An outstanding performance from the fuel and energy sector has marked the year of 2005 for the Belarusian economy. On the whole, the output of top ten leading industrial sector rose by as much as 96.9 percent over the past three years. The rising prices of oil and petroleum products, Russian market demand and government-stimulated demand in the country became three major factors behind the impressive growth. With the world economy growing very fast, it would be surprising if Belarus with its inherited production infrastructure were in recession.
In 2003, the share of fuel industry in the output of top ten sectors amounted to 16.8 percent, petroleum products - to 15.3 percent. Two years later mechanical engineering was the largest industrial sector (18.8 percent). The situation changed significantly in 2005.
The top ten of Belarusian industry is led by the fuel sector (20.1 percent), with petroleum products ranking second (18.6 percent). Moreover, there is a synergy of physical production growth and skyrocketing prices for petroleum products (by 60-90 percent over the past three years).
Such a serious structural change cannot fail to influence the condition of industry as a whole and, more specifically, on public budget revenues. In order to neutralize the sharply increased amount of foreign exchange proceeds from the export of petroleum products, metals and fertilizers, and protect the economy from the "Dutch disease," the monetary authorities should have sterilized money supply by setting up a stabilization fund. Its resources could work on international stock markets and bring to Belarus 10-15 percent of income per year.
However, nothing of the kind had been done. Therefore, manufacturing sectors had to work in the conditions of the strengthening Belarusian rubel. Money supply rose by 73.7 percent in 2005 (from December to December). This means the money that could have worked for the country's future were actually wasted by its immediate consumption.
If we take main commodity items, producers of buses and grain harvesters are leader in term of physical production growth (140 percent and 120 percent from 2003 to 2005, respectively). However, it has to be pointed out that this is an investment choice made by the government rather than by the market. Government organizations place orders for buses and grain harvesters. And they spend public budget money.
The logic of such industrial policy is simple. First the government takes money from profitable companies and forces the entire business community (through taxes) to take part in establishing new state productions, then it makes agricultural producers and public transport companies buy those buses and grain harvesters on loans and subsidies take from public budget.
It is obvious that such an approach is wrong. From the viewpoint of the price/quality balance, farms and public transport do not get the value for their money. Being under powerful fiscal pressure, small and medium businesses cannot create new jobs and strengthen their competitive capacity.
At the same time, the government is using its import-substitution policy to force up GDP growth. Belarusian harvesters and buses are just a local project, too small, expensive and inefficient from the viewpoint of the country's development strategy. It is very probable that it can follow the same (unlucky) track as the project of making washing machines in Belarus. The entry of this product into the domestic market ended with a fiasco. The consumer did not understand the good intention of its producers. As a result, the output of washing machines fell by 70 percent between 2003 and 2005. Just like the production of watches and bicycles, this project is a failure.
Of course, the government can pump up producers of those products with public budget resources, give them tax concessions and introduce import restrictions with regard to similar products from abroad. But such a policy is not economic development but another drug injection.
The growth of building materials production is another example of administratively-driven demand. The government is to blame for rising prices for real property, and it plays a key role in this market. Since the balanced development of the economy is blocked, banks and population have to concentrate their resources on housing construction and purchases of real property. This boosts demand for cement, ceramic tile and other building materials. Belarusian customs also helps to increase demand for domestic products. This sector will see serious changes as soon as the real property market breaks down.
Profitability reported by different industrial sectors is also evidence of the low quality of the government's industrial policy. As many as 61.8 percent of industrial companies have profitability below 10 percent as of the first eleven months of 2005.
Last year has not been good for thousands of small and medium enterprises all over the country. Tax and regulatory burden remained the same. They were deprived of the choice of a development strategy. Workers saw crisis phenomena rising in their plants. There is a steady upward trend of outstanding debts on bank loans, including those received to pay wages to workers. The authorities are hiding that many companies fail to pay their workers in time, like Motavela, Termoplast, Intehral and other enterprises in Minsk. Inventories of the Minsk Watch Factory already exceed an annual amount of production.
The year of 2005 has proved the probability of small-scale bankruptcies all over the country. Areas of tensions will appear from place to place in the economy. The central government and local authorities will have to resort to subsidies and bank loans more and more often. And they will still fail to anticipate economic problems and solve them in advance.