Leanid Zlotnikau: Belarus May Announce Default

We will soon run out of resources to curb inflation and support pensions and salaries.

Inflation in Belarus has almost reached the annual forecast of the authorities for four months. Charter97.org spoke with economist Leanid Zlotnikau about the inflation, as well as the state of the Belarusian economy:

- The budget deficit and debts, which we have to pay off, are growing quite fast. The deficit has recently been $4 billion, and now it's $6 billion. Enterprise indebtedness on all sorts of loans, wages and so on is growing. It turns out that they are growing faster than the enterprises can pay back.

The high prices cause tensions in the economy; the authorities try to help the enterprises and raise prices for the products, but the population can't afford to buy everything. Therefore, one should also increase the income of the population. The government is trying to "solve" the problem, but one way or another, it continues to cause inflation. Today, it is quite high. The government cannot solve all these problems. One can only fix it with a free economy - at the expense of its profitability and productivity. However, we are lagging behind in terms of efficiency.

One must take into account that the government's ability to borrow has decreased this year because, first of all, Russia has put the brakes on lending, and revenues from the sale of oil products have dropped. Moreover, the reconstruction of two refineries has just been accomplished, and there are large debts to pay.

The only thing the government can use to somehow maintain some "stability" in the coming months to curb inflation is to reduce the gold and foreign exchange reserves. This year, one can still somehow patch the holes in the budget and the pension fund and raise wages, but only with the use of the gold reserves. They have already been spent a little this year, but further, their expenditure will be even greater.

The growth in prices can remain within 3-5% a month by using the gold reserves, and some stability can endure until the fall or the end of this year. Later, the country will have no resources to curb inflation and support pensions and salaries.

- The Belarusians have already withdrawn 44% of foreign currency deposits from the banks. What does this trend mean, and what are the consequences for the financial system?

- Where do companies get funds to buy materials? At a bank. Where does a bank get the money to provide funds? Three primary sources make up this fund for loans. One-third of that fund is people's money. If we're talking about currency, about 40% of the foreign exchange capital of commercial banks belongs to the population.

The debts of enterprises are growing. They are delaying the debt repayment. These factors hinder the development of the Belarusian economy. If the population withdraws floating capital, the banks have greatly reduced opportunities to support enterprises as the normal economic life becomes more complicated.

- What will happen to the economy if people withdraw all their foreign currency deposits from the banks?

- The number of withdrawn deposits can approach 100% because the population is vindictive. The state has already repaid deposits for legal entities in Belarusian rubles, not foreign currency. So far, the population has not faced the same problem, but if panic erupts, then everything may happen.

Debt repayment problems, payments for the consumption of goods are the financial problems that will grow several times. It may slow down the economic turnover, and certain products will have less demand.

- What can the authorities do if they face a shortage of foreign currency to repay foreign debts?

- Default. If the government declares default, the credit rating of Belarus will fall. It results in the complete absence of crediting of Belarus. The country will not be able to repay its debt, and they understand that. Interest on Eurobonds, which we used to borrow at 6%, may rise now at 12%. One has to realise that these are, so to speak, "throw-away" credits. It bears high risks of losing money, which is given at an unaffordable interest rate for Belarus. Default means that the country will not receive any support.

The financial situation of both the population and the enterprises would deteriorate. Then the authorities would start negotiating that we would pay one per cent more in two years, and so on. In other words, they would negotiate with the borrowers.

Belarus can solve its problems through the privatization of enterprises, selling them to foreign owners. For example, they are trying to sell Grodno Azot at $1.7 or $2 billion to pay debts. The cost is too high, and no investor wants to buy it. The authorities will sell the best companies in Belarus to pay off these bad assets.

- Many countries imposed lockdowns during the pandemic causing a recession in their economies. Today, their economies are recovering, but Belarus faces the opposite. Why is it happening?

- Our economy has become increasingly less efficient in recent years; there is no development of the economy, as it happens in the world. Our world is developing a network economy, numerous new technologies, goods, products that are not and cannot be manufactured in Belarus. We lag behind the rest of the world as we have a weak private and market sector. Look at the rural sector, which keeps on degrading. The economy cannot develop under such conditions.

Our enterprises lag behind the West, even Russia, which gives us little for our economy. There are no new technologies; we cannot make new products. However, it is worth noting Russia itself lags behind.

I have already cited the data that GDP grew by 15-25% in various sectors, while the consumption of the population and real income grew 1.7 times; it means that we have eaten out our economy. Consequently, we have a special situation. Even if we achieve slight growth, it does not mean that we will live better. We lag behind our neighbours, who were in the same socialist camp, at the same level when the Soviet Union collapsed. Incomes of the Lithuanian population are almost four times higher in GDP terms than in Belarus. Compare Poland, Estonia, the Czech Republic with Belarus, and you'll see how less the Belarusians earn, consume, and so on. There is a degradation within the model under current support.

- There are reports that villages of Belarus no longer turn on illumination due to lack of funding. What else can happen if the economic crisis continues? May people have problems similar to those in the USSR on the eve of the collapse, or those in Venezuela now?

- You know, I agree that problems of this kind are growing, especially in the Mahiliou and Vitsebsk regions. They have the lowest incomes in Belarus; these regions have degraded the most in economic development.

On the eve of the collapse of the USSR, people's incomes did not fall, but the goods disappeared from sale. Now, perhaps, there will be no shortage of goods, just a lack of money. There will be a reverse phenomenon - inflation will behave differently.

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