The first quarter of 2006 was entirely in the shadow of the presidential campaign. The Belarusian economy entered a dangerous phase of post-modernist statistics under the influence of propagandistic considerations. Judging by statistical reports, Belarus is almost a Hong Cong. But while talking to company directors, one can see their concern about growing problems and expectation of change.
The impressive GDP growth in the first quarter, 10.9 percent, cannot soothe the concerns, even though it is the best start of the year in Belarusian history. An unprecedented increase of 36.2 percent in fixed asset investment does not inspire optimism. The fact is the first quarter of 2006 saw very clearly imbalances in public finance and low quality of public budget policy.
Despite promises to reduce taxes and leave more money for companies, the government continues to re-distribute more than one half of GDP through central budget. This exposes local authorities, among others, to financial difficulties. Money is collected but it is not spent in time. Consolidated budget revenues amounted to 51.4 percent of GDP in the first two months of this year, while expenditures were only 43.7 percent. By collecting huge taxes, the government actually gets a free loan. The money is used for corporate projects, whose number is never getting smaller.
When there is a lot of money in the budget, the authorities are not really thinking why debts are growing and how investment mistake can be corrected. No wonder the number of organizations who want more and more from public budget is getting increasingly bigger.
The government is following the way of the least resistance by increasing subsidies for the real sector. By working outside the bounds of market-based and commercially founded business plans, the authorities are eroding the basis of the banking system and corrupting company directors. Accounts payable rose by 20.1 percent and accounts receivable - by 27.6 percent in comparison with the first quarter of 2005.
At the same time, many enterprises and banks, especially those linked with mineral resources, are "swimming" in profits. Their earnings amounted to 21.2 trillion rubels in January-February 2006, or 31.2 percent more than in the same period in 2005, while consumer prices rose by 8.2 percent. However, they do not know how to use them in the best way. They cannot raise wages for their workers higher than the administrative set ceiling. Bonuses cannot be paid to all. Production modernization and new projects can only bring trouble and a lot of questions from higher authorities. So, banks and companies have spare money and they prefer to spend it uselessly today instead of thinking about sustainable development tomorrow.
Earnings in industry rose by 25.9 percent over the first two months of 2006, while production cost of sold products - by 27.3 percent. Production costs rise faster than earnings also in construction, transport and trade, that is, in key economic sectors. In other words, the economy is running in a stable but useless way: business is running but net profit, return on investment, presence of Belarusian companies in external markets - these and other qualitative indicators of business operation are not interesting for the country's main investor, i.e. the state.
The money supply has risen by sevenfold in the past four years. The National Bank obviously prefers to increase the amount of money in circulation in response to the growth of hard currency earnings. As a result of constant growth of prices for petroleum products, it creates the illusion of the stable Belarusian rubel. If the National Bank and the Council of Ministers agreed to sterilize excessive hard currency earnings by sending them to a stabilization fund or investing them outside the country, the exchange rate of the Belarusian rubel would weaken against the main currencies of the country's trading partners. This would give additional advantages to exporters in sectors other than mineral resources.
In addition, Belarus would establish a serious fund to ensure the stability of the pension system and help social policy at the time of low prices for oil, metals and potash fertilizers. Unfortunately, the Belarusian authorities have not set up such a fund. Light, forest, food, mechanical engineering and electronic industries have become hostages to the government's exchange rate and budget policies. Producers in the chemical sector have also found themselves in a bad situation. Their export fell by 18.7 percent in January-February 2006. Even wood - the traditional Belarusian export - decreased by 12.2 percent. Ferrous metal export is no longer growing. It fell by 10.3 percent in the first two months of this year. A further decrease is inevitable due to changes in the world metal market.
There is one more alarming sign for traditional Belarusian export: export of fertilizers went down by 26.9 percent, and the share of fertilizers in commodity export shrank from 8.4 to 4.7 percent. More and more sectors of Belarusian industry get caught in the trap of the Dutch disease. This is a condition which is defined by Russian economist Andrey Illarionov as "continuous high inflation rate and growth of the national currency exchange rate leading to undesirable structural changes and wasteful budget policy." Export of mineral products rose by 68.6 percent in January-February 2006, while their share in total export increased from 33.3 to 43.5 percent. Average export prices went up by 48.1 percent. Import of mineral products increased by 66.3 percent, while their share in total import grew from 38.6 percent in 2005 and 41.7 percent in 2006. Average import prices jumped by threefold in just two months. This proves that Russia is starting to equalize prices of petroleum products for Belarus.
It was quite natural that incomes of population rose in the pre-election quarter: by 28.4 percent in January-February 2006, while consumer price index grew by 8.2 percent. With such a rise of incomes in place, the suffering of the private sector from excessive regulation is compensated to a certain extent by the growth of people's purchasing capacity. Retail trade rose by 21.4 percent, although the target for the first quarter was just seven percent. It should be noted here that small business accounts for 34 percent of retail trade.
Statistics of the first quarter 2006 certainly has influence from the presidential election. Nevertheless, they show that neither the population nor the government get prepared for a new price situation in the gas and oil market. Authorities and companies are competing in wasting their working assets. The National Bank condones the business cycle, without thinking about creating a competitive financial system. Development is within the old production structure. And there have been no attempts in the first quarter to draw new technologies to the country and diversify export.

Belarusian economy in first quarters of 2002-2006

Source: Ministry of Statistics and Analysis