The Belarusian economy is currently experiencing both cyclical and structural recessions
By Uladzimir Akulich, Sierž Naūrodski and Aleś Alachnovič, CASE Belarus
If no significant actions with regard to the cyclical or structural components of growth are taken, the Belarusian recession threatens to turn into a depression.
The Belarusian economy has been stagnating since mid-2011. According to the IMF, Belarus was ranked 61 in the world in terms of GDP per capita at market exchange rates in 2013. By November 2015, it had fallen to 81. In 2015, after four years of stagnation, the Belarusian economy slid into a recession (fig. 1) — its first since 1996.
Most importantly, Belarus is currently experiencing both cyclical and structural recessions. Since 2006, the structural component of the Belarusian economy (the driving force of the economy, or the long-term trend) turned downward (fig. 2). However, due to an increase in the cyclical component in 2008 and again in 2010–2011, this did not significantly affect total actual growth rates. According to a study of the Eurasian Economic Commission, the contribution of the structural component of the economy to overall economic growth in Belarus in 2010–2013 was just 30%, while the contribution of the cyclical component was 70%.
The fact that Belarus is going through cyclical and structural recessions at the same time suggests that the nature of the current crisis is different from those encountered before, and is more fundamental. The complexity of the situation requires the government to use different growth stimulation tools that may be contradictive to each other. Overcoming a structural recession requires the implementation of structural (institutional) reforms, the first stage of which should be deep liberalization and macroeconomic stabilization, normally requiring tight monetary policy. Fighting a cyclical recession involves stimulating domestic demand by easing monetary policy. Therefore, the Belarusian government should determine the sequence: which disease to cure first and when to proceed with the second.
However, the answer seems to be rather obvious. Belarus is the country with the slowest transformation progress in Europe, according, for instance, to EBRD transition indicators. In order to create a strong foundation for sustainable growth, the Belarusian government should immediately accelerate the implementation of structural reforms, primarily by eliminating the existing administrative mechanisms of inefficient resource allocation. Only after should it consider triggering domestic demand via a soft monetary policy, with the belief that this time the resources will go to those who are able to ensure their effective use. Such an approach will allow GDP to move in an upward direction again. Experts (such as Dmitry Kruk of the Belarusian Economic Research and Outreach Center (BEROC)) believe that “in the absence of structural reforms in the coming years, the growth rate will not exceed 2–3%, even if the cyclical component of GDP grows. Structural reforms in Belarus will spur the GDP growth rate up to 7% per year over 10 years.”
If no significant actions with regard to the structural or cyclical components of growth are taken, the Belarusian recession threatens to turn into a depression. In the first quarter of 2016, GDP declined by 3.6%. Such a serious loss, in our opinion, is the effect of the high base of Q1 2015. As the base effect vanishes throughout 2016, we will likely witness a GDP drop of around 3% by the end of the year. The World Bank predicts a 3% decline in GDP in Belarus in 2016. The IMF forecast is also 3%, while the IPM Research Center predicts a 2% GDP slump. Isn’t it high time to start reforms?