Outlook for Belarus economy in 2015 looks bleak

Belarusian government is optimistic but preparing for the worst

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During the government meeting, Prime Minister of Belarus, Mikhail Myasnikovich stated that the draft forecast of social and economic development of Belarus for 2015 was improved with a view to the major challenges. Besides, state officials took into consideration a dramatic slowdown in investment and economic activity and suggested measures to compensate losses of the country.

Finally, state officials are willing to listen to experts’ opinion that the global crisis is likely to prolong and there is no point in hoping to get help out of the blue.  Prime Minister has also said that it is necessary to realize that all the states are in a complicated situation; therefore, Belarusians have to tackle problems themselves.

The forecast was calculated on the basis of the average annual oil price (83 USD per barrel instead of 100 USD per barrel) and the average annual ruble exchange rate (39 USD/RUB instead of 43).  These figures reflected the reality better than the parameters which were set in the Russian budget last week (100 USD per barrel and 37,7 USD/RUB) but did not correspond to neither the current situation nor the forecasts of the respectful and experienced analysts from Bloomberg to IMF and the World Bank.  If OPEC does not restrict the limit of oil production and the West does not lift sanctions against Russia within the next 6 months, it is possible that the oil price will fall from 81 USD per barrel up to 50-60 USD, while the Russian ruble will drop from 45,8 up to 50-60 USD/RUB.  Since the Ukrainian conflict is escalating all these aggravating factors can lead to immense consequences.

Amendments in the draft forecast have shown that the GDP in Belarus is supposed to be about 100,2-100,7%.  On the one hand, it can be seen the recessionary bias, but, on the other hand, taking into account forecast level of productivity, it is expected that the growth of salary will rise up to 101,4% while the growth of population income is supposed to hit 1,5%. Meanwhile, in the following year, the main task of the economic policy for the government is immediate reaction to the changes of external conditions.

Moreover, it is probably the first time when the forecast of domestic experts worse than the verdict of foreign ones. According to the World Bank report, which has been recently published, in the coming period economic prospects of Belarus are overcasting due to the unfavorable conditions in the external economic policy and inertia of reforms.  In spite of the fact that economic growth has been slowing down for almost 3 years, it is expected that in 2014 through the domestic demand of goods and net export indicators improvement, the GDP will increase up to 1,5%.

Geopolitical tensions both in Russia and Ukraine led to economic slowdown and accelerated devaluation of the national currencies. Furthermore, such tensions reduce external demand on the key export markets in Belarus. Thus, creation of new opportunities for Belarusian export in agricultural production on the Russian market, potash supply rebound, prospects of oil export increase will only partially compensate negative forecast.  Meanwhile, it is anticipated that prices for goods, oil and potash will drop. The World Bank considers that next year, economic growth in Belarus will make up 1.8%, mainly due to the increase of the internal demand, which will be boosted by monetary policy. Within a mid-term vision fluctuations at the level of 2% will probably remain the same through the domestic consumption demand (next year increase is supposed to be 3,2% and 1.92 in 2016), investments (1,7 and 3,4 correspondingly) and a moderate rise of the demand on the external markets ( export upsurge will make up 2.2% in 2015 and 1.6% in 2016).

The World Bank admonishes that though major constraints influence of the external funding has weakened due to the new agreements, concerning the conditions of oil supply between Russia and Belarus, nevertheless, it is expected that these benefits are going to decrease. In conformity with the Treaty on the establishment of the Eurasian Economic Community   Russia is obliged to increase the amount of crude oil supply for Belarusians refineries from 20 million to 24 million tons.  Besides, the agreement stipulates that Belarus is going to obtain significant amount of custom duties from export supply of oil products (1,5 billion dollars within a year  up to 2024 and, additionally, 1,029 bln in 2015).  It will secure the growth of foreign exchange revenue, minimize external imbalances, improve the balance of payment and contribute to the national debt repayment. The World Bank considers that current account deficit will drop up to 6,3% of GDP mainly though keeping export duties on oil in the budget. However, as acceleration of economic growth and salary increase are the main reasons for import promotion, thus, the situation will worsen. Inflation and rise of labour costs will reduce the competitiveness of products in the external markets and create downward pressure on Belarusian Rouble, in particular, if the progress of the national currency devaluation will continue to spread in the countries which are the main trade partners, predominantly in Russia.

The World Bank assumed that high inflation expectations will remain in Belarus due to the price growth on the utility services and depreciation of the Belarusian ruble. That is why the WB outlook for the following year is 19,9% ; 20,8% in 2015; 18,8% in 2016; 18% in 2017.  However, Belarusian government considers that the rate of the inflation can be kept at 12% by means of pricing policy improvement.  During the Council of Ministers meeting, Minister of Economy Nikolai Snopkov stated that the draft included strengthening personal responsibility for exceeding the targeted consumer price index. Besides, Minister of Economy claims that the draft also aims at eliminating monopoly as sound competition brings low prices. Thus, saturation of domestic consumer market is the major factor in reducing inflation rate.  Meanwhile, the Central Bank of Belarus will concentrate its efforts to tight inflation rate by means of monetary policy instruments. However, the Central Bank is going to enhance export credits with the view to make partial compensations from the budget.

The World Bank considers that there are ways to tackle the challenges which Belarus faces. The right policy can change the long-term path of economic development. Sebastian Eckardt, senior economist of the World Bank in Belarus, claimed that though the threat of the balance of payments crisis has been reduced, nevertheless, macroeconomic policy should be aimed at controlling inflation and devaluation pressure, mainly, by keeping the gradual growth of salary and developing supply of credit. Mr. Sebastian also added that inflation along with devaluation were the main reasons for economic instability.

At the same time it is necessary to have a comprehensive and consistent plan of structural reforms with a view to stimulate the growth of productivity and boost export competitiveness of raw materials. The point is that promotion of the growth productivity should be made through market discipline, market-incentives for the state-owned enterprises, state support reduction and implementation of stable and transparent privatization The authors of the report have mentioned that among the most significant measures is the introduction of a new approach towards policy lending and the state support, in order to reduce subsidized credits as it decreases tightening effect of monetary policy and formulate the necessity to maintain high interest rates in the rest of the economy. Besides, the World Bank suggests not only restructuring non-profitable state-owned enterprises and expanding social protection measures but also improving corporate management in the state-owned enterprises and promoting business climate to provide favourable conditions for the dynamic development of private sector.