Bel arus country economic memorandum
•• Liberalize labor markets by removing administrative controls on wages and employment levels. To achieve this, Belarus may consider harmonizing primary and secondary regulation to stop the enforcement of wage grids in all firms. In addition, full discretion on decisions related to the levels of employment could be given to SOEs. To facilitate this, any guidelines on employment-level targets among enterprises should be eliminated. •• Strengthen unemployment benefits and safety nets to mitigate risks associated with more dynamic labor markets. Simplify the requirements for unemployment registration and eliminate the obligation to participate in paid public works to receive unemployment benefits. The unemployment benefit should be extended to workers without employment for no longer than the first six months. In the short term, the cap for the unemployment benefit should be redefined to provide a minimum level of income for the unemployed. In terms of social assistance, efforts need to be made to improve means-tested targeting and reduce leakage. •• In the medium term, establish an effective unemployment insurance mechanism to facilitate labor mobility and to provide adequate protection from the risks associated with dynamic labor markets. •• Reform active labor market policies to support skill development and job creation in the private sector. Belarus may consider using the funding of active labor market policies (for example, for training in government organizations) to fund on-the-job training in private enterprises for newly-hired workers and alternative schemes based on international experience. In addition, incentives for firms to hire new workers through temporary wage and hiring assistance should be in place. The design of such policy measures should be aimed at avoiding abuse and minimizing fiscal cost.
Reducing Distortions in the Allocation of Capital Fueled by a rapid expansion in credit, after 2005, investment became a major source of economic growth. Gross fixed capital formation grew at an average rate of 18.6 percent (in real terms) annually, outpacing GDP growth rates (7.4 percent) during the second half of the past decade. State interference in the financial system has undermined the efficient allocation of capital. Belarus’s financial sector channels a predominant share of financing to less-productive parts of the economy, including SOEs, which enjoy privileged access to and lower costs of financing. In addition, the government influences the allocation of credit through its directed lending (GDL) programs, which push funds toward the government’s priority sectors. This practice has softened budget constraints and delayed restructuring in the enterprise sector. There are large vulnerabilities and risks associated with the misallocation of credit in the economy. By boosting domestic demand, the rapid expansion in credit has not only exacerbated external imbalances, but also undermined the efficiency of investment. Stagnating returns on capital and growing (albeit still reportedly low) rates of nonperforming loans (NPLs) are worrying signs of deteriorating asset quality and associated banking system risks. In addition, the Belarusian state banks have regularly relied on
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Executive Summary