Economist Says The Authorities Will Draw on Almost All Reserves This Year

The "safety cushion" is exhausted.

Economist Dzmitry Kruk, a senior researcher of the BEROC centre, answers the question of Vital Tsyhankou, the journalist of Radio Svaboda, where and at what price Minsk can get new loans, and explains why privatization now would not bring quick and significant success.

- In recent days, there have been opinions that the authorities have already decided on an additional issue of money. Do you have any information about it? Are there any indications that the process has already begun?

- I can neither confirm nor deny information about it. Until there is no official data for the new period, no one will say for sure.

After all, where there's smoke there's fire. We have recently witnessed a protracted deterioration of the finances of state-owned enterprises. Since last April, ones in offices express the idea to support these enterprises at the expense of the state budget. Nevertheless, it was possible to find ways to solve this problem for most of 2020 with other tools, without resorting to printing new money. Partly at the expense of the reserves accumulated in previous years and banks.

Early this year, we had a different situation. State-owned enterprises are still loss-making and require more and more resources. It makes the old methods useless. That is why I see more pressure on the National Bank to ease its monetary policy. Analyzing the statistics, I have no reason to claim that the National Bank has given up and started printing money.

- Given your analysis (and the opinions of other independent economists), it follows that the authorities have no choice but to print money or make new loans. If not, what else? Reduce wages and pensions? Such a social and political situation is not very favourable for this.

- Indeed, one has to realize there are no good, marvellous mechanisms for solving the problem right now. If one continues to support all state-owned enterprises, pays all salaries there, does not cut jobs - then printing money or new loans remain.

The National Bank says one has to look at each enterprise and deal with cost containment. Also, the National Bank presses the banks to lend less to households and more to the corporate sector. It wants to take the burden off itself and transfer it to commercial and state-owned banks.

- There is another option used by many governments at critical moments - privatization. To exclude unprofitable enterprises from state aid, so that the new private owners who are brave enough to buy them would bear the burden. But we understand this option does not work in Belarus for political reasons - Lukashenka has repeatedly mentioned it.

- Yes, the main reason is political; it is a conceptual factor why privatization is not possible at the moment. If we forget about it for a moment, there are still two technical points.

Firstly, it is never done quickly; it takes six months in the most successful cases. Secondly, according to the estimates, the market value of the top twenty Belarusian giants today is worth five billion dollars. The price is miserable and not comparable to the loss of control over the public sector. In other words, privatization can't ensure patching up the holes for at least a few years.

- Another option is new loans. According to Pavel Latushka, Minsk decided to place state bonds on the Moscow Stock Exchange (after all, nobody will buy them on Western stock exchanges due to political reasons). Latushka warned potential buyers that the future Belarusian democratic government would not recognize debts incurred after August 2020.

- If one looks at the budget law, one can conclude that the state is not counting on new loans as much as it did last year. The billion that Russia has already granted, and the other 500 million promise, are seen as something that will ensure the balance of payments on foreign debt this year. It follows from the budget plan that another 500 million is needed. It's not that much.

The main problem is that it would be almost impossible to get this kind of money under good market conditions. Secondly, the additional 500 million is the very minimum needed. Against the backdrop of a budget deficit, the authorities need additional foreign loans. Where will they find them? The idea of the Russian market arises. Will political risks affect the Russian bond market? I think to a lesser degree. It will be possible to borrow money, but at very high interest rates.

I'm pretty sure that all the new loans taken by the Belarusian government will be more expensive than before. It is hard for me to say what they will consider the lesser evil (to borrow at high interest rates or to tolerate further).

- But if they feel the heat, all arguments about the expediency of the situation are pushed aside. They will take loans at any interest rate, according to the "after us the deluge" principle.

- It may happen. Non-economic considerations will really come first here. Anyway, they may choose the scenario of 2020. They will gradually cut expenses without crossing the red line in any one direction.

- You say that this year's budget is planned with a deficit. What sectors will face the most dramatic cuts?

- We can see that mainly the direction of investment, capital expenditures, and various sectoral programs will be cut. The budget does not provide for radical spending cuts, the authorities want to use all the reserves accumulated earlier to avoid it.

In 2021, the main source of financing the deficit is the reserves accumulated from the surpluses of previous years. They will be fully spent. It is the safety cushion that has been built up over the past few years. This year, they will draw on almost all reserves.