but on the other hand there is quite efficient private sector and private companies. According to different estimates the private sector is responsible for 30 per cent (as estimated by the EBRD) or even 50 per cent (official data) of GDP. There are such companies as EPAM which employs over 6 thousand of programmers and is listed on the NYSE; Swiss Stadler (train manufacturer) which employs almost a thousand FTEs; Austrian Kronospan (furniture and steel sector) which has invested over EUR530m since 2011; American General Motors, Polish Idea Bank, Japanese Panasonic, or French Danone.

  1. „Typical concessions that Belarus is forced to agree to are the sale of key enterprises. In this way, several years ago Beltransgaz was sold – a company dealing with the transit of gas, recognized in its time as the pearl in the Belarusian crown.”

Beltransgaz was acquired by Gazprom in the years 2007-2011 for quite a substantial amount. Since 2011 Belarus has not sold any of its major companies to Russians (or to any other country for that matter).

  1. „The money obtained does not have a real bearing on the state of the economy, because almost immediately it is allocated for the payment of existing liabilities. Practically the whole of the first two tranches were used for the repayment of foreign debt.”

This was true before 2016. The first two tranches of the loan (the March and July ones) valued USD800m were kept as the FX reserves by the National Bank of Belarus, so they increased from USD4.1bn (in March 2016) up to USD4.7bn (in September 2016). More can be found on the NBB website http://www.nbrb.by/engl/statistics/reserveAssets/assets.asp

I’m not praising the Belarusian authorities but we should justly present all facts before drawing conclusions. Unfortunately, this article is one-sided.

Aleś Alachnovič is an analyst at EY, Vice President at CASE Belarus and a PhD candidate at the Warsaw School of Economics (SGH), an alumnus of the London School of Economics.

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