Bel arus country economic memorandum
Growth Increasingly Reliant on Domestic-Demand-Boosting Policies After 2005, economic growth became increasingly reliant on domestic demand. Unable to diversify its export products and markets to find other sources of income and overcome its dependence on underpriced energy inputs economic growth in Belarus became less export driven since mid-2000s (figure 1.15). To keep the economic model intact, domestic demand had to be boosted. Overall, domestic absorption contributed twothirds of total economic growth, on average, between 2005 and 2010, on the back of expansionary income, fiscal, and monetary policies.
Figure 1.15. Growth Composition, by Expenditure contribution to GDP growth, in percent
20 15 10 5 0 -5
8.5 6.3 0.6 5.8 -3.5
10.5
5.8
5.5
1.5
4.5
6.5
4.6
-0.6 -7.4
-8.7
-9
-10 -15
8.8 4.7 5.9
4.9
0.8 4.9
1.3 3.4
8.4
8.9
6.3 8.8
6.9
6.5
-1.8
-4.7
-11.1
-12.8
-13.3
3.6
7.5
4.9 6.3 1.7 -4.8
5.7 -7.4
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Exports of goods and services Gross fixed capital formation GDP growth
Imports of goods and services Total consumption of goods and services
Source: World Bank calculations based on Belstat data.
Rapidly growing real wages fueled growth in consumption. Consumption grew strongly, supported by the government’s wage policies, as well as positive changes in the ToT, which, through income and wealth effects, fueled domestic demand more generally. Household consumption went up by a 14.6 percent annual average in the period 2005–08, collapsed in 2009, and went further up by 9.5 percent in 2010. Real wage and income growth outpaced productivity gains and, thus, became an additional factor contributing to the loss of competitiveness of Belarus (figure 1.10). High investment growth was supported by expansionary fiscal and monetary policies after 2005. Gross fixed investment contributed 5.5 percent to economic growth on average during 2005–10. Gross fiscal capital formation (GFCF) expanded by close to 23 percent on average per year in the period 2005–08. Even in 2009, when economic growth was 0.2 percent, investment (i.e. GFCF) continued to grow at a rate of 5 percent. In 2010–11 it grew on average by 14.2 percent. On the fiscal front, general government expenditures in Belarus remained large, accounting for over 47.4 percent of GDP, on average, for the period 2005–10 (figure 1.16). This is over 3 percentage points higher than the regional average and about 5 percentage points above the average in countries with similar per capita income. Moreover, especially prior to 2008, the government spent in a procyclical fashion.5
Figure 1.16. Expenditure Growth with Moderate Deficits in percent of GDP
in percent of GDP
60 50
47.7
46
48
0
0.43
0.04
30 10
49
1.43
40 20
47.6
49.6
46.4
1.35
-0.66
-0.7
-1.72
2003
Revenues
2004
2005
2006
Expenditures
2007
2008
2009
Balance, rhs
43.8
-1.78
2010
Sources: Ministry of Finance, Social Protection Fund, and World Bank estimates. 5 Detailed discussion on public expenditures in Belarus can be found in World Bank (2011_b).
8
Chapter 1. A Grow th Model in Peril
5 4 3 2 1 0 -1 -2 -3 -4 -5