As the growth rate of the Belarusian economy slows down and foreign debt payments increase, the topic of structural reforms comes to the fore. Alex Kremer, the head of the World Bank’s office in Belarus, spoke on the roadmap of reforms, how much the state sector costs the economy and whether Belarusians would have to suffer as they did in the 1990s.
Urgent need for reforms
We have always believed and are still convinced that the economic future of Belarus depends on whether structural economic reforms will be carried out.
Our message remains unchanged: today, structural reforms are even more important and relevant than it was in the past. The Belarusian economic model the country chose around 2003 is currently under severe stress. Belarus has consumed more than it has produced for a long time and thereby making significant progress in terms of improving the living standards of people.
There are not so many ways to close the gap. The country is like a family. If you consume more than you earn, this is due to the depletion of your own savings and reserves, external borrowing or help from other countries. The ability to use all these options has recently been declining.
The state of balance leaves much to be desired: household savings are running out, and it is more difficult for the country to borrow from its traditional lenders. As a result, the country has to live within its means: it cannot afford the previous level of state support for agricultural enterprises, subsidizing heating services for the population.
The need for structural transformations became much more acute in 2017 when foreign debt reached 130% of exports than in 2003 when it was only 30%.
Roadmap of reforms
The Roadmap is a process of in-depth technical discussions and consultations of the World Bank and the authorities in 2016–2017, and then in 2018–2019. The roadmap includes five chapters. The first and most important is the real economy. We focus on the situation with state-owned enterprises and competition policy.
State-owned enterprises use national capital less effectively than private ones. They create a debt burden that increases the need for borrowing, including external borrowing. Economic growth is impossible without the effective use of capital. If Belarus continues to borrow outside the country in order to support its state-owned enterprises, its position will remain very fragile.
The World Bank does not insist on large-scale privatization. Some businesses will work better if they become private. Others may well remain state-owned, be restructured and made subject to market discipline. Some businesses will have to be closed down.
Another chapter of the roadmap is social protection. Belarus needs a broad and effective unemployment protection program. Expenditures on unemployment benefits in Belarus amount to 0.006% of GDP. The cost of targeted social assistance is 0.02% of GDP. According to our estimates, the cost of social assistance can be increased fivefold.
This will be the right and effective approach to protect the poor, vulnerable segments of the population. Even after a fivefold increase, these expenses for targeted assistance will be 95 times lower than the amount the state spent to help state-owned enterprises in 2015.
Another factor associated with state-owned enterprises is the debt burden that has already been accumulated. These are share loans in foreign currency of state-owned enterprises in Belarusian banks. One of the issues of the roadmap is how the National Bank and the government can ensure the stability of the banking sector until this debt burden is settled.
The National Bank has been quite actively working to implement the recommendations of the World Bank and the IMF to ensure the stability of the banking sector over the past three years.
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The fourth topic is heating tariffs. A study of household expenditure shows that the most vulnerable poor people can be protected through housing and utility subsidies. This will be more efficient than subsidizing heat tariffs. Now the population pays about 20% of the cost, the rest is covered by cross-subsidization, business, enterprises or by government subsidies.
The proposed housing subsidy will be targeted and intended for those who need such support. The key principle of the housing subsidy – it should be social and aimed at protecting those in need.
The final theme of the roadmap is government spending. This is the topic where the most advanced dialogue is taking place. For example, a system of per capita financing is being introduced in education. It will really allow schools to better manage their finances, allow to direct funds to where they are most needed.
In the health sector, the Ministry of Health, together with the Ministry of Finance, is currently testing a result-based financing system. That is, the money will be allocated to medical institutions for the procedures that they carry out, and not the total amount. This will allow the heads of medical institutions to better control their resources.
We are currently at the stage where the World Bank is ready to refer its recommendations to the government. Then it’s up to them.
Crisis of the 90s won’t recur
The fact that the attitude of the population of Belarus to reforms has changed shows that people have a rather realistic perception of reforms, many understand that structural transformations are inevitable, though painful.
Moreover, Belarus has advantages over the countries of the former USSR, which carried out reforms in the 90s. The transformation process for Belarus will be less painful because half of the workers are already engaged in the private sector of the economy.
So public sector reform will have a less serious impact on the overall social situation than it would have been ten years ago. In addition, Belarus has developed strong trade relations with the EU in the west and with Russia in the east, which is incomparable with the situation in the 1990s, when the countries were left alone with their difficulties.
It is like visiting the dentist – the longer you delay, the harder it will be.”
And finally, Belarus has budgetary resources to build a system of social protection, to ensure an acceptable standard of living for the most vulnerable segments of the population. And this is a significant advantage compared to the 90s.
It is difficult to predict how long it will last but I can say two things with absolute certainty. Firstly, it certainly will not be like the reforms of the 90s. Secondly, it is like visiting the dentist – the longer you delay, the harder it will be. But one will still have to go.
Read the rest of the insightful interview by Alex Kremer on TUT.BY