ANALYSIS: Intensifying administrative interference in economic management accelerates inflation in Belarus

<p> Monthly overview of Belarus’ real economy sector, Jan 2021 </p> <p>   </p> <p> MINSK, Feb 24 – PrimePress. Belarus’ economy entered the Year 2021 with solid agreements on Russian oil supplies. Contracts for potash fertilizer export were also concluded promptly. This made it possible to keep the country’s industry flagships busy from the very beginning of the year and prevent a decline in industrial output and GDP. An additional stimulus to GDP growth was the abnormally cold winter, which boosted electricity and heat production and consumption. </p> <p>   </p> <p> On the other hand, the tense political situation in the country, increased pressure on private business and the likelihood of new Western sanctions increase the risks of financial destabilisation and stimulate negative expectations of economic actors. </p> <p>   </p> <p> Table 1. Key indicators of Belarus’ macroeconomic performance: </p> <br> <table border="1" cellspacing="1" cellpadding="0"> <tbody> <tr> <td> <p>     Indicator </p> </td> <td> <p> Real figures, Jan 2021, billion Belarusian rubles </p> </td> <td> <p> Jan 2021 on Jan 2020, % </p> </td> <td> <p> Official forecast for 2021, % </p> </td> </tr> <tr> <td> <p> GDP </p> </td> <td> <p align="right"> 12.247 </p> </td> <td> <p align="right"> 1.3% </p> </td> <td> <p align="right"> +1.8% </p> </td> </tr> <tr> <td> <p> Industrial output </p> </td> <td> <p align="right"> 10.281 </p> </td> <td> <p align="right"> 8.5% </p> </td> <td> <p align="right"> no forecast </p> </td> </tr> <tr> <td> <p> Fixed capital investments </p> </td> <td> <p align="right"> 1.590 </p> </td> <td> <p align="right"> 5.3% </p> </td> <td> <p align="right"> 21.3-21.7% of GDP </p> </td> </tr> <tr> <td> <p> Inflation growth since early 2017, % </p> </td> <td> <p align="right"> 1.1* </p> </td> <td> <p align="right"> 7.7 </p> </td> <td> <p align="right"> 5% at most </p> </td> </tr> <tr> <td> <p> Foreign trade balance (goods and services), USD million </p> </td> <td> <p align="right"> 1,922.3** (+3.4% of GDP) </p> </td> <td> <p align="right"> minus 403*** (minus 0.6% of GDP) </p> </td> <td> <p align="right"> + 1% of GDP in 2020 </p> </td> </tr> <tr> <td> <p> Real disposable household incomes, year on year, % </p> </td> <td> <p align="right"> +4.6** </p> </td> <td> <p align="right"> +6.1*** </p> </td> <td> <p align="right"> annual forecast +2.4% (2020 forecast) </p> </td> </tr> </tbody> </table> <br> <p> * month on month </p> <p> ** Jan-Dec 2020 </p> <p> *** Jan-Dec 2019 </p> <p>   </p> <p> Low comparative base helps Belarus report GDP growth </p> <p>   </p> <p> In January 2021, the National Statistical Committee of Belarus (Belstat) registered a GDP growth of 1.3% to Br12.247 billion. At the same time, industrial production increased by 8.5% to Br10.281 billion. In January 2020, these indicators showed a negative trend: GDP started last year with a decline of 1.8%, with a 5.8% year-on-year decline in industrial output. </p> <p>   </p> <p> The improved y-o-y GDP dynamics at the beginning of this year is largely due to a low comparative base, which ensured explosive growth of individual indicators, especially in oil refining. </p> <p>   </p> <p> Belstat says, the production of coke and refined petroleum products increased by 33.9% year on year in Jan 2021 to Br1.272 billion, while chemical products - up 38.6% on the year to Br0.889 billion. </p> <p>   </p> <p> Keeping oil refineries busy with a standard workload had a positive impact on the related industries. The volume of freight turnover, also due to the increase in petroleum products transportation, grew by 2.9% on the year in January 2021 to Br9.236 billion. Wholesale turnover increased by 2.2% to Br7.997 billion. Higher growth in these sectors was hampered by the ongoing global economic crisis. </p> <p>   </p> <p> Another growth driver of the Belarusian economy in early 2021 was the abnormally cold winter, which triggered an increase in consumption of electricity and heat. According to Belstat, the output of such economic activity as "supply of electricity, gas, steam, hot water and conditioned air" increased by 13.4% y-o-y in January 2021 to Br1.198 billion. A year ago, the fall in this indicator was 10.5% due to the warm winter. </p> <p>   </p> <p> January’s dynamics of other industries worsened year on year: according to Belstat, capital investments in Jan 2021 decreased by 5.3% to Br1.590 billion (Jan 2020 - a 2.9% decline). Agricultural output increased by 0.2% to Br1.068 billion (Jan 2020 – a 4.5% increase). Retail turnover in January 2021 amounted to Br4.194 billion, down 0.9% on the year (Jan 2020, +4.1%). </p> <p>   </p> <p> As for the Belarusian economy’s prospects for the current year, Dmitry Kruk, Senior Researcher at the Belarusian Economic Research and Outreach Centre BEROC, presented a forecast according to which Belarus’ GDP in 2021 is estimated within a range from minus 2% to +1.5%, excluding the possible impact of several threats, including financial destabilization, domestic political crisis and western sanctions. </p> <p>   </p> <p> Belarus’ inflation hits a four-year high </p> <p>   </p> <p> The abolition of VAT exemption for a number of foodstuffs and children’s products, medicines and medical supplies, including socially important goods, contributed to accelerating inflation in January 2021. January’s annual inflation accelerated to 7.7% (January 2021 vs. January 2020) against 7.4% in December (December 2020 vs. December 2019), which is a record high of the last 48 months. </p> <p>   </p> <p> According to Belstat, consumer prices in Belarus increased by 1.1% month on month in January 2021. Foodstuff prices rose by 1.5% (+6.6% on the year in January 2021), non-food prices - up 1.3% (+8.7%). Service tariffs rose by 0.3% (+8% year-on-year). </p> <p>   </p> <p> In addition to the abolition of the preferential VAT rate, inflation continues to be influenced by such negative factors as the weakening of the Belarusian ruble, deteriorating economic sentiment, rising inflation and devaluation expectations, as well as supply shocks for some food products. </p> <p>   </p> <p> According to the National Bank, annual core inflation in Belarus accelerated to 7.5% in January 2021 from 7.1% a month earlier. Trend inflation in January was 5.9% against 5.6% in December. Administered prices and tariffs increased by 7.3% year-on-year against 6.7% in Dec 2020. Seasonal prices (for fruit and vegetable products) rose by 12.5% vs. 16%. The contribution of these components to the overall inflation rate changed accordingly. </p> <p>   </p> <p> In the socio-economic development forecast for 2021, the government for the first time introduced the consumer price index for socially important goods as one of the most important parameters. It is calculated by Belstat for 72 everyday goods, including meat, milk and milk products, sausages, fish, groceries, bread, oil, vegetables, motor fuel, and certain medicines. </p> <p>   </p> <p> According to the government's forecasts, this figure should not exceed 4.9% for the year, but in January 2021 consumer prices for socially important goods rose by 1.3%. In annual terms, according to the Ministry of Antimonopoly Regulation and Trade (MART), the increase was 5.9%. </p> <p>   </p> <p> The greatest contribution to the increase in prices of socially important goods, according to the MART, in January was made by the increase in prices of medicines (+4.6% for the month), fish and fish products (1.8% on average), oils and fats (2% on average). Vegetables (e.g. potatoes, beetroot) due to the costs of suppliers for their storage in January have risen by 8.3% on average. </p> <p>   </p> <p> In addition, January saw an increase in the price of motor fuel (by 1.1% for the month) and liquefied gas in cylinders (by 1.3%). The prices of tobacco products (5.4%) and vodka (2%) rose due to the need to compensate for the increase of excise rates on January 1, notes MART. </p> <p>   </p> <p> Thus, Belarus is experiencing an increased inflationary background, exacerbated by the actions of the authorities in search of additional budget revenues. According to estimates of the Eurasian Development Bank (EDB), inflation in Belarus will accelerate to 8-8.5% per annum in February. </p> <p>   </p> <p> In order to resist further price hikes, the government hastily decided to freeze prices of socially important goods. According to Resolution No. 100 of the Council of Ministers of 23 February 2021, starting from 24 February and until the end of the month prices cannot be raised at all, and starting from 1 March - by no more than 0.2% per month. This decision applies to 62 titles of food and consumer goods of everyday use, as well as 50 Belarusian-made medicines. </p> <p>   </p> <p> 2020 events in Belarus alert investors </p> <p>   </p> <p> Foreign direct investment (FDI) on a net basis (excluding debt to direct investors for goods, works and services) in Belarus increased by 6.6% year on year in 2020 to $1.415 billion. At the same time, the official forecast for 2020 envisaged an FDI inflow of at least $1.7 bn. </p> <p>   </p> <p> Based on the quarterly breakdown of foreign direct investment flows on a net basis, approved by the government for 2020, the Belarusian economy was expected to receive $675 million during the first 3 months of the year, $885 million during 6 months, $1.23 billion during 9 months and $1.7 billion during the full year. </p> <p>   </p> <p> The actual inflow of direct foreign investments on a net basis was as follows: over 3 months - $1.456 billion, over 6 months - $1.355 billion, over 9 months - $1.292 billion, for the whole year - $1.415 billion. </p> <p>   </p> <p> Thus, in the second and third quarters of last year, there was an net outflow of investments from the Belarusian economy. This can be attributed to the consequences of the global crisis, as well as to the events during and after the election campaign. </p> <p>   </p> <p> It can also be noted that the difference between the forecast and the fact arises not least due to insufficient consideration of the real dynamics of foreign direct investments in Belarus by quarters by the authors of the forecast. In the first quarter, reinvestments are reflected in the statistics. Due to reinvestment in January-March the flow of foreign direct investments on a net basis exceeds the inflow of investments for the II-IV quarters by times and sometimes by an order of magnitude. </p> <p>   </p> <p> The specifics of 2020 were that the first quarter ended with a collapse in the oil and other commodity markets. Investment activity was then muted amid a coronavirus epidemic and a sharp drop in business travel around the world. In Q3 and Q4, the negative factor of socio-political instability added to the Belarusian environment. </p> <p>   </p> <p> In 2020, foreign direct investment from Russia and Cyprus accounted for 50.2% of all investments in the Belarusian economy. Net FDI from Russia increased by 16.6% in 2020 compared to 2019, to $307.3 million, while FDI from Cyprus decreased by 7.6% to $251 million. </p> <p>   </p> <p> In the past six years, the combined share of Russia and Cyprus has never fallen below 50%. In the case of Russia, this is due to the continued deep binding of the Belarusian economy to the Russian economy. In reality, Cypriot investments are driven primarily by movements of Belarusian and Russian capital. Cyprus is a convenient jurisdiction for tax optimization. </p> <p>   </p> <p> Despite the authorities’ assurances of "all-weather friendship" and "iron brotherhood" with China, foreign direct investment from China in 2020 amounted to only $24 million (4 times lower than in 2019). The main flow of resources from China comes in the form of tied loans, which are debt instruments. </p> <p>   </p> <p> Overall, in 2020, the pattern of investment in previous years remained unchanged. Investments in the Belarusian economy are mostly made through reinvestments. Privatisation is virtually frozen in the country. In this environment, investments are coming from Russia and offshore Cyprus. </p> <p>   </p> <p> The investment forecast depends on the flow of investments in the largest investment projects. As soon as the modernisation of another enterprise comes to an end, the resources flowing into the economy are reduced. </p> <p>   </p> <p> In terms of forecasts, in 2021 we can expect a decrease in foreign direct investment due to the post-election situation in the country. Lukashenko's calls at the All-Belarusian People's Congress to "sort out" private business that is "meddling in politics" do not add to optimism. In such an atmosphere of fear and intimidation, large flows of funds into Belarus are unlikely, most likely, the investments will be gradually withdrawn from Belarus. </p> <p>   </p> <p> The European Bank for Reconstruction and Development (EBRD) sent a negative signal to investors. In November, the EBRD said that after the election it had curtailed lending to Belarus’ public sector and focused on investing in private business. The bank's shareholders are concerned about the political and economic situation in Belarus, so the process of adopting a new country strategy has been postponed indefinitely. </p> <p>   </p> <p> Major risks: increased administrative pressure on economy, and inflation </p> <p>   </p> <p> Thus, a group of risks is becoming stronger in the Belarusian economy due to the political crisis. They include the possibility of new sanctions from the EU countries and the United States, the exodus of skilled labour, negative expectations of economic agents, and a shortage of foreign exchange resources. </p> <p>   </p> <p> At the same time, the most painful for the Belarusian economy are the "man-made" risks created by the Belarusian authorities. These include increased pressure on business, unpredictable changes in economic legislation, and injections of resources into inefficient state-owned enterprises. </p> <p>   </p> <p> These decisions not only raise questions about economic equality for private and state-owned businesses, but also create preconditions for macroeconomic instability in the country. An evidence of this is the accelerating inflation, which in January was provoked mainly by taxation decisions. The growth of consumer prices is already well above the forecast level and could accelerate in the coming months. End </p> <p>   </p> <p> PrimePress Business Analysis Agency </p>

2021-02-26

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