The budget surplus surprised the Belarusian government

The functioning of the Belarusian economy under President Alexander Lukashenko's rule has already surprised many economic experts in Western Europe. Many of them have no idea how the country achieved a budget surplus, which in some sectors amounted to USD1.5bn.
The budget surplus surprised the Belarusian government

Vostochnyy, Belarus (Ilya Kuzniatsou, CC BY)

In mid-June 2018, at that time the Prime Minister, Andrei Kobyakov, expressed his surprise at the government meeting, when it turned out that in the period from January to April 2018 the state budget surplus amounted to about USD1.27bn, and increased by USD670m in April alone. The surplus in the general government sector amounted to USD1.8bn and grew by USD1bn in April. Interestingly enough, a surplus of USD100m was even recorded in the budget of the Social Benefits Fund.

The most important reason for the surplus was the increase in the budget revenues — from January to April they amounted to USD4.01bn, i.e. nearly 40 per cent of the annual plan. During that period the expenditures reached the level of USD2.61bn, that is, 28 per cent of the amount planned for the whole year.

There is one more reason for such optimistic results. Vladimir Tarasov, a financial expert from the specialist news site Belrinok, points out, that in recent years the Belarusian government has utilized a rather convenient way of presenting the budget. Every year, two scenarios of economic development are prepared — the basic scenario and the target scenario. The first one is pessimistic and takes into account events which could negatively impact the state’s finances, such as a decrease in oil prices. The second one is the optimistic scenario which ensures the proper implementation of the five-year development plan.

It is not hard to guess, that the scenario currently best suited to Mr. Lukashenko’s needs is the one that is subsequently presented to the public. If the country’s economic condition is not good, the target scenario is published, in order not to discourage investors and to use it as a propaganda tool. At present, when Belarus has once again entered a path of economic growth (with GDP growing by about 3 per cent annually), the government is using the basic, pessimistic scenario. As a result, such a high and unexpected budget surplus was recorded — according to the official narrative the surplus is the result of efficient management, but in reality it depends to the greatest extent on external factors.

The Belarusian method of rescuing unprofitable companies

One of the ideas for the utilization of a budget surplus is to use these funds to support unprofitable state-owned enterprises. This is a serious problem, because according to the recently published report entitled „Financial stability of the Republic of Belarus in 2017”, up to 55 per cent of state-owned enterprises are unprofitable, and 75.8 per cent are not able to pay their bills and meet their obligations on time.

In accordance with a Decree of the President of the Republic of Belarus, the state will support 300 enterprises operating in the agricultural and industrial market in the repayment of their liabilities resulting from the supplies of agricultural equipment in 2015. A total of USD28m was allocated for loans with an interest rate of 1 per cent and a maturity date by 2021.

The companies’ liabilities were also the result of the government’s activities. The agricultural machinery was supplied as a part of governmental initiatives to stimulate internal trade through the purchases of equipment from domestic entrepreneurs. As a result, the agricultural companies had no choice but to agree to the very preferential terms of purchase: repayment in installments over 2-3 years, with the first payment of 25 per cent due after half a year. However, even such solutions were not enough to help the state-owned collective farms (kolkhoz), which were not able to pay for the received gifts.

This is just one example of the actions the Belarusian authorities are taking in order to rescue failing domestic businesses. Supporting unprofitable enterprises with additional loans will not yield the desired result, until the very nature of their business operations changes. Unless the industrial sector is modernized, and modern forms of production management are implemented, any additional liabilities will only exacerbate the pathological debt issues and lack of profits.

The Belarusian president’s interference in the functioning of the market is also causing more harm than good. One could come to the conclusion, that the government’s greatest business achievement is the profitable re-export of petroleum products to Russia.

However, in the near future even this business venture will no longer be able to generate revenues that it once did. This is due to the fact that Russia will stop imposing an additional 30 per cent duty on fossil fuel exports, which previously allowed Belarus to purchase energy raw materials at preferential rates (read more).

No way to escape the debt trap

The experts estimate that the increase in export duties will not bring the expected results, especially in light of the recent data concerning Belarus’s public debt. According to the report published by the Ministry of Finance, it now amounts USD22bn. In October 2017, public debt amounted to USD19.3bn and foreign debt amounted to USD 16.4 billion.

From this perspective, the natural move would be to allocate a part of the budget surplus for the repayment of liabilities. Especially, since Belarus has already been spending more than USD1.3bn on foreign debt servicing, and the Chairman of the State Control Committee, Alexander Kurlypo openly stated that the size of the country’s public debt is paralyzing the financial system.

This is where another problem arises, namely the form of debt repayment. The vast majority of the budget surplus is generated in the BYN, while as much as 92 per cent of the debt is denominated in the USD. In order to pay off the foreign debt, according to the budget assumptions for 2018, a total amount of BYN4.4bn is to be allocated for this purpose — these funds will have to be converted. This, in turn, will inevitably have a negative effect on the exchange rate of the BYN and, consequently, on the amount of the remaining surplus and its possible utilization.

The authorities are no longer able to hide the fact, that new debts are incurred in order to repay the previous liabilities. As a result, there is no chance of deep structural reforms, apart from individual cases that will, in the short term, allow the government to receive further funding and to avoid confrontation with the international financial institutions, such as the IMF.

Apart from servicing the public debt, it would be a good idea to allocate extra funds to the establishment or implementation of social programs. Unfortunately, while the draft budget has to contain provisions regarding the repayment of debt in order to be adopted, the social programs are not taken into account to an extent that would at least enable Belarusian citizens to maintain their standard of living at a stable level. According to the Belarusian economist, Alexander Mucha, in order to ensure the relatively smooth repayment of the existing debts, it will be necessary to limit government expenditures, including social spending.

Although official statistics indicate, that the number of people living below the poverty line (i.e. living on less than USD100 per month) fell from 5.8 per cent of the population to 5.6 per cent, the percentage of residents whose disposable income is half that amount increased from 0.2 per cent to 0.3 per cent nationwide. The situation is the most difficult in Gomel, where 1.1 per cent of the residents have to live on less than USD50 per month.

In theory, jobs are available in Belarus. A record number of over 70,000 new jobs offers have recently appeared on the market. Without going too deep into the nature of most of these vacancies, it is sufficient to say that an average salary does not exceed USD150 per month. This is the equivalent of about BYN300, i.e. less than BYN100 above the poverty line. For comparison, tickets with goods seats for the FIFA World Cup in Russia cost about USD300. This means, that an average Belarusian would have had to work at least two months to buy such ticket.

Meanwhile, the state and the officials do not see this as a problem. They claim that it is important for people to work, and that such low paid jobs are better than nothing. Additionally, under the employment contract system, which is in force in Belarus, employees cannot easily move from one job to another. The International Labor Organization has long ago described this model as a modern form of slavery.

The author is an analyst cooperating with the Department of Conflict Studies at the Vistula Academy of Finance and Business in Warsaw.

Vostochnyy, Belarus (Ilya Kuzniatsou, CC BY)

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