A heavy sense of duty. What has again brought Belarus to the brink of default

The Belarusian economy is similar to the elephant from the Buddhist parable of the blind men - its assessment depends on the observer's position in relation to the authorities. If you listen to what the government says, you might perceive Belarus to be an oasis of stability and order.

Growth on paper

According to IMF calculations, the global economy shrank by 3.4% in 2020, with the economies of the G20 countries shrinking by 3.2%, Russia by 3.6%, and Belarus by a mere 0.9%. Official Minsk interprets this as its achievement in crisis management. In support of their position, they cite data for the first quarter of 2021, when GDP grew by 0.9%. Industry grew by 9.2%., housing construction by 17.9%. Exports of goods and services grew by 16% (from January till February). The Belarusian budget remains balanced. In the first quarter of 2021, the central budget deficit amounted to the equivalent of as little as $654 million, or nearly 1% of GDP. In 2021, the deficit is projected at 2.5% of GDP, which, given the current situation, is a display of fiscal conservatism.

According to the government, there is no significant pressure on the balance of payments. The current account balance dropped below zero by only 0.4% of GDP in 2020 after a deficit of 1.9% in 2019. The surplus of foreign trade in goods and services was $1.9 billion or 3.1% of GDP in 2020 after a deficit of 0.6% of GDP in 2019.

The authorities are proud they managed to maintain growth, albeit small of the population's income. In the first quarter of 2021, real disposable cash income increased by 3.3% compared to the same period in 2020, and real wages grew by 5.4%. Even such a sensitive indicator as the rate of the Belarusian ruble against the basket of major currencies went up by 0.32% in January-March, although the dollar rose by 1.7%.

Recession, not stability

The Belarusian authorities are trying to act as if nothing special is happening either within the country or in relation to it abroad. In their usual way, they bet heavily on meeting the gross targets while ignoring the qualitative parameters, such as trends in investments, debts, non-payments, and competitiveness. A person who is not bound by ideology or official position within the government has a view of the Belarusian economy that significantly differs from the official one. Instead of stability and order, Belarus is going through a period of recession and stagnation. Even the official Belarusian statistics are unable to hide this fact.

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Belarus' GDP amounted to $60 billion in 2020. Compared to 2019, it decreased by $4.5 billion, or 7%, an estimated 0.07% of world GDP. This was also the case 5, 10 and 20 years ago. In 2020, GDP per capita was nearly $6,400. For comparison, it was $6,900 in 2019. In terms of GDP per capita, Belarus has firmly settled at the bottom of the list of eighty countries.

Average annual growth rates of real GDP fell short of 1% between 2011-2020. The growth was nearly three times slower than that of the global economy. According to the IMF’s optimistic forecast, the Belarusian economy will remain in recession in 2021, and GDP will shrink by 0.4%, while the global economy will grow by 6%. Besides Belarus, the economy will shrink only in Bhutan (-1.9%) and Venezuela (-10%) in 2021. The World Bank is more pessimistic, projecting a 2.2% drop in GDP in 2021 and very modest growth of 1.9% in 2022.

Internal sources of growth have been exhausted. Over the past four years, labor productivity has grown several times slower than wages. The government simply lacks reserves to stimulate consumption. The same is true for investments. After investments in fixed assets dropped by 6.8% in the first quarter of 2021, they fell by another 12.1%. The lion's share of investment is in the public sector and state-owned enterprises. The quality of these investments is critically low. This is recognized by the government itself. At the end of 2020, the government estimated the quasi-fiscal risks (risks associated with the fulfillment of obligations by business entities with benefits) in the public sector at 15% of GDP or nearly $9 billion. These figures were not included in the formal list of government obligations, which have sharply increased in recent years.

Lukashenko's debts and the default threat

At the beginning of 2021, the external debt of the broadly defined public sector exceeded $27.3 billion, or 45.5% of GDP. Domestic public debt amounted to 6.4% of GDP at the beginning of 2021. Approximately 90% of it is denominated in dollars. In other words, the total public debt amounted to 51.9% of GDP or $31.2 billion at the beginning of 2021 against 45.9% of GDP or $29.6 billion a year ago. At the same time, the government got so carried away by creatively describing the situation in the economy that at the end of 2021 it set a limit on public debt at 40% of GDP. Obviously, the real situation with the debt does not bother the officials very much, since they keep indulging in wishful thinking.

The state, as the owner, is responsible for the debts of its business entities. At the beginning of 2021, the gross external debt of Belarus exceeded $42.1 billion or 70.2% of GDP. This means that the government will have to deal with more than a half of the $15 billion in debt, and this is a very serious matter since, due to recent political developments, the country has been cut off from the global financial market.

The state of the public debt and gross debt stops the Belarusian authorities from easing its monetary policy. Despite strong pressure from the industrial, construction and agrarian lobbies, monetary policy has remained relatively tight. In the first quarter, the volume of the ruble money supply (M2 indicator) fell by 1.5%, having previously dropped by 3.3% in 2020. Cash in circulation increased by a mere 0.4% after growing 11.2% in 2020.

At the beginning of 2021, 11% of GDP had to be spent on servicing gross external debt. If, in the absence of investment, the government turns on the printing press, prices and the exchange rate of the Belarusian ruble will go up. If the devaluation against the dollar remains the same as in 2020, gross debt servicing will require 15 to 17% of GDP, which will bring Belarus to the brink of default.

Sad statistics

By early 2021, Belarus had exited the relatively comfortable zone of macroeconomic stabilization. Repayment discipline sharply declined. The investment climate significantly worsened. The problem of access to external capital markets became more acute. The outflow of human and entrepreneurial capital accelerated. Industry, the main sector of the Belarusian economy, slumped significantly.

According to official statistics, high-tech industries generate only 5.1% of the gross added value of manufacturing industry. Only 7% of new jobs are in high-tech. Analysis of industry's financial indicators shows a dangerous level of accumulated investment and management decisions. In 2020, industry's ratio of net profit to revenue was as low as 2.5%. It has been worse, but between 2016 and 2020 the ratio remained below 5.5%. Only 428 rubles of net profit was earned per 1,000 Belarusian rubles of state support in 2020.

The ratio of net profit to debt on loans was only 5.9%. It had been worse only during the 2015 crisis, at 2.1%. The financial indicators being what they are, industry is unable to function effectively without constant government support in the form of bank loans. In Belarus, they turn into an additional source of costs. If industrial enterprises used 26.8% of their revenues to pay off loans in 2016, this figure had increased to 37.9% in 2020. In certain sectors of the economy that were targeted by state modernization programs, loan servicing costs exceeded 50% of revenues in 2020.

Another critical qualitative indicator is labor productivity. It amounted to almost $14,000 across the economy in 2020. In the late 2010s, labor productivity exceeded $ 110,000 in the G7 countries (7.9 times greater than in Belarus), nearly $100,000 in the EU (7.1 times greater than in Belarus), and $76,400 in Poland (5.5 times greater than in Belarus). With such a low level of labor productivity, the Belarusian economy is doomed to the throes of stagnation and recession, with a debt noose around its neck. Meanwhile, Lukashenko insists on strengthening the state planning model with elements of war communism.