## cr17384 ## Source details **Canonical URL:** [cr17384](https://www.imf.org/-/media/files/publications/cr/2017/cr17384.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2017/cr17384.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2017/cr17384.pdf.json) --- ### Export diversification: key findings, metrics, and vulnerabilities - By product type, Belarusian goods exports concentrated in petroleum products and potash. - In 2015, nearly half of exports were accounted for by petroleum products (around 30 percent of the total) and chemicals (15 percent, mainly potash). - Revealed comparative advantages (2005–2015) strongest in fertilizers (including potash), mineral fuels, and dairy products. - Product space positioning: specializations are in peripheral areas of the product space, implying greater difficulty moving into new products. - Export quality and complexity: - IMF’s index of export quality (available to 2010) indicates Belarusian export quality in line with central and eastern European comparators, and substantially above EEU peer countries. - Hausmann, Hidalgo et al. (2011) measures indicate Belarus produces a relatively sophisticated set of exports given its income level, but appears to underperform income relative to export complexity. - Export destinations and concentration: - Russia accounts for around 40 percent of total exports and is the dominant market for diversified-product exports (excluding petroleum products and potash). - The EU accounts for around a third of overall trade. - Ukraine accounts for 10 percent of Belarusian exports—mainly of petroleum products. - Hirschman-Herfindahl market concentration index: Belarusian trade is significantly more concentrated over time than Russia and Kazakhstan; comparable to Kyrgyz Republic. - Risks from concentration: - Growth slowdown or recession in Russia via trade channel. - Disruptions to the energy market and price volatility. - Falls in key export prices: potash prices fell by 36 percent in 2016, leading to a loss of more than 1 percent of GDP in export earnings. - Services and GVCs: - Services credits rose from 8 percent of GDP in 2010 to 14 percent in 2016; IT share of services credits rose from 8 percent in 2010 to 17 percent in 2016. - Around 41 percent of services exports in 2016 were to the EU; 24 percent to Russia. - Belarusian enterprises largely unintegrated in forward GVCs; OECD (2015) measures show higher backward participation driven by energy. - Barriers to trade and integration implications: - Tariff and non-tariff barriers within the EEU; more restrictive relations with the EU; logistics and limited trade facilitation. - EEU common external tariff in principle since 2015; EEU tariff remains significantly above EU tariffs; further reductions pending by end-2019. - NTB estimates: Eurasian Development Bank (2015) estimated NTBs between Belarus and Russia equivalent to around 6 percent of export value; around 16 percent with Kazakhstan. - Policy levers and recommendations: - Continue to pursue WTO accession as a high priority. - Seek benefits from EEU integration while reducing NTBs and guarding against increased concentration. - Continue EU dialogue to phase out quotas and related instruments. - Proactively address logistical and infrastructural obstacles to new businesses. - Prioritize business environment reforms to bring new market entrants and promote inward FDI to support GVC participation. ### 2017 Energy Financing Agreement with Russia (Box 1): core elements and implications - Russia will make available to Belarus discounted crude oil, 24 million tons contracted annually through 2024. - Belarus will import 18 million tons annually from 2017 until around 2020 to refine for export; instead of importing remaining 6 million, Belarus will receive a transfer from Russia in the form of crude oil customs duties. - Transfer expected to be around $450-$500 million annually, depending on oil prices. - Measured goods exports will be lower during below-contract crude import volumes (reduced refining value-added); balance of payments impact offset by customs duty transfer (secondary income). - Gas pricing and payments: - Gas import price from Russia: $144 per thousand m3 in 2017 and $132 per thousand m3 in 2018. - In April 2017, Belarus made a lump sum payment of $726 million to Gazprom Belarus. - Additional Russian financial support: - EFSD support of a $2 billion package over 2016–18. - In September 2017, Russia provided a $700 million refinancing loan. ### Fiscal rules: current framework, weaknesses, and recommended design - Existing rules (highlights): - Balanced-budget rule for the state budget — excludes NPP project, extra-budgetary funds, and quasi-fiscal operations. - Medium-term central (general) government debt ceiling of 45 (50) percent of GDP (includes NPP and project loans from China, excludes guarantees). - At least 50 percent of annual public debt repayments should be covered by non-debt creating sources. - All proceeds from export customs duties on crude oil and petroleum products committed to foreign currency public debt principal and interest payments. - Prohibition on net new issuance of government guarantees on domestic corporate domestic debt. - Five-year moratorium on new taxes until 2020 and medium-term objective to maintain state tax revenues below 26 percent of GDP. - Key weaknesses and fiscal risks: - Lack of coherence among rules; unclear link between balanced budget and debt ceilings. - Tax revenue ceiling at 26 percent of GDP could conflict with balance and debt targets. - Important exclusions weaken headline balance: extra-budgetary funds, NPP expenditures, quasi-fiscal operations — average off-balance sheet expenditure was 2 ½ percent of GDP over 2010-16. - Fragmented public debt management and differing central/local debt issuance policies. - Medium-term planning and fiscal risk monitoring weak; insufficient capacity for medium-term forecasts. - Procyclical bias: balanced budget on non-cyclical basis prevents saving in good years and extra spending in bad years; overall government expenditures declined from 55 percent of GDP in 2008 to 38.3 percent in 2016 (excludes off-balance sheet expenditures). - Annual off-balance expenditure rose from around 1 percent of GDP in 2006 to around 3 percent in 2015 and 2016. - Major project loans (Box): NPP financing up to US$10 billion (90 percent Russian financing, 10 percent Belarusian); authorities project NPP cost around US$6-7 billion over 2012-2020; first reactor on track for completion in 2019, second in 2020. Chinese project loans outstanding US$3.1 billion at end-2016; China announced credit lines up to US$7 billion in May 2015. - Recommendations for fiscal rules: - Adopt a comprehensive debt anchor including obligations of all government levels and guarantees (guarantees were 11 percent of GDP in 2016). - Use gross debt for transparency; net debt may serve as reference. - Given macro volatility, set a lower “safe” debt target. - Link operational targets (budget balance or expenditure ceilings) to debt anchor using comprehensive measures including quasi-fiscal activities. - Strengthen institutions: enhance medium-term planning, fiscal risk assessment, and secure broad-based commitment across government. - Calibrating debt anchor: - Recommended medium-term gross debt limit: 60 percent of GDP (more conservative than IMF DSA benchmark 70 percent of GDP due to high FX share and volatility). - Simulation results: safe debt level about 45 percent of GDP; recommended single debt target in the range of 45-50 percent of GDP. - Historical negative shocks increased public debt by 22 percent of GDP in 2011 and by 16 percent of GDP over 2013-15. - Caveat: comprehensive fiscal risk assessment needed before finalizing safe debt level. - Operational rules: - Short-term: continue to target budget balance on a more comprehensive measure linked to debt path. - Medium-term: structural balance rule linked to debt path could foster countercyclical policy but requires buffers and reliable output gap estimates. - Consider a multi-year expenditure ceiling rule over "3 to five years" linked to debt target; advantages: simpler monitoring, does not rely on potential output estimates, adds stabilization. - Enforcement features: - Error-correction mechanisms (e.g., automatic spending freeze) and escape clauses for national emergencies or significant assumption errors recommended. - Concluding policy summary: - Immediately establish and communicate a medium-term fiscal anchor: target safe debt level in the range of "45–50 percent" including all levels and guarantees. - Link operational annual fiscal target to debt anchor; ensure comprehensive balance measures. - Consider multi-year expenditure ceiling rule. - Include error-correction mechanism and escape clauses. - Strengthen medium-term forecasting capacity and fiscal risk monitoring. - Secure broad-based government commitment; avoid ad-hoc SOE and social benefit policies outside overall fiscal target. ### State-Owned Enterprises (SOEs): scale, performance, vulnerabilities, and reforms - Scale and role (2016 / end-March 2017 snapshots): - In 2016 almost 50 percent of employed in Belarus worked in the SOE sector. - SOEs generated over 60 percent of total output and over 77 percent of industrial production. - 4,734 SOEs (out of 7,356 medium and big non-financial companies), grouped into 3,549 legal entities. - Majority fully state-owned: 1,800 legal entities; entities with dominant (over 50 percent) state ownership: 1,384 legal entities. - SOEs employed about 1.4 million workers (about 66 percent of the corporate sector workforce). - SOEs generated about 60 percent of total revenues (turnover) of the corporate sector and managed 76 percent of corporate sector’s assets; responsible for more than 70 percent of corporate sector’s liabilities. - Institutional weaknesses and state support: - Ownership, policy, and regulatory functions often concentrated in line ministries, creating conflicts and weak accountability. - Corporate governance and reporting well short of international best practices. - SOEs shielded from competition via subsidies, easier credit terms, directed lending, guarantees, preferential public procurement, and access to state banks. - Presidential Decree No. 106 (2016) limited state financial support to priority state programs, constrained direct subsidization, and required tender-based loans via the Development Bank for investment projects under state programs. - Financial performance (2013–16) and comparisons with private firms: - SOEs less profitable: ROE and ROA on average around four and three times lower than private companies; average net profit about twice lower. - SOEs less liquid, higher arrears, and run higher arrears on credit than private firms. - SOEs generate much lower value added per employee; operating profit per worker almost half of private companies. - Margin on sales lower for SOEs; costs of remuneration per worker lower but share of remuneration in total costs higher, suggesting overemployment. - Return on capital employed on average three times lower in SOEs than private companies. - Effective interest rate on credit and loans for private companies on average some 1.3 times higher than for SOEs (short series). - Sectoral performance: - Manufacturing: SOEs less profitable, less liquid, operating profit per worker 1.5 times lower; return on capital employed 1.7 times lower. - Agriculture: SOEs underperform severely; operating profit per worker about 2.5 times lower; return on capital employed almost three times lower; directed lending significant (Resolution No. 1102 — in 2017 57.5 percent of directed financing disbursements directed to agriculture, 78.5 percent toward current agricultural activities). - Construction: SOEs’ return on capital employed some eight times lower than private companies; SOEs’ assets dominated by fixed assets (74 percent vs 27 percent). - Crisis and distress metrics: - In 2013-16: some 16 percent of SOEs did not generate enough revenues to cover costs; 20 percent loss making; 33 percent faced liquidity problems; close to 4 percent in protracted financial distress. - Losses of loss-making SOEs peaked at 3 percent of GDP in 2015 (once specific state subsidies excluded) and fell to 1.5 percent of GDP in 2016 (0.8 percent excluding subsidies). - Liabilities of high-risk companies over 16 percent of GDP at end-2016. - Foreign-currency exposure and macro-financial nexus: - Top 100 heavily FX-indebted SOEs: liabilities around 40 percent of GDP and account for 70 percent of total SOE liabilities; long-term liabilities in FX almost 18 percent of GDP. - Currency composition of long-term FX liabilities: 53% USD, 44% EUR, 2% RUB, 1% CNY, 0.2% Other. - Currency composition of FX revenues: 34% USD, 34% EUR, 32% RUB, 0.4% CNY, 0.1% Other. - A simplified calculation: a 10 percent depreciation of the BYN against the $US would increase the debt by some 1.8 percentage points of GDP. - Majority (over 70 percent) of long-term FX liabilities of high FX-indebted SOEs is towards residents, amplifying financial and fiscal risks. - Governance and reform recommendations: - Comprehensive SOE reform strategy focusing on strengthening institutions, separating ownership and regulatory functions, clarifying commercial vs non-commercial objectives, and applying OECD governance guidance. - Key measures: tighten soft budget constraints; enforce reductions in subsidized directed lending and guarantees; unify government oversight of SOE assets; strengthen MoF fiscal risk assessment and reporting; strengthen corporate governance and supervisory boards; pilot privatizations; establish comprehensive SOE inventory and financial indicator database; implement framework to identify and track inefficient/loss-making SOEs with criteria for restructuring or liquidation; adopt IFRS and improve transparency. - Conclusions: - SOEs underperform private firms and create macro-financial and fiscal risks due to scale and tight links to financial sector. - Further reliance on SOEs as engine of growth risks holding back Belarus’ economic development. ### Labor market, social protection, and SOE restructuring scenarios - Employment structure and private sector capacity: - Small and micro organizations employ around 785 thousand people (18 percent of total employment in 2016). - Big and medium private and foreign companies staff headcount around 623 thousand after reductions. - Individual entrepreneurs numbered 236 thousand (5 percent of total employment) in 2016. - Share of private and foreign ownership in gross value added reached 50.1 percent in 2014 (41.4 percent in 2009). - Scenarios for layoffs (two approaches): - Approach 1 total layoffs over three years: 253.3 thousand (Year 1: 101.3; Year 2: 76.0; Year 3: 76.0). Men total 161.6; Women total 91.6. - Approach 2 total layoffs over three years: 282.3 thousand (Year 1: 112.9; Year 2: 84.7; Year 3: 84.7). Men total 153.9; Women total 128.4. - Fiscal cost estimates (December 2016 prices): - Approach 1 totals (BYN million): Year 1 996.9; Year 2 1171.1; Year 3 1258.7; Year 4 657.5; Year 5 481.3. - Approach 1 as percent of 2016 nominal GDP: Year 1 Total 1.1; Year 2 Total 1.2; Year 3 Total 1.3; Year 4 Total 0.7; Year 5 Total 0.5. - Approach 2 totals (BYN million): Year 1 1128.7; Year 2 1425.3; Year 3 1441.1; Year 4 717.9; Year 5 392.8. - Approach 2 as percent of 2016 nominal GDP: Year 1 Total 1.2; Year 2 Total 1.5; Year 3 Total 1.5; Year 4 Total 0.8; Year 5 Total 0.4. - Fiscal cost components include severance pay, early retirement, unemployment benefits, TSA (GASP), and revenue loss. - Social protection design recommendations: - Severance: current practice three monthly salaries paid in case of staff reduction or liquidation. - Fixed-term contracts widespread; recommendation to move toward more unlimited contracts in medium term. - Increase unemployment benefits at least to MSB for employable population (MSB referenced as BYN 193.14 in one estimate and BYN 204.35 in May/Dec 2016 tables) to reduce poverty risks. - Review obligatory paid public works requirement to ensure activities do not crowd out private-sector opportunities. - Improve ALMP design, strengthen cooperation with private employers, and regularly evaluate program effectiveness. - Proposed (not implemented) unemployment insurance: benefit 60 percent of average wage for up to six months (70 percent first 13 weeks, 50 percent next 13 weeks); funding via 0.5 percentage point contribution increase (employee 0.25 percent and employer 0.25 percent) to Social Protection Fund; Ministry decided in October 2017 not to introduce unemployment insurance and not to increase benefits (maximum unemployment benefit remained two base rates, or BYN 46 as of October 2017). - Mitigating and complementary policies for labor absorption: - Macroeconomic stability, deregulation, financial sector development, phasing out directed lending, and equal access to resources. - Improve business climate: reduce administrative burden, adjust sanctions, decriminalize selected offences, strengthen property rights. - Support SME and self-employment: adjust financial support conditions, consider temporary wage subsidies for new hires. - Targeted retraining linked to private sector demand (e.g., ICT sector capacity and Hi-Tech Park growth). ### Credit, banking sector dynamics, and policy implications (chapter excerpts) - Credit growth and patterns: - In 2016 real credit growth turned negative in May 2016. - Directed lending declined by 5.6 percent on average in 2016 at constant exchange rate in nominal terms versus 3.7 percent decline for non-directed lending. - Anemic investment contribution related to creditless recovery dynamics. - Bank asset quality and transfers: - NPL ratio jumped to 11.5 percent in 2016Q1 from 6.8 percent at end-2015; NPL ratio 12.8 percent as of September 2017. - Asset Management Company (AMC) and transfers of agricultural loans: BYN2.7bn moved outside banking system by end-September 2017 (equivalent to about 6¾ percent of banks’ credit to the economy and 2.7 percent of GDP). - Transfers largely exchanged for central and local government bonds; banks now hold about 70 percent of domestic government bonds at end-2016; claims on government increased to 14 percent of banks’ assets at end-2016 (from 6.6 percent end-2013). - Asset transfers: total BYN 2,724.7 mn — to AMC BYN 772.4 mn (28.3 percent), to local governments BYN 1,952.3 mn (71.7 percent); of which loans to SOEs BYN 2,472.4 mn (90.7 percent); NPLs BYN 1,211.6 mn (44.5 percent); loans under DL category BYN 469.6 mn (17.2 percent). - Profitability and provisioning: - System-wide ROA fell to 1.2 percent as of 3Q2016 from 2.3 percent as of end-2013; ROE fell to 9.4 percent from 16.2 percent. - Provisioning fell to below 40 percent of NPLs in September 2016 from 80 percent at end-2013. - Regulatory changes: - Standard definition of unhedged borrowers and stepped-up provisioning requirements to 5 percent by 2020 introduced January 2017. - Systemically important borrower category introduced May 2017; 150 percent risk-weight on full amount of exposures if additional credit extended. - Tighter provisioning and restructured loan rules being applied. - Corporate sector strain: - Sector-wide net profit margin declined to 1.6 percent in 2015 from 6.2 percent in 2012; share of loss-making companies rose to 23.5 percent from 5.5 percent. - Current liquidity ratio declined to 111 percent from 133 percent. - Corporate indebtedness increased to 50 percent from 35 percent of assets; non-financial corporate sector debt around 105 percent of GDP in 2016 (from slightly above 80 percent in 2014). - Policy implications: - Credit growth likely to remain weak given high NPLs, low provisioning, and constrained funding sources. - Priority to improve corporate balance sheets and efficiency, strengthen bankruptcy and resolution frameworks, avoid resorting to distortive measures (e.g., expanding directed lending or subsidies) without structural reforms, as these risk further deterioration in banks’ asset quality. - Reforms needed to improve SOE efficiency and creditworthiness to support sustainable credit demand. *Source: IMF staff analysis and compilation from cr17384 — Republic of Belarus country report / Selected Issues (chapter text).* ### References ______________________________________________________________________________ 20 ### References ### Export diversification: key findings and metrics - By product type, Belarusian goods exports are relatively concentrated in petroleum products and potash. - In 2015, nearly half of exports were accounted for by petroleum products (around 30 percent of the total) and chemicals (15 percent, mainly potash). - Revealed comparative advantages (2005–2015) are strongest in: - fertilizers (including potash), mineral fuels, and dairy products. - Product space positioning: - Belarusian specializations are in peripheral areas of the product space, implying greater difficulty moving into new products. - Export quality and complexity: - IMF’s index of export quality (available to 2010) indicates Belarusian export quality in line with central and eastern European comparators, and substantially above EEU peer countries. - Hausmann, Hidalgo et al. (2011) measures indicate Belarus produces a relatively sophisticated set of exports given its income level, but appears to underperform income relative to export complexity. - Export destinations and concentration: - Russia is Belarus’s main export market, accounting for around 40 percent of total exports—and a dominant share of diversified-product exports (excluding petroleum products and potash). - The EU accounts for around a third of overall trade. - Ukraine accounts for 10 percent of Belarusian exports—mainly of petroleum products. - The Hirschman-Herfindahl market concentration index shows Belarusian trade is significantly more concentrated over time than trade in comparators such as Russia and Kazakhstan; Belarus’s market concentration is comparable to Kyrgyz Republic. ### Barriers to trade and integration implications - Trade regime differences: - Belarus faces different trade regimes vis-à-vis Russia in the framework of the Eurasian Economic Union (EEU) and the European Union (EU). - Identified barriers to higher export potential: - Tariff and non-tariff barriers within the EEU. - More restrictive trade relations with the EU. - Other barriers including logistics and limited trade facilitation. - Potential policy levers: - WTO accession would help improve export competitiveness. - Further EEU integration could boost trade potential but may increase concentration of trading links rather than diversification. ### 2017 Energy Financing Agreement with Russia (Box 1): core elements and fiscal/trade implications - Russia will continue to make available to Belarus discounted crude oil, in an amount of 24 million tons, contracted annually through 2024. - Belarus will import 18 million tons annually from 2017 until around 2020, which it will refine for export; instead of importing the remaining 6 million, Belarus will receive a transfer from Russia in the form of crude oil customs duties. - This transfer is expected to be around $450-$500 million annually, depending on oil prices. - Measured goods exports will be lower during the period of below-contract volumes of crude oil imports, implying reduced value-added from refining and exporting; the balance of payments impact is offset by the customs duty transfer (secondary income). - Gas pricing and payments: - Belarus will continue to import gas at discounted prices from Russia, at a price of $144 per thousand m3 in 2017 and $132 per thousand m3 in 2018. - In April 2017, Belarus made a lump sum payment of $726 million to Gazprom Belarus. - Additional Russian financial support: - Eurasian Fund for Stabilization and Development support of a $2 billion package over 2016–18. - In September 2017, Russia directly provided to Belarus a $700 million refinancing loan. ### International evidence on diversification and policy implications (Box 2) - Export accelerations: - Cerra and Woldemichael (2017) find diversification and lower average applied tariffs are associated with higher probabilities of export accelerations. - Participation in global value chains (GVCs) is a critical trigger for export accelerations, driven by growth in foreign value-added content of exports; this highlights the importance of FDI. - Real exchange rate depreciations play a stronger role in Latin America relative to a worldwide sample. - Diversification and resilience: - IMF (2014) finds higher export diversification is associated with lower growth volatility; diversification “spurts” were most frequent in the 1960s and 1990s. - Barriers to trade from cross-country studies: - IMF (2017) identifies quality of infrastructure and transport services, availability of ICT, and more burdensome customs procedures (as measured by the World Bank’s Logistics Performance Index) as inhibiting trade in Latin America; similar structural factors are relevant for Belarus. - Implication for Belarusian policy design: - Policies that reduce trade costs (infrastructure, logistics, customs procedures), encourage participation in GVCs, and attract FDI are likely to support export diversification and export accelerations. *Republic of Belarus — Selected Issues (November 29, 2017), References* ### 2005. They find evidence that real and financial sector reforms are positively associated with higher growth, ### cr17384 - 2005. They find evidence that real and financial sector reforms are positively associated with higher growth, ### Export concentration and vulnerabilities - The degree of export market concentration implies several sources of vulnerability for Belarus. - Risks identified (several materialized in the past three years): - a growth slowdown or recession in Russia through the trade channel; - disruptions to the energy market, including volatility in pricing; - falls in the price of other key exports—potash prices fell by 36 percent in 2016, leading to a loss of more than 1 percent of GDP in export earnings. - Lower degrees of concentration (and higher diversification) are associated with lower growth volatility (see Box 2). ### Services sector expansion and composition - The services sector has a larger private share of ownership and is increasingly important. - Services credits (in the balance of payments) increased from 8 percent of GDP in 2010 to 14 percent in 2016. - The IT sector’s share of services credits increased from 8 percent in 2010 to 17 percent in 2016. - Central bank data on trading partners for services in 2016: - around 41 percent of services exports were to the EU; - 24 percent to Russia. - Services exports have also increased in terms of world market share (Figure 7). ### Participation in global value chains (GVCs) - Belarusian enterprises are largely unintegrated in forward GVCs (supplying intermediate goods and services used in other countries’ exports). - Data limitations noted: EORA database runs to 2013 and covers goods but not services. - An OECD (2015) study measures much higher backward participation (foreign goods and services used as inputs into the country’s own exports), reflecting the dominant role of energy exports. ### Tariff and nontariff policy barriers - Belarus has lowered tariffs in recent years, including within the Eurasian Economic Union (EEU). - The 5-member EEU has applied in principle a common external tariff since 2015. - Belarus has progressively reduced its average tariffs on manufactured goods, consistent with convergence to the common tariff (Figure 8). - The EEU tariff currently remains significantly above EU tariffs but further reductions are pending by end-2019, in line with World Trade Organization (WTO) accession commitments of Russia and Kazakhstan. - Nontariff barriers (NTBs) within the EEU remain significant and include safety and hygiene measures, technical barriers to trade, and other policy interventions including price controls, marketing restrictions, and subsidies. - Estimates of NTBs: - Eurasian Development Bank (2015) estimated moderate NTBs between Belarus and Russia, equivalent to around 6 percent of export value; - Higher NTBs between Belarus and Kazakhstan, around 16 percent. - Vinokurov (2017) finds Belarus would benefit most from a reduction in NTBs, especially manufacturers of machines and equipment. ### WTO membership and trade relations - Belarus is not yet a WTO member; all other EEU countries are now members, leaving Belarus at a competitive disadvantage for exporting to non-EEU countries. - The World Bank (2015) estimates net welfare gains to Belarus from WTO accession of 8.2 percent of Belarusian consumption, or 4 percent of GDP, in the medium term. - Trade relations with the EU remain covered by the 1989 Trade and Cooperation Agreement between the then European Community and the former Soviet Union: - Under this agreement, most-favored-nation treatment is the default for trade relations. - The EU can impose country-specific measures on Belarus, which is not a WTO member. Recent measures: removal of quota limits on textile exports; imposition of duties on steel bars at 12.5 percent. - Belarus has bilateral trade agreements with Azerbaijan, Tajikistan, Moldova, Uzbekistan, Turkmenistan, Ukraine, and Serbia. The EEU has a free-trade agreement with Vietnam. ### Logistical and market-entry barriers - Logistics performance indicators show mixed evidence: - World Bank Logistics Performance Index for 2016 ranks Belarus at 120 out of 160 countries (Ukraine 80th, Russia 99th). Belarus scores relatively well on timeliness and international shipments; scores worse on customs, infrastructure, and tracking and tracing. - World Bank Doing Business 2018 ranks Belarus overall 38th out of 190 countries (Russia 35th), reporting strong performance on trading across borders (time and costs of border compliance). A caveat: survey may reflect views of existing, undiversified exporters. - OECD trade facilitation indicators for Belarus are poor by regional standards (Europe and Central Asia). - Barriers to new market entrants limit diversification: - World Bank’s Entrepreneurship Survey indicates persistently low levels of new businesses (Figure 9). - Inward FDI was modest at 39 percent of GDP at end-2016. - Sources of inward FDI stock as at end-2015 are predominantly from Russia, which accounts for nearly three quarters of the total (including capital routed through Cyprus). FDI from China has so far been low. ### Authorities’ strategy and initiatives - Senior leadership announced a “one third - one third - one third” target for exports: one third to Russia and the EEU, another third to the EU, and the remaining third to other countries. - Through the EEU framework, Belarus is pursuing bilateral trade agreements with third countries. The EEU and Vietnam concluded a free trade agreement in 2015, which took effect in 2016. FTA negotiations in progress between EEU members and Egypt, India, Iran, Israel, and Serbia on goods; and with Singapore on goods and services. - Belarus has renewed efforts to join the WTO. Two discussions between Belarus and a working party of WTO members took place in 2017; technical discussions will continue into 2018. - The authorities are seeking to attract new companies at the Great Stone business park under construction: - Great Stone is a predominantly Chinese-financed special economic zone located just outside Minsk. - The business plan aims to attract 200 high-tech companies and employ over 120,000 people. - The park enjoys large tax and customs exemptions. ### Policy implications and recommended priorities - Benefits of export diversification require sustained policy efforts across multiple areas. Policy priorities suggested to maximize prospects for higher diversification: - Continue to pursue WTO accession as a high priority; accession discussions may include difficult talks on subsidies (including to agriculture) and the role of the state. - Seek potential benefits from further EEU integration, including pursuing an agenda to reduce nontariff barriers, while guarding against concentration risks. - Continue dialogue with the EU to create conditions for a phase-out of quotas and related instruments. - Proactively address logistical and infrastructural obstacles to new businesses, even if manageable for existing businesses. - Prioritize business environment reforms that bring in new market entrants and promote inward FDI, and ultimately prospects for greater participation in GVCs. ### Fiscal rules: introduction and international experiences - A fiscal rule is often a permanent constraint on fiscal policy through simple numerical limits imposed on budget or debt aggregates with a view to guide fiscal policy and promote fiscal sustainability. - As of end 2015, 96 countries had at least one national or supranational fiscal rule, of which more than half were emerging market and developing economies. - Common objectives and design elements: - Set a clear objective (traditionally long-term debt sustainability). - Contribute to economic stability by smoothing cycles. - Be comprehensive yet simple to ensure broad support and verifiability. - Be resilient to shocks to allow flexibility. - Three main categories of fiscal rules, with benefits and drawbacks: - Rules targeting budget balances (overall balances, primary balances, structural balances): - Can support debt sustainability and economic stabilization; simple to communicate and monitor. - Can lead to procyclical fiscal policies. - Structural balance rules account for economic cycles but face uncertainties in estimating potential output and excluding commodity and asset price cycles. - Debt rules: - Theoretically effective in ensuring convergence to a debt target and easy to communicate. - Do not provide short-term guidance because debt ratios react with a lag to policy slippages, exchange rate and interest rate fluctuations, and budgetary measures. - Operational challenge: difficulty of setting the appropriate debt target. - Expenditure rules: - Impose caps to nominal spending or real expenditure growth; easy to monitor and communicate. - Enhance stabilization by constraining spending during booms while allowing tax revenues to adjust. - May constrain automatic stabilizers during downturns; excluding cyclically-sensitive expenditures can complicate monitoring. - Do not provide a direct anchor for debt sustainability but give operational guidance for fiscal targets. *International Monetary Fund, Republic of Belarus—Selected content from IMF staff report.* ### 5. The next sections discuss how key elements of the fiscal rules in Belarus could be ### 5. The next sections discuss how key elements of the fiscal rules in Belarus could be ### Overview and objective - Strengthen Belarus’ fiscal framework to be more robust to economic cycles and large shocks by: - Improving the medium-term fiscal framework. - Establishing comprehensive debt anchor and budget balance measures. - Better management of fiscal risks. ### Existing fiscal rules in Belarus - Current rules include: - A balanced-budget rule for the state budget — which excludes an ongoing nuclear power plant (NPP) project, extra-budgetary funds, and quasi-fiscal operations (recaps and guarantees). - A medium-term central (general) government debt ceiling of 45 (50) percent of GDP (which includes the NPP and project loans from China, but excludes guarantees). - At least 50 percent of annual public debt repayments should be covered by non-debt creating sources. - A commitment to use all proceeds from export custom duties on crude oil and petroleum products for foreign currency public debt principal and interest payments. - A prohibition on net new issuance of government guarantees on domestic corporate domestic debt. - Additional targets: a five-year moratorium on new taxes until 2020 and a medium-term objective to maintain state tax revenues below 26 percent of GDP. ### Key weaknesses and fiscal risks - Lack of coherence among rules: - No clear relationship among the rules; unclear whether a balanced budget would maintain the debt ceilings. - A tax revenue ceiling at 26 percent of GDP could be inconsistent with the budget balance rule and debt ceilings. - Public debt management is fragmented, with separate ceilings for debt at the central and local levels and on guarantees. - Different policies are adopted on debt issuance at the central and local level. - Important exclusions weaken budget balance measures: - Headline state budget balance excludes extra-budgetary funds including the social protection fund (SPF), NPP expenditures and quasi-fiscal operations such as recapitalization and guarantee payments. - Consequence: public debt dynamics worsened despite continuous headline budget surplus. - Staff-calculated comprehensive balance improves linkages with debt dynamics. - The average off-balance sheet expenditure was 2 ½ percent of GDP over 2010-16. - Medium-term planning and fiscal risk monitoring are weak: - No clear single medium-term fiscal anchor (e.g., size of public debt). - Capacity of medium-term forecasts needs enhancement. - Insufficient attention to monitoring government’s overall exposure to fiscal risks. - Procyclical bias: - Balanced budget defined on non-cyclical basis does not allow saving in good years and extra spending in bad years. - Overall government expenditures, including SPF expenditures, reduced from 55 percent of GDP in 2008 to 38.3 percent in 2016 (this measure excludes off-balance sheet expenditures). - Annual off-balance expenditure, mainly for SOE and bank recapitalization, rose from around 1 percent of GDP in 2006 to around 3 percent of GDP in 2015 and 2016. ### Box: Major project loans (treatment and risks) - Nuclear Power Plant (NPP): - Financing arrangement: Russia-Belarus intergovernmental agreement; borrowings are sovereign debt on-lent to Belarusian NPP company. - Available financing up to US$10 billion (90 percent Russian financing and 10 percent Belarusian co-financing). - Authorities project cost of the NPP project around US$6-7 billion over 2012-2020. - First reactor on track for completion in 2019; second scheduled for 2020. - NPP related loans are treated as budget expenditures in IMF staff framework; repayments start in 2021, in principle from resources generated by Belenergo-owned NPP company. - Chinese project loans: - Several credit lines to finance investment in priority sectors; outstanding loan stock was US$3.1 billion at end-2016. - Loans have maturities up to 18 years, contracted in US dollars, euros, and Chinese yuan; distributed by Export-Import Bank of China and China Development Bank. - The Belarusian government is legal borrower of record and on-lends funds to state-owned and private companies. - In May 2015, China announced credit lines to Belarus of up to US$7 billion. - Treated as on-lending; if corporate borrowers cannot service loans and government assumes repayment burden, relevant amounts would need to be reclassified as government expenditure. ### Recommendations: updating the fiscal rules (based on international experience) - Adopt a comprehensive debt anchor: - Target a safe debt level based on a comprehensive debt measure that includes obligations of all levels of government. - Include government guarantees, given large stock of guarantees (11 percent of GDP in 2016) and continuous payments by the government. - Use gross debt for transparency; net debt may serve as a reference. - Given Belarus’ macroeconomic volatility, set a lower “safe” debt target to reduce likelihood of losing control of debt dynamics. - Adopt operational fiscal targets linked to the debt anchor: - Operational targets could be budget balance or expenditure ceilings. - The measure for the target should be comprehensive, including all levels of government and quasi-fiscal activities, to better link to debt dynamics. - Targets should be resilient to shocks and contribute to macroeconomic stability. - Strengthen supportive institutions and secure broad-based government commitment: - Enhance medium-term planning and fiscal risk assessment. - Policy makers at different levels should commit to comply with rules and avoid policies that undermine the fiscal anchor. ### Calibrating public debt anchor for Belarus - Debt limit identification: - Debt limit roughly calibrated as level beyond which debt distress is likely (default, restructuring, large sovereign spread increases). - Single debt limit strengthens the fiscal framework and links to debt sustainability objectives. - Recommended medium-term gross debt limit: - 60 percent of GDP recommended as medium-term gross debt limit for Belarus. - Rationale: IMF DSA benchmark for Market Access Countries uses 70 percent of GDP, but Belarus’ high foreign currency share of public debt and larger macroeconomic volatilities justify a more conservative 60 percent of GDP limit. - Historical evidence: in 2011 and 2015 when public debt approached 60 percent of GDP, sovereign spread increased rapidly and country was downgraded. - Deriving a safe debt target: - Simulations choose an initial debt level such that debt remains below 60 percent of GDP with chosen probability over the medium term, given negative historical shocks. - Simulation assumptions and method: - IMF DSA framework used for stochastic simulations, drawing shocks from calibrated joint normal distribution of historical values for real GDP growth, effective real interest rate, primary balance and change in real exchange rate over 2006-2016. - Simulation results: - Safe debt level for Belarus about 45 percent of GDP; provides fiscal buffer of around 15 percent of GDP below the 60 percent limit. - Historical negative shocks saw public debt increase by 22 percent of GDP in 2011 and by 16 percent of GDP over 2013-15. - Belarus’ history of maintaining high primary balances could permit a smaller buffer. - Overall recommended single debt target in the range of 45-50 percent of GDP. - Caveat: - Comprehensive fiscal risk assessment (e.g., contingent liabilities from SOEs) is needed before finalizing a safe debt level. ### Operational rules: short-term and medium-term options - Short-term: - Continue to target budget balance but on a more comprehensive measure and linked to a debt path toward the safe debt level. - Advantage: preserves role of overall balance as operational target and may be easier to adopt. - Drawback: tends to be procyclical; may be unavoidable given recent adverse debt dynamics. - Medium-term: - Structural balance rule linked to a debt path could foster countercyclical policy by allowing revenues and some expenditures to respond to the cycle. - Constraints: - Requires fiscal buffer for implementation, difficult at current juncture. - Highly sensitive to measures of potential GDP growth (output gap), which is difficult to estimate given high GDP volatility. - Complex to implement and verify compliance due to dependence on unobservable variables. *Source: Belarusian authorities and IMF staff calculations.* ### 16. A multi-year expenditure ceiling rule (linked to debt target) could be a more practical ### 16. A multi-year expenditure ceiling rule (linked to debt target) could be a more practical ### Multi-year expenditure ceiling rule: design and advantages - Setting a stable path for expenditure growth ceiling over "3 to five years", consistent with a debt target, would: - Help preserve debt sustainability. - Add a stabilizing component to fiscal policy by providing a smooth and predictable path for expenditures so they "would not need to adjust to yearly shocks." - Advantages over a structural balance rule: - "Does not necessarily rely on estimates of potential output," making it a simpler rule and "easier to monitor." - Preconditions for effectiveness and credibility: - "Strengthening medium-term fiscal management" and rebuilding fiscal buffers. ### Error-correction mechanisms and escape clauses - Error-correction mechanism: - Could increase enforcement of fiscal rules through automatic corrections to deviations from target. - Examples from other countries: - Slovak Republic and Poland added triggers as debt approaches the debt limit. - In Slovak Republic, once debt breaches "50 percent of GDP", the government needs to take corrective measures to prevent debt from reaching the "60 percent limit." - Belarus could consider mechanisms such as an automatic spending freeze (or cuts) to support a debt ceiling. - Escape clauses: - The new rule "should also include escape clauses." - Revisions to the planned path should be allowed under well-motivated conditions, including national emergencies or significant errors in the underlying assumptions (e.g. long-run growth, interest rates). - Requires supportive fiscal surveillance mechanisms to avoid damaging credibility. ### Concluding fiscal framework recommendations (policy summary) - Establish and communicate immediately a medium-term fiscal anchor: - Target a safe debt level in the range of "45–50 percent". - The debt measure "should be comprehensive, including all levels of government and guarantees." - The government could retain "existing different debt ceilings for central, local government debt and guarantees" for its own policy guidance. - Link operational annual fiscal target to the debt anchor: - Short term: "the budget balance could be used as the operations target," but it "needs to be linked to a medium-term debt path to target the debt anchor." - Ensure balance measures are comprehensive, "including all levels of the government, quasi-fiscal operations and extra budgetary funds." - Consider a "multi-year expenditure ceiling rule (linked to the debt objective)" as a more practical and desirable medium-term option. - Adopt additional mechanisms to ensure credibility: - Include an "error-correction adjustment mechanism" (e.g., automatic spending freeze) to prevent breaching the debt target. - Include "escape clauses allowing revisions to the planned path under certain conditions, e.g. national emergencies or significant changes in underlying assumptions." - Strengthen medium-term fiscal planning: - Build "enhanced capacity of medium-term macro-fiscal forecasts, based on realistic assumptions." - Fiscal risk management: - "Fiscal risks should be identified, monitored and incorporated in the budget process." - Some steps can be implemented immediately, including adopting "a credible single medium-term safe debt target" and improving budget and debt measures as first steps. - "The establishment of proper operational targets might require technical assistance." - Political economy and coordination: - "It is key to secure broad based support from all levels of the government." - Recent ad-hoc policies to support the SOE sector and social benefits have "resulted in deteriorating fiscal stance" because these were not incorporated in the overall fiscal target. - Ensure commitment from all levels of government to the fiscal rules. *Ministry of Finance has already requested assistance to enhance their revenue forecasting.* --- ### SOEs in Belarus: scale, role, and fiscal implications (overview) - Scale and importance: - "In 2016 on average almost 50 percent of employed in Belarus worked in the SOE sector." - SOEs generated "over 60 percent of total output" and "over 77 percent of the industrial production." - Counts and concentration (as of end-March 2017): - "4,734 SOEs (out of the total of 7,356 medium and big non-financial companies), grouped into 3,549 legal entities." - Majority fully state-owned: "1,800 legal entities." - Entities with dominant (over 50 percent) state ownership: "1,384 legal entities." - Employment and shares: - SOEs employed about "1.4 million workers (about 66 percent of the corporate sector workforce)." - SOEs generated about "60 percent of total revenues (turnover) of the corporate sector." - SOEs managed "76 percent of the corporate sector’s assets" and were responsible for "more than 70 percent of corporate sector’s liabilities." - Role in policy: - SOEs are central to the country's growth strategy and used to implement socio-economic policy objectives (exports, production targets, employment, wages). - The distinction between commercial and non-commercial functions is often blurred; some SOE activities resemble general government functions. - The state footprint raises concerns about a level playing field for private companies. ### SOE institutional weaknesses and state support - Institutional weaknesses: - Ownership, policy, and regulatory functions often concentrated in a line ministry, creating conflicts between ownership value maximization and socio-economic objectives and weakening accountability. - "Corporate governance and reporting of SOEs are well short of international best practices." - SOEs often shielded from competition due to state support and preferential treatment, distorting incentives and reducing efficiency. - Forms of state support and protection: - SOEs benefit from government subsidies, easier access to credit on better terms, directed lending programs, government guarantees, and access to state banks. - Recapitalization funds and sectoral restructuring programs provide public resources to SOEs. - Public procurement preferential treatment and government economic development programs favor SOEs in targeted sectors. - Presidential Decree and limitations (2016): - "In 2016 a Presidential Decree (No. 106) financial support of the state to the real sector: (i) should be limited to priority state programs (with a competitive selection mechanism), (ii) direct subsidization from the budget should be limited to reimbursement of expenditures on production equipment and spare parts for investment projects under state programs, and (iii) loans should be limited to those granted, based on a tender, by the Development Bank for investment projects under state programs (consisting of 20 programs)." ### State intervention in distressed SOEs and restructuring gaps - Active state role in addressing distress, but no comprehensive framework: - State recapitalizations and transfers have been used to break feedback loops between SOEs and financial institutions by substituting bad loans with government bonds. - Examples: - Heavily indebted wood working companies acquired by the Ministry of Finance and transferred to the Development Bank for debt restructuring. - Problematic agriculture companies moved into a specially created asset management company (AMC) or transferred from republican to local governments. - Little visible progress in operational restructuring of these SOEs. - Corporate insolvency framework: - Remains relatively weak, with lengthy rehabilitation procedures. ### SOE financial performance vs. private companies (2013–16 overview) - Profitability and returns: - "On the macro level, SOEs are less profitable than private companies." - In "2013–16, SOEs’ return on equity (ROE) and return on assets (ROA) were on average respectively around four and three times lower than those of private companies," and SOE average net profit was "about twice lower." - Differences would be more prominent if data were corrected for government subsidies. - Liquidity and arrears: - SOEs are "on average less liquid than private companies," based on current liquidity ratios and the share of overdue payables. - SOEs run "higher arrears on credit and loans than private companies." - Wage arrears per worker picture is mixed; SOEs appear to finance a larger share of their wage bill with bank loans than private companies. - Productivity and efficiency: - SOEs generate much lower value added per employee than private companies. - In "2013-16 their operating profit per worker was on average almost half of private companies," despite lower overall costs of production per worker. - Margin on sales was on average lower in SOEs, implying selling prices of SOEs’ products were on average lower than those of private companies. - Costs of remuneration per worker were lower in SOEs, but "the share of costs of remuneration in total costs of production was on average higher in SOEs than in private companies," which may suggest overemployment in SOEs. *Source: IMF staff note (Republic of Belarus) — content as provided in the chapter text.* ### 7.6 percent). The highest share of debt issued to pay wages was held by SOEs under the supervision of the Ministry ### REPUBLIC OF BELARUS ### SOE versus private sector: broad findings - Highest share of debt issued to pay wages was held by SOEs under the supervision of the Ministry of Architecture and Construction (i.e., 76.9 percent of the total accrued wage bill), and Ministry of Industry (10.5 percent). SOE holdings named: Belarusian State Light Industry Goods and Production and Sales Concern (Bellegroprom - 39.1 percent) and the Trade Concern of Forestry, Woodworking and Pulp and Paper Industry (Bellesbumprom -15 percent). NBRB analytical reports. - Return on capital employed was on average three times lower in SOEs than in private companies. - SOEs’ net operating profit as a ratio of fixed capital investment was on average 2.5-3 times lower than private companies. - Calculated effective interest rate on credit and loans for private companies is on average some 1.3 times higher than for SOEs (based on very short time series: 3 quarters). - SOEs have more assets per worker and rely more heavily on equity than debt financing; however, asset quality and productivity differ substantially between SOEs and private companies. - Private companies: cost of debt financing on average lower than their return on equity, suggesting private firms may generate earnings by acquiring debt. ### Capital efficiency and incentives (analysis) - Possible factors for SOE underperformance: - Investment decisions of SOEs made at macro/sectoral policy level may not be optimal for individual firms. - Poor system of incentives and lack of managerial skills. - Presence of non-core assets and holding structures protecting inefficient companies. - Measurement notes: - Return on capital employed measured as operating profit/loss to capital employed (proxied by assets minus short-term liabilities). - Asset values reported at book value, not market value; some assets may be leased, not owned. - Short time series and sectoral reclassifications limit some conclusions. ### Sectoral overview (role in GDP and employment) - Manufacturing, agriculture and construction share in 2016 GDP: manufacturing 19.6 percent, agriculture 6.8 percent, construction 6.3 percent. - Sectoral data comparability caveat: Changes to classification by Belstat in 2016 (SNA2001 to 2008) distort sectoral time series. ### Manufacturing sector (2013–16) - SOEs vs private companies: - SOEs less profitable, less liquid, less efficient in resource use despite flagship companies (e.g., Belaruskali and oil refineries). - SOEs’ margin on sales substantially lower; share of total costs of production to revenues exceeded private companies’. - Lower non-labor costs drove higher cost ratios for private companies; SOEs’ current assets fell short of current liabilities in 2015–16, indicating liquidity problems. - Operating profit per worker: SOEs on average some 1.5 times lower than private companies. - Return on capital employed: SOEs on average some 1.7 times lower than private companies. - Costs of credit for SOEs in manufacturing not very different from private sector (short time series caveat). ### Agricultural sector - SOEs significantly underperformed private companies; state support (directed lending and subsidies) masks larger gaps. - Directed lending note: Resolution No. 1102 of December 29, 2016 — in 2017 57.5 percent of all disbursements under directed financing is directed towards the agriculture, 78.5 percent of which towards the current agricultural activities. - Without state subsidies, SOEs would on average have run net losses; even after subsidies, one in four SOEs in the agriculture sector was loss making in 2016. - Performance gaps: - Operating profit per worker in SOEs about 2.5 times lower than private companies. - Return on capital employed in SOEs almost three times lower than private companies. - Operating profit per unit of fixed capital investment about twice lower in SOEs. - Trend concerns: number and employment in SOEs increased 2013–16 while private sector share declined; raises fiscal and financial stability risks. ### Construction sector - SOEs underperform private companies in ROE and ROA. - Fixed assets dominate SOE total assets (on average 74 percent versus 27 percent in private companies). - Return on capital employed: SOEs on average some eight times lower than private companies (2013–16). - Profitability of investment in fixed capital (operating profit to fixed capital investment): SOEs lag private companies on average by some 30 percent. - Employment and assets dynamics 2013–16: - SOEs: 22 percent drop in number of SOEs, 47 percent real terms growth in total assets, accompanied by 15 percent reduction in employment. - Private companies: 17 percent increase in number of private companies, assets almost doubled in real terms, accompanied by 11 percent reduction in employment. - Possible implications: excess fixed assets in SOEs, underutilization, subpar quality, overvaluation effects, and potential overemployment. ### 2015–16 recession responses and impacts - Crisis channels: exchange rate depreciation and volatility, weakening demand, worsening spread between input and output prices. - Crisis exposed corporate balance sheet problems, including currency and asset-liability mismatches. - Profitability in both SOEs and private companies suffered, driven by losses on investing and financing activities; in SOEs 2016 also losses on current operations. - Private companies on average increased margin on sales by keeping cost increases below revenue increases. - On average, liquidity and sustainability of both SOEs and private companies deteriorated during the recession. *Sources: Belstat and IMF staff calculations.* ### 24. On average, SOEs’ response to the crisis was less radical than that of private ### 24. On average, SOEs’ response to the crisis was less radical than that of private ### SOEs’ response to the crisis: aggregate adjustments and state influence - In 2015–16 the reduction in employment in private companies was almost twice the size of that in SOEs: 12.7 percent versus 6.6 percent. - Cuts in fixed capital investment (as reported): - SOEs: 13.8 percent in 2015 and 21.2 percent in 2016. - Private companies: 17.5 percent in 2015 and 22.7 percent in 2016. - While both groups reduced fixed capital investment as a share in fixed assets by 33 percentage points, in 2015 the ratio dropped in SOEs by 15 percentage points relative to 23 percentage points in private companies. - SOEs’ behavior was highly influenced by: - State response in a form of extended direct and indirect support (see paragraph 6 in source). - Socio-economic policy objectives. - Reluctance to liquidate even non-viable companies. Since January 2016 to end-August 2017 20 SOEs were liquidated (10 in 2016 and 10 in 2017). - Caveat: Numbers are distorted by the state support and changes to the number of companies; the latter is partially addressed by using assets as a reference point. ### Staffing, wages, and productivity differences - SOEs: - Reduced both labor and wages. - Real average monthly wages and salaries dropped by 9.5 percent in 2015-16. - Private companies: - Cut employment but increased wages on average by 8 percent. - Growth in real wages was below the growth of real revenues from sales per worker, implying some labor productivity gains for private companies. - The increase in real wages might have allowed private companies to attract more qualified employees despite the overall employment reduction. - In 2016 the number of loss-making companies decreased in both SOEs and private companies (changes in national accounting rules likely had some impact), but for SOEs the drop came short of the decrease in the total number of companies. - Authority behavior noted: reluctance to liquidate likely non-viable loss-making SOEs and use of organizational changes including mergers of loss-making companies with more profitable ones. ### Coverage and composition of the SOE database - Company-by-company database covers about 560 largest SOEs, representing some 90 percent of revenues from sales of SOEs with at least 25 percent state ownership; includes additional information on 100 heavily indebted SOEs. - As of end-2016 the database covered: - 341 joint-stock companies (59 percent of revenues from sales of SOEs covered by the database). - 217 unitary enterprises, owned or partially owned by the republican or local governments. - Size concentration in 2016: - Top 21 companies generated 50 percent of revenues from sales and employed some 24 percent of workers. - Largest 60 companies accounted for 70 percent of revenues and 42 percent employment. - Largest 100 companies accounted for 79 percent of revenues and 52 percent of employed. ### Financial performance and risk metrics of SOEs (2013–16) - On average in 2013-16: - Some 16 percent of SOEs did not generate enough revenues to cover their costs. - 20 percent were loss making. - 33 percent faced liquidity problems. - Close to 4 percent were in protracted financial distress (four consecutive years) — defined as meeting three out of four criteria: (i) cost recovery<1; (ii) net profit before tax<0; (iii) current ratio<1; and (iv) total assets to total liabilities<1. - Sector concentration: Slightly over 50 percent of high-risk companies were engaged in agriculture; the rest were in manufacturing, processing and repairs, construction and transportation. - Persistence: Almost 5 percent (27 SOEs) were in financial distress for 3 years and almost 7.5 percent (41 SOEs) for 2 years. - Losses and changes: - In 2015 total losses of loss-making SOEs, once specific state subsidies are excluded, peaked at 3 percent of GDP (2.2 percent without excluding subsidies). - In 2016 these fell to 1.5 percent of GDP (0.8 percent of GDP), as the number of loss-making entities dropped from 152 to 118. - Liquidity and distress shares: - Share of SOEs experiencing liquidity problems peaked at 35 percent in 2015 and dropped to 33 percent in 2016. - Share of SOEs in financial distress fell from 19 percent (106 companies) to 15 percent (85 companies). - Liabilities of high-risk companies reached over 16 percent of GDP at end-2016, remaining an important source of fiscal risks. ### Foreign-currency exposure and macro-financial nexus - High FX-indebted SOEs (top 100 heavily indebted in foreign currency): - Their liabilities (around 40 percent of GDP) account for 70 percent of total liabilities of SOEs. - Their share in total revenues from sales equals some 60 percent. - Long-term liabilities in foreign currencies at almost 18 percent of GDP on average. - In 2016 almost 90 percent of total long-term liabilities of high FX-indebted SOEs were in foreign currencies, compared to some 40 percent of their revenues from sales being in foreign currencies. - Currency composition of long-term foreign-currency liabilities: 53% USD, 44% EUR, 2% RUB, 1% CNY, 0.2% Other. - Currency composition of foreign-currency revenues: 34% USD, 34% EUR, 32% RUB, 0.4% CNY, 0.1% Other. - In 2016 24 percent of high FX-indebted SOEs was in financial distress. - Vulnerability: - On average, based on a simplified calculation, a 10 percent depreciation of the BYN against the $US would increase the debt by some 1.8 percentage points of GDP. - Residency of creditors: The majority (over 70 percent) of SOEs’ long-term foreign currency liabilities of high FX-indebted SOEs is towards residents. - Risk amplification: High foreign-currency indebtedness towards the resident financial sector generates additional financial and fiscal risks and aggravates problems related to the already high dollarization of the economy. ### International experiences and governance lessons - Roles and objectives of SOEs differ across countries: network industries, executive-like public policy implementers, or mixed commercial/non-commercial roles. - Empirical evidence: - Many studies find SOEs are less profitable and efficient than private companies, but results vary with market structure and competition. - Comparisons pre- and post-privatization often show performance improvements but not universally. - Minority state ownership tends to be associated with more cost-efficient firms than majority state ownership. - In crisis periods the performance gap between SOEs and private firms can narrow because private companies worsen while SOEs are less affected. - Governance recommendations from OECD and European Commission studies: - Comprehensive legal framework to define the role of the state as owner, separate ownership, policy, and regulatory functions, and centralize state ownership where appropriate. - Clear reporting and accountability frameworks for SOEs. - Rules to govern SOEs’ efficient performance and transparent performance targets distinguishing commercial and non-commercial activities. - Ensure independence of SOE management and operational autonomy to achieve well-defined targets. - Transparent accounting and reporting standards based on best international practices. - Common reform elements implemented in several countries: - Inventory of SOEs, including commercial and non-commercial objectives. - Separation of ownership and regulatory functions. - Centralization of SOEs’ ownership and/or monitoring. - Improved transparency of SOEs’ performance, including reporting and strengthening board appointment processes for transparency, impartiality, accuracy and independence. ### Conclusions - SOEs’ performance in Belarus lags that of private companies despite possible advantages from state involvement and socio-economic objectives. - SOEs exhibit lower average efficiency and effectiveness and generate risks to fiscal and financial sectors through the macro-financial nexus. - Performance shortfalls are particularly visible in manufacturing, agriculture and construction. - While findings align with studies for other countries, the large relative size of the SOE sector, its prominence in the Belarusian economy, and tight macro-financial links imply that sector problems will have larger socio-economic consequences. - Further reliance on the SOE sector as an engine of growth risks holding back Belarus’ economic development. *Source: IMF staff compilation from the chapter content provided.* ### 38. Deep reforms would be required to overhaul the SOE sector and transform it from ### 38. Deep reforms would be required to overhaul the SOE sector and transform it from being a drag on fiscal resources and growth. ### Reform strategy and institutional focus - Reforms should be based on a comprehensive SOE reform strategy and focused on strengthening institutions. - To boost potential growth, it is important to further develop the private sector and create a non-discriminatory, level-playing field for private companies to compete with SOEs performing commercial functions. - Reforms should draw on other countries’ experiences and OECD guidelines on corporate governance of SOEs. ### Detailed reform objectives and measures - Detailed reforms should aim at improving transparency, corporate governance, and minimizing fiscal risks. - Key focus areas: - (i) changing the system of incentives by providing clear distinction between SOEs’ commercial and non-commercial objectives, and separation of ownership and regulatory functions; - (ii) identifying viable and non-viable companies with the aim to reform the viable and liquidate the non-viable ones; - (iii) strengthening corporate governance, oversight and transparency. - Authorities are advised to adopt a comprehensive SOE strategy that will (see 2017 Article IV Staff Report): - continue tightening soft budget constraints, including by enforcing planned reductions in subsidized directed lending and state debt guarantees; - unify government oversight of SOE assets; - strengthen the fiscal risk assessment and reporting capacity of the MoF, and links to the budget, focusing initially on SOEs; - strengthen corporate governance, including separation of ownership and regulatory functions and strengthening supervisory boards; - proceed with plans for pilot privatizations; - establish a comprehensive SOE inventory, and financial indicator database. - implement a framework for identifying and tracking inefficient and loss-making SOEs, with strong criteria for subsequent restructuring or liquidation; - prepare and implement clear criteria for continued state ownership or privatization; - introduce measures to enhance competition, including possible privatization; - other complementary measures such as strengthening the legal, accounting, reporting and auditing framework (e.g. switch to IFRS), transparency, and close coordination of SOE restructuring with financial sector reforms. ### Empirical indicators: Non-Financial Corporate Sector (overview of figures) - Figures present comparative indicators for SOEs and private firms, 2013–2016, covering: - Corporate Sector: Cost Recovery (ratio) - Corporate Sector: Net Profit/Loss Before Tax Minus Subsidies per Worker (BYN thous) - Corporate Sector: ROA Before Tax (ratio) - Corporate Sector: Costs per Worker (BYN thous) - Corporate Sector: Revenues per Worker (BYN thous) - Corporate Sector: ROE Before Tax (ratio) - Corporate Sector: Arrears on Credit and Loans (percent of total credit and loans) - Corporate Sector: Current Liquidity (short-term assets as a percent of short-term liabilities) - Corporate Sector: Payables Overdue (ratio) - Corporate Sector: Payables to Receivables (ratio) - Corporate Sector: Wage Arrears per Worker (BYN) - Corporate Sector: Payables Overdue to Receivables Overdue (ratio) - Sectoral figures (2013–2016) provided for Manufacturing, Agriculture, and Construction, including: - Cost Recovery (ratio) - ROA (ratio) - Current Liquidity (short-term assets as a percent of short-term liabilities) - Cost of Remuneration in Total Costs (percent) - Debt to Equity (ratio) - Loss-Making Companies indicators (SOE's total net losses of loss making (percent of GDP); Private total net losses of loss making (percent of GDP); SOE's loss-making to total companies (percent, rhs); Private loss-making to total companies (percent, rhs)) ### Background: necessity and risks of SOE reform in Belarus - Reform of SOEs is necessary to: - increase competitiveness and efficiency of allocation of resources; - reduce risks to the budget and financial stability; - provide a better foundation for higher sustainable economic growth. - Current adverse conditions cited as limiting long-term support for inefficient SOEs: - projected low economic growth; - reduction of economic support from Russia compared to previous years; - insufficient inflow of foreign direct investment; - rather slow development of the private sector. - Case-by-case and non-transparent state support tools risk: - additional burden on the budget; - further growth of non-performing loans in the banking system; - increased government debt. ### Employment and social concerns - SOEs account for: - more than 75 percent of industrial output; - around 60 percent of fixed capital investment; - around 1.5 million of staff headcount in 2016. - Concerns about labor shedding are a key argument for delaying reforms; SOEs often have more staff and are less efficient compared with similar private enterprises (Cuaresmo, et al. (2012) and World Bank (2012)). - Estimates of excessive labor at SOEs vary: - World Bank (2012) estimated overstaffing at SOEs to be around 10.3 percent, with industry and construction most affected. - Eurasian Fund for Stabilization and Development (EFSD, 2016) estimated 20 percent excess employment at SOEs and 14 percent of total employment in the economy. - Ministry of Labor and Social Protection found evidence of 5.4 percent excessive labor in enterprises where overstaffing was detected during January – September 2016. - Analysis of Belstat data on involuntary part-time employment suggests 2.3 percent excess employment in the economy during 2016. - Table 1. Belarus: Estimates of Hidden Unemployment (selected values) - All-day (whole shift) downtime: - Number of employees, thousand: 204.3 (2015), 148.5 (2016), 80.6 (H1 2017) - Duration of downtime, days/person: 21 (2015), 18 (2016), 10 (H1 2017) - Incomplete working hours on the initiative of the employer: - Number of employees, thousand: 320.2 (2015), 252.4 (2016), 115.3 (H1 2017) - Duration, days/person: 14 (2015), 15 (2016), 10.5 (H1 2017) - Hidden unemployment*, thousand: 140.5 (2015), 100.9 (2016), 32.0 (H1 2017) - Hidden unemployment as percent of total employment: 3.1 (2015), 2.3 (2016), 0.7 (H1 2017) - *Those not working for three months with 21 working days are considered potentially unemployed. - Enterprise monitoring by the National Bank of Belarus indicates the number of enterprises with excessive employment has been decreasing as the economy strengthens. - Staff headcount of SOEs declined at an average annual pace of 3.2 percent during 2014 – 2016 (Belstat). - Big and medium private and foreign companies reduced their staff headcount in 2016 by almost 10 percent compared with the previous year. ### International experience and limits of lessons - Eastern and Central Europe (1990s): - Rapid transformation often involved shifts of labor from public to private sectors; private sector growth did not fully offset public sector job losses, causing significant unemployment increases and decreases in overall employment. - Stronger unemployment benefit systems were put in place initially; later eligibility and benefit levels were restricted in many countries to conserve resources and encourage re-employment. - China: - Gradual reforms starting in the 1980s with partial managerial independence for SOEs; large-scale ownership change of small and medium SOEs in the late 1990s under “retain the large, let go of the small”. - Consequences for employment were partly mitigated by social protection and re-employment schemes and by strong private sector development during periods of substantial economic growth. - Factors determining impact of SOE restructuring on employment: - (i) the pace of SOE reform; - (ii) the pace of other macroeconomic reforms in the economy; - (iii) the size of available policy buffers; - (iv) domestic economic conditions (e.g. recession; private sector job prospects); - (v) external trade and finance conditions; - (vi) government regulations and agreements (e.g. agreements of the new owners of privatized enterprises with the authorities on the pace and scale of staff optimization); - (vii) the size of the public sector prior to the reform. *Source: IMF staff analysis and figures as presented in the provided content.* ### 8. External environment, even though worsened in recent years, is much more favorable ### 8. External environment, even though worsened in recent years, is much more favorable ### External environment and growth - Average GDP growth in 1991-1995 in Central and Eastern Europe and CIS countries is contrasted with projected GDP growth in 2017 (chart source: WEO). - Compared to the 1990s: - Sales networks and trade chains have been restored and stabilized. - Countries of the region have transitioned to market economy and experience economic growth. - The outlook of Russian economy remains particularly important for Belarus in terms of exports prospects and financial support. ### Private sector absorption and employment dynamics - Small and micro organizations (private and mixed ownership) employ around 785 thousand people, which is 18 percent of total employment in the economy in 2016. - Big and medium private and foreign companies have staff headcount of around 623 thousand people after significant reductions of the last three years. - Individual entrepreneurs numbered 236 thousand people or 5 percent of total employment in 2016. - According to Belstat, in 2014 the share of private (without state share) and foreign ownership in gross value added reached 50.1 percent, compared with 41.4 percent in 2009. - Conclusion: comprehensive measures to promote private sector development along with improving macroeconomic environment can help mitigate consequences of SOE restructuring. ### Controls on layoffs and social protection capacity - Employers must inform the state employment office on upcoming “mass release of workers” under the Law “On employment of population”. - Mass release defined as: - liquidation of enterprise with staff headcount more than 25 people; or - a layoff equivalent to a percentage of total staff headcount set by the Ministry of Labor and Social Protection for enterprises of different sizes; or - as a percentage of employed in Oblast or district. - Local authorities can postpone layoffs for up to six months or distribute them over one year if job search difficulties exist. - The current system of social protection is sufficiently developed to manage administration of benefits and employment promotion measures in case of increased demand. - Privatization transactions are likely to be accompanied by agreements on employment dynamics at corresponding enterprises. ### Estimating size and timing of SOE labor shedding — scenarios and assumptions - Two illustrative approaches used to estimate potential labor shedding during SOE restructuring; workers assumed laid off at beginning of each year of a three-year period. - Assumptions on re-employment and retirement: - Half of the laid off workers who have not retired early find a job after one year; the rest will not find a job during the five-year period. - Layoff timing for both approaches: 40 percent of total layoffs happen in first year, and 30 percent in the second and third years. - Approach 1: - Based on sectoral and aggregate estimates of excess employment of the World Bank (2012) for industry, construction and agriculture. - Gender and age profile estimated using economy-wide indicators. - Approach 2: - Based on staff headcount by forms of ownership with breakdown by age and gender. - Assumes that the number of unemployed in 2016 according to labor force survey will double during a three-year period because of restructuring. - “State ownership” data adjusted by estimated staff headcount of budgetary organizations not subject to restructuring. - Table 2. Belarus: Layoffs Assumptions (thousand) - Approach 1 totals: - Year 1: 101.3 - Year 2: 76.0 - Year 3: 76.0 - Total: 253.3 - Men: Year 1 64.7; Year 2 48.5; Year 3 48.5; Total 161.6 - Women: Year 1 36.7; Year 2 27.5; Year 3 27.5; Total 91.6 - Approach 2 totals: - Year 1: 112.9 - Year 2: 84.7 - Year 3: 84.7 - Total: 282.3 - Men: Year 1 61.6; Year 2 46.2; Year 3 46.2; Total 153.9 - Women: Year 1 51.4; Year 2 38.5; Year 3 38.5; Total 128.4 ### Fiscal costs considered and Box 1 assumptions - Fiscal costs included in estimates: - Severance payments, unemployment benefits, pensions for early retirees, reduction in contributions to the Social Protection Fund and in personal income tax, and state targeted social assistance (GASP) costs for the long term unemployed. - Severance payment assumption: - Severance payments amounting to the average wage for three months are paid to all reduced workers. - December 2016 data on nominal gross average monthly wages and salaries of men and women by types of ownership used for calculations (excluding budgetary sector wage bill from state ownership and adding wage bill of organizations of mixed ownership without foreign participation). - Early retirement assumptions: - Possible to retire two years earlier than general retirement age in case of liquidation and absence of employment opportunities; one year earlier for other valid layoff reasons. - Workers closer to retirement age more likely to be laid off and accept early retirement when pension significantly higher than unemployment benefits. - Average old-age pension size in December 2016 used for expenditures. - Unemployment benefit assumption: - Size raised to minimum subsistence budget for employable population as of December 2016 (BYN 193.14), received by the registered unemployed for 12 months. - Number of recipients each year = number of laid off workers less those who retired early. - GASP assumption: - Half of the long-term unemployed due to SOE restructuring with no other sources of income will apply for GASP, providing benefit in the amount of the minimum subsistence budget on average per capita for a maximum period of six months during the calendar year. - Revenue loss: - Revenue losses of the budget and the Social Protection Fund from the lower wage bill were taken into account using gender-specific nominal gross average monthly wages. ### Fiscal cost estimation results (Table 3) - Approach 1 (BYN million, December 2016 prices) - Year 1: - Severance pay 248.3 - Early retirement 101.0 - Unemployment benefits 171.0 - TSA (GASP) 0.0 - Revenue loss 476.6 - Total 996.9 - Year 2: - Severance pay 186.2 - Early retirement 176.8 - Unemployment benefits 128.2 - TSA (GASP) 19.3 - Revenue loss 660.5 - Total 1171.1 - Year 3: - Severance pay 186.2 - Early retirement 153.1 - Unemployment benefits 127.3 - TSA (GASP) 33.8 - Revenue loss 758.4 - Total 1258.7 - Year 4: - Severance pay 0.0 - Early retirement 77.3 - Unemployment benefits 0.0 - TSA (GASP) 48.2 - Revenue loss 532.0 - Total 657.5 - Year 5: - Severance pay 0.0 - Early retirement 0.0 - Unemployment benefits 0.0 - TSA (GASP) 48.2 - Revenue loss 433.1 - Total 481.3 - Approach 1 (percent of 2016 nominal GDP) - Year 1 Total 1.1 - Year 2 Total 1.2 - Year 3 Total 1.3 - Year 4 Total 0.7 - Year 5 Total 0.5 - (Component percent entries listed in Table 3 preserved as presented) - Approach 2 (BYN million, December 2016 prices) - Year 1: - Severance pay 273.4 - Early retirement 185.9 - Unemployment benefits 144.4 - TSA (GASP) 0.0 - Revenue loss 525.0 - Total 1128.7 - Year 2: - Severance pay 205.1 - Early retirement 325.3 - Unemployment benefits 108.2 - TSA (GASP) 13.3 - Revenue loss 773.4 - Total 1425.3 - Year 3: - Severance pay 205.1 - Early retirement 282.8 - Unemployment benefits 105.8 - TSA (GASP) 23.3 - Revenue loss 824.2 - Total 1441.1 - Year 4: - Severance pay 0.0 - Early retirement 143.4 - Unemployment benefits 0.0 - TSA (GASP) 32.8 - Revenue loss 541.7 - Total 717.9 - Year 5: - Severance pay 0.0 - Early retirement 0.0 - Unemployment benefits 0.0 - TSA (GASP) 32.8 - Revenue loss 360.1 - Total 392.8 - Approach 2 (percent of 2016 nominal GDP) - Year 1 Total 1.2 - Year 2 Total 1.5 - Year 3 Total 1.5 - Year 4 Total 0.8 - Year 5 Total 0.4 - (Component percent entries listed in Table 3 preserved as presented) ### Further mitigating and complementary policies (recommendations) - Macroeconomic and structural policies to boost private sector growth: - Well-balanced and responsible monetary and fiscal policy. - Further deregulation of prices and product markets. - Development of financial sector and gradual phasing out of directed lending. - Ensure equal access to resources for all market participants via transparent and competitive markets. - Reforms to eliminate barriers for job creation in the private sector: - To employ additional 150 thousand people in three years (around 10 percent of staff headcount of state-owned enterprises in 2016), big and medium-sized private and foreign companies need to increase staff headcount by 7.5 percent each year. - Measures to improve business climate: reducing administrative burden, decreasing financial sanctions for minor breaches, decriminalizing selected economic offences, strengthening property rights (including recognizing privatization agreements not subject to legal challenges upon a certain period). - Support small and medium businesses and self-employment: - State employment office already provides consulting services and subsidies between 11 and 20 minimum subsistence budgets on average per capita (BYN 197.57 from August 1, 2017), with 1810 people receiving assistance in 2016. - Financial support conditions can be adjusted, including appropriate screening and potential recoverability of provided resources. - Temporary financial support for payment of salaries of new workers could support private-sector hiring. - Level playing field: - Survey (IPM Research Center, April 2017) findings: - Only 12.9 percent of surveyed stated that conditions for state sector and private companies are equal. - 25.5 percent mentioned unequal business conditions compared to state-owned enterprises as one of five most significant barriers to business development. - Unequal treatment includes controlling bodies, different rental rates and prices for raw materials, unequal conditions for obtaining permits and licenses, and access to credit. - Authorities should pursue equal treatment of enterprises of any ownership type across financial support and other economic relations. *cr17384 - 8. External environment, even though worsened in recent years, is much more favorable* ### 17. The state should provide the proper social protection of workers made redundant due ### 17. The state should provide the proper social protection of workers made redundant due to state-owned enterprises restructuring ### Severance payments and fixed-term contracts - Severance payments in Belarus: three monthly salaries are paid in case of termination of labor contract due to staff reduction or liquidation of the organization to employees with any tenure. - According to Doing Business 2017 database: severance payments for employees with shorter tenure are more generous in Belarus than in other surveyed countries; Belarus is close to the average size of severance payment for employees of all tenures. - Widespread use of fixed-term labor contracts lasting from one to three years means most layoffs happen upon their expiry and severance pay is not applied in these cases. - Empirical indicator (medium and big companies reporting to Belstat): in 2010 – 2016 the share of terminations due to liquidation or staff reduction was between 0.8 and 1.6 percent of total terminations. - Policy recommendation: - Revise the system of fixed-term labor contracts in the medium term toward the more frequent use of unlimited labor contracts, which would provide more protection of workers and increase the motivation of employers to use labor resources more efficiently. ### Unemployment benefits and replacement rates - Current level of unemployment benefits in Belarus is low and cannot provide proper social protection. - Recommendation: increase unemployment benefits at least to the level of minimum subsistence budget (MSB) for employable population for all categories of registered unemployed to reduce risks of poverty. - Design principles: - Size and duration of unemployment benefits should support living standards while individuals are actively searching for employment. - Duration in case of state-owned enterprise restructuring will depend on pace of complementary economic reforms and the phase of the economic cycle. - Consider trade-offs between longer-term support for workers with skills mismatch and budget constraints/incentives for job search. - Use labor force survey data and employment indicators of state-owned organizations reporting to Belstat regularly to analyze potential duration and size of benefits. - Possible differentiation: - Differentiation in the amount of unemployment benefit based on the reason for dismissal can be considered to avoid excess generosity. - Table 4: Replacement Rates Under Increased Unemployment Benefits (Gross nominal average wages, May 2017; Mid-range wages; MSB for employable population, May 2017; Replacement rate) - up to 300 (BYN) — Share of workers 10.4 percent — Mid-range wages (BYN) 300 — MSB (BYN) 204.35 — Replacement rate (percent) 68.1 - 300.1 to 400 (BYN) — Share of workers 13.5 percent — Mid-range wages (BYN) 350 — MSB (BYN) 204.35 — Replacement rate (percent) 58.4 - 400.1 to 500 (BYN) — Share of workers 13.5 percent — Mid-range wages (BYN) 450 — MSB (BYN) 204.35 — Replacement rate (percent) 45.4 - 500.1 to 600 (BYN) — Share of workers 12.8 percent — Mid-range wages (BYN) 550 — MSB (BYN) 204.35 — Replacement rate (percent) 37.2 - 600.1 to 800 (BYN) — Share of workers 20.6 percent — Mid-range wages (BYN) 700 — MSB (BYN) 204.35 — Replacement rate (percent) 29.2 - 800.1 to 1000 (BYN) — Share of workers 12.5 percent — Mid-range wages (BYN) 900 — MSB (BYN) 204.35 — Replacement rate (percent) 22.7 - 1000.1 to 1500 (BYN) — Share of workers 11.7 percent — Mid-range wages (BYN) 1250 — MSB (BYN) 204.35 — Replacement rate (percent) 16.3 - 1500.1 to 2000 (BYN) — Share of workers 2.8 percent — Mid-range wages (BYN) 1750 — MSB (BYN) 204.35 — Replacement rate (percent) 11.7 - more than 2000 (BYN) — Share of workers 2.2 percent — Mid-range wages (BYN) 2000 — MSB (BYN) 204.35 — Replacement rate (percent) 10.2 - Weighted average replacement rate, percent: 37.2 - Source for table calculations: Belstat data ### Paid public works and conditionality - Current requirement: obligatory participation in paid public works for the registered unemployed. - Role of paid public works: - Serve as job opportunity for those without other income sources and as a test for willingness to work. - Considerations: - If large-scale layoffs occur, paid public works would need to be expanded, which would likely reduce their efficiency. - Types of public works should not coincide with temporary job opportunities in the private sector. - Policy recommendation: - Review the requirement on obligatory participation in paid public works and ensure offered activities do not crowd out private-sector opportunities. ### Active labor market policies (ALMPs) - The state employment service provides services such as retraining, self-employment assistance, etc. - Effectiveness of existing measures is difficult to evaluate. - Design improvements: - Improve ALMP design based on information on potential significant layoffs gathered from employers. - Strengthen cooperation with private-sector employers. - Regularly assess effectiveness of all programs and make necessary adjustments. - Table 5: Implementation of Active Labor Market Policies - Applied to the agencies of labor, employment and social protection for assistance in employment (thousand): - 2014: 231.1 - 2015: 250.6 - 2016: 239.2 - of which registered as unemployed (thousand): - 2014: 148.1 - 2015: 182.1 - 2016: 167.6 - Job placement - total (thousand): - 2014: 159.1 - 2015: 151.8 - 2016: 159.8 - of which job placement of registered unemployed (thousand): - 2014: 108.6 - 2015: 107.4 - 2016: 109.0 - Sent to professional training, retraining, advanced training, training courses (thousand): - 2014: 9.2 - 2015: 8.7 - 2016: 11.0 - Number of unemployed assisted in the starting entrepreneurial activities (people): - 2014: 1979 - 2015: 1822 - 2016: 1810 - Sent to paid public works (thousand): - 2014: 53.3 - 2015: 55.3 - 2016: 55.8 - Number of resettled families of the unemployed: - 2014: 252 - 2015: 168 - 2016: 151 - Source: Ministry of Labor and Social Protection ### Unemployment insurance proposal and policy decision - Proposed unemployment insurance design (not implemented): - Coverage: registered unemployed with at least one-year employment record and respective compulsory insurance contributions. - Benefit amount: 60 percent of the average wage of an employee, paid for up to six months. - 70 percent of average wage is paid during first 13 weeks of unemployment. - 50 percent during the next 13 weeks. - Funding proposal: increase contributions from 35 percent to 35.5 percent; the additional 0.5 percent earmarked for unemployment insurance and managed by the Social Protection Fund. - Contribution split: employee 0.25 percent and employer 0.25 percent. - Policy decision in October 2017: - The Ministry of Labor and Social Protection decided not to introduce the unemployment insurance in the near future and not to increase unemployment benefits. - It was stated that the maximum amount of unemployment benefits will remain the same (two base rates, or BYN 46 as of October 2017). ### Conclusions and medium-term considerations - Scale and severity: - Consequences of state-owned enterprises restructuring for the labor market are likely to be significant, but scale in Belarus might be much less severe than in Central and Eastern European countries in the 1990s. - Share of employment in organizations of state ownership and mixed ownership with share of the state declined from 64 percent in 2009 to around 58 percent in 2015, indicating gradual reduction of overstaffing through voluntary departures and retirement without large-scale restructuring. - Private sector absorption potential: - Existing private sector could absorb a significant part of reduced workers if authorities implement comprehensive policies to promote private-sector development. - Example: ICT sector staff headcount was around 85 thousand people in 2016; 2017 EY survey among Hi-Tech Park residents indicated that “88 percent of companies are planning to boost their headcount in the next two-three years, and 52 percent intend to expand it by more than 25 percent.” - Recommendation: organize retraining programs based on IT companies’ needs and provide advance information on upcoming layoffs to private firms that could employ dismissed workers. - Fiscal and efficiency assessment: - Estimate of fiscal costs of social protection measures during restructuring suggests these costs are manageable even if restructuring happens in a rather short period. - Potential savings from restructuring can turn out bigger than costs for social safety nets in the medium term as loss-making enterprises are restructured first. - Improved allocation of resources and reduced state support should increase effectiveness of state-owned enterprises and reduce state expenditures. - Restructured enterprises should be able to economize on labor costs assuming they can keep the same level of output with fewer workers. - Overall policy recommendations: - Ensure redundant employees receive sufficient social protection during job search. - Conduct comprehensive analysis of available data to adjust social protection measures for large layoffs from state-owned enterprises. - Regularly evaluate efficiency of passive and active labor market policies. - Strengthen cooperation between social protection agencies, local authorities, and potential private-sector employers. *International Monetary Fund — Republic of Belarus country report (chapter text).* ### 5. Unlike the rapid boom-bust ### 5. Unlike the rapid boom-bust ### Factors Contributing to Weak Credit - Belarus experienced a protracted period of rapid credit growth backed by strong investment, likely fueled by distortive policy measures resulting in an inefficient resource allocation. - In 2016, with the economy in the second year of recession, real credit growth turned negative in May 2016. - Directed lending declined more pronouncedly than market-based lending: dropping by 5.6 percent on average in 2016 at constant exchange rate in nominal terms compared to an average decline of 3.7 percent for non-directed lending. - Possible explanations for weak credit growth: - Companies may have retained excess capacity during the recession and may not need investments to meet recovery in demand. - Companies may have overborrowed during the boom period and have little appetite and capacity to borrow further due to deterioration in balance sheets and weakened financial performance. - Banks’ ability and appetite to lend may be impaired from the boom-bust cycle while alternative sources of funding (e.g. companies’ internal resources and capital markets) are limited. - Anemic contribution of investment partly explains lower output growth under creditless recoveries. ### Bank Credit Quality - NPL ratio jumped to 11.5 percent in 2016Q1 from 6.8 percent at end-2015. - The jump likely reflects underlying asset quality issues that had been masked previously as exemptions on risk classification of certain state-supported loans expired and government support for SOEs dropped. - The government established the Asset Management Company (AMC) and transferred distressed agricultural sector loans to the AMC and local governments to clean up banks’ balance sheets. - Despite these efforts, the NPL ratio remained elevated at 12.8 percent as of September 2017, only slightly below the level prior to the asset transfer to the AMC at end-December 2016. - Transfers relieved banks of some lower quality assets but were replaced by holding of central and local government bonds; given lack of an active secondary market and sizable bank holdings of government bonds, the transfer will not likely create space for additional lending. - Stagnant deposit growth and scarcity in alternative sources of funding limit scope for credit growth. Box — The Transfer of Agricultural Loans - Loans to certain agricultural companies were transferred from banks to the Asset Management Company established in mid-2016; restructured to maturity of seven years at annual interest rate of 3 percent. - Debtor companies received financial relief (installments, extended periods) on penalties and late fees to social protection fund, repayment of budgetary loans and unpaid interest, arrears in taxes and fees, and arrears in utility payment. - Another set of loans restructured and transferred to local governments. - Transfers were made at face value, primarily in exchange for central and local government bonds. - BYN2.7bn of agricultural sector loans moved outside the banking system by end-September 2017 (equivalent to about 6¾ percent of banks’ credit to the economy and 2.7 percent of GDP). - NPL ratio declined to 12.8 percent at end-2016 when transfer to AMC of BYN0.6bn took place, before climbing to 13.7 percent at end-June 2017 as stock of total credit declined while NPL only saw moderate increase. - Commercial banks held about 70 percent of domestic government bonds at end-2016; claims on government increased to 14 percent of banks’ assets at end-2016, up from 6.6 percent at end-2013. - Asset transfer (as of Oct-2017): Total transferred BYN 2,724.7 mn (100.0 percent) - to AMC BYN 772.4 mn (28.3 percent) - to local governments BYN 1,952.3 mn (71.7 percent) - of which: loans to SOEs BYN 2,472.4 mn (90.7 percent) - NPLs BYN 1,211.6 mn (44.5 percent) - loans under DL category BYN 469.6 mn (17.2 percent) ### Interest Margin and Bank Profitability - System-wide return on assets (ROA) almost halved to 1.2 percent as of 3Q2016 from 2.3 percent as of end-2013. - Return on equity (ROE) fell to 9.4 percent from 16.2 percent over the same period. - Faster decline in deposit rates than lending rates under interest rate measures implemented in 2015 resulted in widening of interest margins. - Banks showed some signs of profitability recovery in the last quarter of 2016, possibly helped by interest income from government bonds received in exchange for distressed assets. - Provisioning fell to below 40 percent of NPLs in September 2016 from 80 percent at end-2013; need to ramp up provisioning will likely weigh on banks’ appetite to extend credit. ### Regulatory Changes - NBRB introduced several regulatory changes to strengthen risk classifications and provisioning requirements, likely influencing banks’ appetite to extend credit: - Standard definition of unhedged borrowers and provisioning requirement introduced in January 2017; provisioning requirements to be raised in a stepped manner to 5 percent by 2020. - Systemically important borrower category introduced in May 2017: liabilities to banking sector exceeding 10 percent of banking sector capital. Banks required to assign 150 percent risk-weight on full amount of exposures to such clients if any additional credit is extended. - NBRB is revising provisioning requirements on restructured loans, tightening risk classification criteria and resulting provisioning requirements. - Tighter regulatory requirements may affect banks’ lending practices and could discourage lending to systemically important borrowers, potentially limiting scope for high quality bank assets. ### Corporate Financial Performance - Sector-wide net profit margin declined to 1.6 percent in 2015 from 6.2 percent in 2012. - Share of loss-making companies jumped to 23.5 percent from 5.5 percent over the same period. - Current liquidity ratio declined to 111 percent from 133 percent. - Corporate indebtedness increased to 50 percent from 35 percent of assets over the same period. - Non-financial corporate sector debt estimated around 105 percent of GDP in 2016, from slightly above 80 percent in 2014 — similar to levels for Hungary and Spain. - Elevated real lending rates since 2013 and reduced domestic demand during the recession likely contributed to decline in profitability. - Failure of corporate credit to respond to significant decline in nominal (and to a lesser extent in real) lending rates points to distress in corporate balance sheets. - SOE sector: - Accounts for around ¾ of corporate sector assets and two-thirds of the country’s workforce. - Return on equity dropped to below 2 percent at the bottom in 2015 compared to over 10 percent for private sector companies. - Gap in revenue per worker between SOEs and private companies widened to close to 40 percent in 2016. - SOEs likely to face tighter financing constraints as government reduces directed lending and issuance of guarantees. - Reforms needed to improve SOE efficiency and creditworthiness. ### Experiences in Baltics - Estonia, Latvia and Lithuania experienced creditless recoveries after the 2008-09 global financial crisis; credit growth turned positive in 2013 in Estonia, and in 2015 and 2016 in Lithuania and Latvia respectively. - The boom-bust cycle harmed banks’ asset quality and constrained credit supply; private sector overborrowing impaired corporate balance sheets and dampened borrowing capacity post-bust. - Baltic countries experienced strong recovery in real GDP growth despite continued credit declines: - Real GDP growth fell by 14-15 percent in 2009 and unemployment peaked at 17-19½ percent in 2010. - Output recovered sharply by 6-7½ percent in 2011 while private sector credit continued to decline. - Recovery in Baltics attributed to significant adjustment (wages and labor), corporate deleveraging, maintained exchange rate pegs, improved competitiveness, and export growth. - In Belarus, factors supporting Baltic-style recovery seem absent: - Unemployment remained extremely low. - Corporate indebtedness continued to increase during the recession. - Slow improvement in productivity and competitiveness and low level of export diversification will likely limit contribution of exports to output growth. ### Conclusion and Policy Implications - Credit growth will likely remain weak despite signs of economic recovery following two years of recession. - Banking sector continues to face weak asset quality, low provisioning and profitability, and the effects of regulatory changes. - Transfer of distressed agricultural sector loans out of the banking sector depresses headline credit growth; lack of a secondary market and limited additional funding sources constrain increase in bank lending. - With NPL ratio still high and bankruptcy/insolvency framework in need of strengthening, banks’ lending conditions will likely remain tight for some time. - Key policy priorities: - Improve corporate sector balance sheets and efficiency to create sustainable demand for credit; corporates need to improve productivity, restore financial performance, and deleverage. - Strengthen bankruptcy and resolution framework for non-viable companies. - Avoid resorting to distortive measures to fuel credit growth (e.g., increasing directed lending or subsidies) without accompanying structural reforms, as such measures could increase risks of further deterioration in banks’ asset quality. - Authorities could try to fuel credit growth (examples: increasing directed lending, subsidies for export financing and housing construction), but such measures risk future deterioration in banks’ asset quality if not accompanied by corporate sector reforms. *Republic of Belarus — IMF Country Report (excerpts from chapter 5).* --- _Source: https://www.imf.org/-/media/files/publications/cr/2017/cr17384.pdf_