Monetary and fiscal manoeuvres

 The early transformation period saw the re-invention of monetary and fiscal instruments, effectively absent under central planning.

On the monetary front, Belarus (as well as other transitional countries) experienced extremely high inflation, estimated in four-digit numbers, dramatic devaluation of the local currency, and negative interest rates.

By 1994, the Belarusian monetary sector was moving towards gradual policy stabilisation and toughening with decreased emission and a high refinance rate of the National Bank.

The arrival of Lukashenko in 1994 and the period thereafter is largely characterised by loose, politically-driven fiscal and monetary policies. High emission rates, range of currency, price and other restrictions resulting in episodes of high inflation and abrupt currency devaluation.

For example, hyper-inflation, estimated at 109 per cent in 2011, was caused to a great extent by the President’s pledge to achieve an average monthly salary of 500 USD by the 2010 Presidential Elections; this decision was not accompanied by a respective growth in labour productivity.

The loose macroeconomic policy, backed by the worsened conditions of energy supply in Russia eroded the central bank reserves and caused a 180 per cent devaluation of the Belarusian rouble (BRL) in 2011.

Belarus’ budget expenditures are mainly comprised of social security, agriculture, and expenditure on the national economy.

The public sector is deeply involved in the economy through government-directed lending programs, high public investment, and sizable subsidies and transfers under a heavy tax burden.

For instance, between 2005 and 2010, the stock of government-directed lending programs (providing enterprises with low interest rates) rose from 3 per cent of GDP to around 25 per cent.

The revenue part of the budget is comprised mainly of taxes on foreign trade, excise and VAT, income and profit taxes.

The tax burden in Belarus is one of the heaviest and most bewildering among transition economies. While Belarus has made some progress since 2005 in simplifying the tax system, the tax-to-GDP ratio (the Social Protection Fund included) accounted for 40 per cent in 2010, which was one of the highest in the region.

Today, the Belarusian tax system is still characterised by a heavy tax burden, high marginal rate of direct taxation (including profit tax and other fees) and a complicated set of tax exemptions, deferrals, rescheduling, tax forgiveness, and fragmented tax bases.

Unlike its regional peers, Belarus managed to avoid high budget deficit over the transition years and even the global financial crisis of 2009. Experts note, however, that low explicit budget deficit in Belarus is only part of the picture, since activities such as tax expenditures, quasi-fiscal activities and contingent liabilities do not directly enter the budgetary statistics.