Belarus’ Fallow Fertilizer Folly

At the same time relations with Ukraine are reoriented, Russia has offered Belarus as an original Eurasia Economic Union member $2 billion in bilateral credit as a potash cartel collapsed in acrimony and kept the current account deficit at 10 percent of GDP with reserves down to less than two months’ imports. Growth has been only 1 percent on double-digit inflation as the IMF criticized salary increases and high directed hard-currency lending in its annual update. Half of advances are in dollars and NPLs are one-fifth the total, and $4.5 billion in state bank and enterprise privatization plans have stalled as longer-term entry into WTO is contemplated. Public sector pay jumped 20 percent in 2013 and subsidized credit through the Development Bank amounted to almost 5 percent of output, undermining the balanced budget target. The Fund recommended deep cuts in these categories along with energy and transport tariff hikes for better cost recovery. The Lukashenko government insists that agricultural and housing funding should stay in place while conceding scope for VAT and other tax rises for fiscal equilibrium. Monetary policy has been erratic as the headline refinancing rate was slashed 500 basis points to 23 percent at mid-year as foreign currency reserve requirements and risk weightings were lifted sharply. Exchange rate flexibility has been “limited” with only 2 percent nominal depreciation, according to the report, which advised reduced intervention to correct overvaluation. It questioned a new high-yield rubel instrument insuring against devaluation and the continued lack of structural reform with pervasive price controls and official ownership and meddling in business. The regime argues for gradual implementation to preserve its “socially-oriented model” as it owes the Fund $1.5 billion both in 2013 and 2014 from its previous post-2008 crisis program. Arrangements for another Eurobond were shelved as funding outreach continues to China and the Middle East along with Russia. IMF renewal is off the table with performance and policy lapses and international sanctions by the US and Europe in view of anti-democratic practice.

Elsewhere in the region Serbia’s Fund resumption has also been delayed indefinitely despite EU accession invitation, as the ruling coalition called snap elections amid festering fiscal and balance of payments woes. Gulf investors pledge outlays but they will not materialize soon enough to offset double-digit unemployment and dinar weakness. Croatia may be considering a request after another sovereign downgrade, and Slovenia was admonished to be “more ambitious” with budget-cutting in its Article IV evaluation to tackle the 80 percent of GDP public debt ratio with the initial EUR 3 billion bank recapitalization load. The eventual number may be double according to outside experts, and pension and subsidy reforms have barely begun as immediate bond refinancing was mainly through a confidential private placement. The economic contraction of over 10 percent in recent years is the largest in the Eurozone after Greece, with interconnected banks and companies lacking a durable fix beyond the cited “stop-gap solution.”