VZCZCXRO3198
RR RUEHAST
DE RUEHSK #0600/01 1600759
ZNR UUUUU ZZH
R 090759Z JUN 06
FM AMEMBASSY MINSK
TO RUEHC/SECSTATE WASHDC 4516
INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE
RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/DEPT OF COMMERCE WASHDC
RHMFISS/HQ USEUCOM VAIHINGEN GE
RUFOADA/JAC MOLESWORTH RAF MOLESWORTH UK

UNCLAS SECTION 01 OF 03 MINSK 000600 
 
SIPDIS 
 
SENSITIVE 
 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ECON ETRD PREL USTR BO
SUBJECT: IMF: Belarus Faces Falling Growth 
 
MINSK 00000600  001.2 OF 003 
 
 
¶1. (SBU) Summary: In a recent briefing a visiting IMF team 
acknowledged that the Belarusian economy has seen strong growth the 
past few years, driven mainly by the re-export of Russian oil, but 
also to a lesser extent to growing productivity.  However, Belarus 
also faces a number of significant problems that will soon lead to 
an end to growth, if no reforms are undertaken.  The IMF predicts 
that if Belarus' currently advantageous terms of trade remain 
unchanged (unlikely, given Russian pressure to raise energy costs), 
the economy will still run out of steam within the near future.  In 
previous years the GOB has told the IMF that Belarus' economy is 
fine as is.  This year, for the first time, senior GOB officials 
were somewhat open to the IMF's message of reform.  Mid-level 
officials are much more open to liberalization, and their skill has 
successfully countered some of the damage Lukashenko would 
otherwise have inflicted on the economy.  End summary. 
 
¶2. (U) On May 30, visiting IMF Deputy Division Chief Balazs Horvath 
informed a group of foreign diplomats on the findings of the 
recently concluded annual IMF Article IV consultations in Belarus. 
Unsurprisingly, the IMF found the GOB is "not in full agreement" 
with the IMF on macroeconomic policy, with senior GOB officials 
continuing to insist Belarus' quasi-socialist model works perfectly 
well.  However, while in previous years senior GOB officials 
rejected outright IMF recommendations for macroeconomic 
restructuring, this year the IMF found some tentative openness to 
discussing macro reform.  The IMF delegation was also granted 
greater access to policymakers this year, including to economic 
advisors in the Presidential Administration and to several 
ministers. 
 
 
Economy Growing, For Now... 
--------------------------- 
 
¶3. (SBU) The IMF mission announced in their press release after the 
visit that Belarus saw 9.2% GDP growth and 8% inflation in 2005. 
These are the official GOB statistics.  Horvath explained the IMF 
agrees there was significant growth last year, but challenges these 
official figures.  He claimed the GOB's statisticians are very 
professional and proficient, but the IMF has strong doubt about the 
data they are given.  Under the Belarusian system, enterprise 
directors face considerable pressures to meet or exceed GOB 
targets, and so many likely report that they met these goals, even 
when they did not.  Moreover, the CPI cannot accurately reflect the 
true level of inflation because the GOB controls so many prices at 
the local level, as well as imposes indirect controls on enterprise 
profits.  Horvath added the Ministry of Statistics rejected these 
criticisms.  He could not provide an IMF estimate of growth or 
inflation. 
 
¶4. (SBU) The IMF attributed Belarus' strong growth to two factors. 
First, Horvath stated that in the past year Belarus saw significant 
productivity growth, driven by an increase in capacity utilization. 
He qualified this statement by saying that wages, raised by 
government fiat, have still grown at a higher rate than 
productivity every year for the past ten years.  Second, and more 
significantly, Belarus' economic growth last year was driven to a 
major extent by the country's ability to buy heavily subsidized oil 
and gas from Russia.  Horvath explained that in 2005 Belarus bought 
crude oil at half the world price from Russia, refined it and sold 
it westwards at world prices.  Most of this profit goes to the GOB, 
which uses it to subsidize wage increases and social projects.  He 
added that Belarus does not re-export the subsidized natural gas it 
buys from Russia, but that this subsidized gas allows Belarus' 
energy intensive goods to be sold for less.  Horvath said the GOB 
had assumed world prices for oil would keep rising as they did in 
¶2005.  When the IMF pointed out that they expected oil prices were 
unlikely to grow much in 2006, GOB officials began to worry about 
loss of growth this year. 
 
 
GOB's Unrealistic 5-year Plan 
----------------------------- 
 
¶5. (SBU) Horvath pointed out that the GOB's new 5-year plan, for 
2006 though 2010, assumes an annual GDP growth rate of 8.5%.  The 
IMF believes Belarus could have sustained GDP growth, given 
Belarus' well-educated and disciplined workforce, but not 8.5% a 
year.  To reach this high level of growth, the GOB assumes it will 
be able to double investment, squeeze consumption by 6%, and the 5- 
year plan assumes unchanged external terms of trade--including no 
changes in the price for subsidized Russian energy.  The plan does 
not envision any market liberalization or reform.  In one positive 
step, the plan does explicitly state the goal of limiting wage 
growth to the level of productivity growth. 
 
 
 
MINSK 00000600  002.2 OF 003 
 
 
Endemic Weaknesses 
------------------ 
 
¶6. (SBU) The IMF pointed out several endemic problems with the 
Belarusian economy.  Belarusian goods are losing market share in 
Russia as Russian consumers become more affluent and as Russian 
agriculture develops.  Horvath also said that 114 Belarusian 
entities, all controlled by the Presidential Administration, 
account for over half of GDP.  The GOB plans to maintain control 
over all these companies.  Horvath said this structure is very 
rigid and hard to adjust to meet a changing market.  According to 
the GOB, around 15% of Belarusian businesses are loss-making, with 
another 33% borderline.  However, Horvath said that if 
international accounting practices were used, at least half of 
Belarusian firms would be considered loss-making.  He also 
explained that in Belarus the state controls the largest banks, and 
uses these banks to provide directed loans.  This practice leads to 
a sharp loss of liquidity in the banking sector, requiring the 
state to recapitalize these banks out of the state budget at the 
end of each year.  Such recapitalization eats up a significant 
portion of the budget, equal to around one percent of GDP. 
 
 
IMF Recommended Fixes 
--------------------- 
 
¶7. (SBU) Horvath argued that the GOB should start structural 
reforms, including increasing government savings against future 
disruptions, now when the economy is growing.  Horvath stressed 
that Belarus' GDP growth will decline each year and drop to nothing 
if no changes are made.  The IMF's suggestions for reform include: 
 
--the GOB lowering taxes and expenditures; currently the government 
redistributes half of GDP through the budget; 
--limit wage growth to the level of productivity growth; 
--discontinue centrally directed wage increases, which mandate 
identical wage increases across the economy, regardless of the 
health of an individual sector or enterprise; 
--rapidly phase out directed lending; 
--get rid of the Golden Share practice, which scares away 
investment, particularly long-term strategic investment; 
--reduce bureaucratic red tape and the size of the government; 
--allow the private sector to drive growth. 
 
 
And the Good News: GOB Slightly Open to Suggestions and Bureaucracy 
Countering Lukashenko's Worst Policies 
--------------------------------------------- ---------------------- 
 
¶8. (SBU) The IMF has found that the GOB has very talented people 
working at the mid-level in the National Bank and Ministry of 
Finance.  Unfortunately, there are not as many good people working 
in the Ministry of Economics, Horvath said.  These mid-level 
officials understand how a free market economy works and are ready, 
in some cases eager, for reform.  In particular, the IMF found that 
Belarus' monetary policy has made strong progress.  However, at the 
policy level the GOB is still wedded to its socialist/statist 
model.  Horvath claimed that this year the IMF mission had higher 
level access than ever before, meeting with several ministers and 
with members of the Presidential Administration.  Also for the 
first time this year these people did not reject outright the IMF's 
calls for reform.  Horvath believed that there is a general feeling 
in the GOB that the current system is unsustainable and something 
must be reformed. 
 
¶9. (SBU) Horvath also pointed out that some in the bureaucracy are 
now successfully minimizing the harm from Lukashenko's inept 
economic management.  For example, last November the GOB was 
running a budget surplus of two percent.  In late November 
Lukashenko signed a Presidential Decree ordering his government to 
spend the entire surplus by the end of the year, largely by 
boosting salaries nationwide.  This led to a massive infusion of 
money into the economy and created a budget deficit for the year. 
The IMF predicted this move would cause inflation to spike, but 
instead the National Bank and Ministry of Finance successfully 
cooperated to limit the damage.  Horvath said they were able to 
withdraw much of this money from circulation and rebuild national 
deposits in early 2006. 
 
 
IMF Predicts Growth to End 
-------------------------- 
 
¶10. (SBU) When pressed to make a prediction on the future of the 
Belarusian economy, Horvath answered that, if there is no change in 
Belarus' terms of trade, then the GOB will have "a couple of years 
of declining growth rates, well below the GOB's forecast of 8.5%." 
 
MINSK 00000600  003.2 OF 003 
 
 
However, if the terms of trade change, as seems likely with the 
probable rise in Russian energy prices, then the Belarusian economy 
will see its growth end faster and its advantageous window for 
economic reform close sooner. 
 
 
Comment 
------- 
 
¶11. (SBU) Even though the IMF saw greater interest in reform this 
year, Lukashenko repeats in most of his public addresses the need 
for Belarus to maintain his "socially oriented" economic policies. 
With Lukashenko strengthening his presidential control over the 
economy, it is probable that the GOB will not institute any serious 
economic reforms now while conditions are favorable.  Instead, we 
expect they will wait until the last possible moment to act, if at 
all.  This approach runs the risk of increasing the potential 
disruptiveness of economic change and souring much of the public on 
serious economic liberalization. 
 
 
KROL