IMF: Belarus Faces Falling Growth

UNCLAS SECTION 01 OF 03 MINSK 000600

SIPDIS

SENSITIVE

SIPDIS

E.O. 12958: N/A
TAGS: ECON ETRD PREL USTR BO
SUBJECT: IMF: Belarus Faces Falling Growth

MINSK 00000600 001.2 OF 003



1. (SBU) Summary: In a recent briefing a visiting IMF team
acknowledged that the Belarusian economy has seen strong growth the
past few years, driven mainly by the re-export of Russian oil, but
also to a lesser extent to growing productivity. However, Belarus
also faces a number of significant problems that will soon lead to
an end to growth, if no reforms are undertaken. The IMF predicts
that if Belarus' currently advantageous terms of trade remain
unchanged (unlikely, given Russian pressure to raise energy costs),
the economy will still run out of steam within the near future. In
previous years the GOB has told the IMF that Belarus' economy is
fine as is. This year, for the first time, senior GOB officials
were somewhat open to the IMF's message of reform. Mid-level
officials are much more open to liberalization, and their skill has
successfully countered some of the damage Lukashenko would
otherwise have inflicted on the economy. End summary.


2. (U) On May 30, visiting IMF Deputy Division Chief Balazs Horvath
informed a group of foreign diplomats on the findings of the
recently concluded annual IMF Article IV consultations in Belarus.
Unsurprisingly, the IMF found the GOB is "not in full agreement"
with the IMF on macroeconomic policy, with senior GOB officials
continuing to insist Belarus' quasi-socialist model works perfectly
well. However, while in previous years senior GOB officials
rejected outright IMF recommendations for macroeconomic
restructuring, this year the IMF found some tentative openness to
discussing macro reform. The IMF delegation was also granted
greater access to policymakers this year, including to economic
advisors in the Presidential Administration and to several
ministers.


Economy Growing, For Now...
--------------


3. (SBU) The IMF mission announced in their press release after the
visit that Belarus saw 9.2% GDP growth and 8% inflation in 2005.
These are the official GOB statistics. Horvath explained the IMF
agrees there was significant growth last year, but challenges these
official figures. He claimed the GOB's statisticians are very
professional and proficient, but the IMF has strong doubt about the
data they are given. Under the Belarusian system, enterprise
directors face considerable pressures to meet or exceed GOB
targets, and so many likely report that they met these goals, even
when they did not. Moreover, the CPI cannot accurately reflect the
true level of inflation because the GOB controls so many prices at
the local level, as well as imposes indirect controls on enterprise
profits. Horvath added the Ministry of Statistics rejected these
criticisms. He could not provide an IMF estimate of growth or
inflation.


4. (SBU) The IMF attributed Belarus' strong growth to two factors.
First, Horvath stated that in the past year Belarus saw significant
productivity growth, driven by an increase in capacity utilization.
He qualified this statement by saying that wages, raised by
government fiat, have still grown at a higher rate than
productivity every year for the past ten years. Second, and more
significantly, Belarus' economic growth last year was driven to a
major extent by the country's ability to buy heavily subsidized oil
and gas from Russia. Horvath explained that in 2005 Belarus bought
crude oil at half the world price from Russia, refined it and sold
it westwards at world prices. Most of this profit goes to the GOB,
which uses it to subsidize wage increases and social projects. He
added that Belarus does not re-export the subsidized natural gas it
buys from Russia, but that this subsidized gas allows Belarus'
energy intensive goods to be sold for less. Horvath said the GOB
had assumed world prices for oil would keep rising as they did in

2005. When the IMF pointed out that they expected oil prices were
unlikely to grow much in 2006, GOB officials began to worry about
loss of growth this year.


GOB's Unrealistic 5-year Plan
--------------


5. (SBU) Horvath pointed out that the GOB's new 5-year plan, for
2006 though 2010, assumes an annual GDP growth rate of 8.5%. The
IMF believes Belarus could have sustained GDP growth, given
Belarus' well-educated and disciplined workforce, but not 8.5% a
year. To reach this high level of growth, the GOB assumes it will
be able to double investment, squeeze consumption by 6%, and the 5-
year plan assumes unchanged external terms of trade--including no
changes in the price for subsidized Russian energy. The plan does
not envision any market liberalization or reform. In one positive
step, the plan does explicitly state the goal of limiting wage
growth to the level of productivity growth.



MINSK 00000600 002.2 OF 003


Endemic Weaknesses
--------------


6. (SBU) The IMF pointed out several endemic problems with the
Belarusian economy. Belarusian goods are losing market share in
Russia as Russian consumers become more affluent and as Russian
agriculture develops. Horvath also said that 114 Belarusian
entities, all controlled by the Presidential Administration,
account for over half of GDP. The GOB plans to maintain control
over all these companies. Horvath said this structure is very
rigid and hard to adjust to meet a changing market. According to
the GOB, around 15% of Belarusian businesses are loss-making, with
another 33% borderline. However, Horvath said that if
international accounting practices were used, at least half of
Belarusian firms would be considered loss-making. He also
explained that in Belarus the state controls the largest banks, and
uses these banks to provide directed loans. This practice leads to
a sharp loss of liquidity in the banking sector, requiring the
state to recapitalize these banks out of the state budget at the
end of each year. Such recapitalization eats up a significant
portion of the budget, equal to around one percent of GDP.


IMF Recommended Fixes
--------------


7. (SBU) Horvath argued that the GOB should start structural
reforms, including increasing government savings against future
disruptions, now when the economy is growing. Horvath stressed
that Belarus' GDP growth will decline each year and drop to nothing
if no changes are made. The IMF's suggestions for reform include:

--the GOB lowering taxes and expenditures; currently the government
redistributes half of GDP through the budget;
--limit wage growth to the level of productivity growth;
--discontinue centrally directed wage increases, which mandate
identical wage increases across the economy, regardless of the
health of an individual sector or enterprise;
--rapidly phase out directed lending;
--get rid of the Golden Share practice, which scares away
investment, particularly long-term strategic investment;
--reduce bureaucratic red tape and the size of the government;
--allow the private sector to drive growth.


And the Good News: GOB Slightly Open to Suggestions and Bureaucracy
Countering Lukashenko's Worst Policies
-------------- --------------


8. (SBU) The IMF has found that the GOB has very talented people
working at the mid-level in the National Bank and Ministry of
Finance. Unfortunately, there are not as many good people working
in the Ministry of Economics, Horvath said. These mid-level
officials understand how a free market economy works and are ready,
in some cases eager, for reform. In particular, the IMF found that
Belarus' monetary policy has made strong progress. However, at the
policy level the GOB is still wedded to its socialist/statist
model. Horvath claimed that this year the IMF mission had higher
level access than ever before, meeting with several ministers and
with members of the Presidential Administration. Also for the
first time this year these people did not reject outright the IMF's
calls for reform. Horvath believed that there is a general feeling
in the GOB that the current system is unsustainable and something
must be reformed.


9. (SBU) Horvath also pointed out that some in the bureaucracy are
now successfully minimizing the harm from Lukashenko's inept
economic management. For example, last November the GOB was
running a budget surplus of two percent. In late November
Lukashenko signed a Presidential Decree ordering his government to
spend the entire surplus by the end of the year, largely by
boosting salaries nationwide. This led to a massive infusion of
money into the economy and created a budget deficit for the year.
The IMF predicted this move would cause inflation to spike, but
instead the National Bank and Ministry of Finance successfully
cooperated to limit the damage. Horvath said they were able to
withdraw much of this money from circulation and rebuild national
deposits in early 2006.


IMF Predicts Growth to End
--------------


10. (SBU) When pressed to make a prediction on the future of the
Belarusian economy, Horvath answered that, if there is no change in
Belarus' terms of trade, then the GOB will have "a couple of years
of declining growth rates, well below the GOB's forecast of 8.5%."

MINSK 00000600 003.2 OF 003


However, if the terms of trade change, as seems likely with the
probable rise in Russian energy prices, then the Belarusian economy
will see its growth end faster and its advantageous window for
economic reform close sooner.


Comment
--------------


11. (SBU) Even though the IMF saw greater interest in reform this
year, Lukashenko repeats in most of his public addresses the need
for Belarus to maintain his "socially oriented" economic policies.
With Lukashenko strengthening his presidential control over the
economy, it is probable that the GOB will not institute any serious
economic reforms now while conditions are favorable. Instead, we
expect they will wait until the last possible moment to act, if at
all. This approach runs the risk of increasing the potential
disruptiveness of economic change and souring much of the public on
serious economic liberalization.


KROL