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IMF experts emphasize urgent need for structural reforms

Deep structural reform is critical to achieving higher sustainable growth, the International Monetary Fund (IMF)’s staff team says in a report.

“Structural deficiencies are holding back growth and have made the economy increasingly crisis-prone,” says the staff report, prepared following consultations with Belarusian officials, which ended on March 25. “Belarus is one of the least reformed countries in the CIS. The economy remains heavily centralized with state-owned enterprises (SOEs) accounting for more than half of GDP and two-thirds of employment. The pervasive use of quantitative targets for SOEs and administrative price controls – some 20–30 percent of consumer prices are regulated – distorts resource allocation.”

“The urgency of structural reform is underscored by Russia’s WTO accession – which is increasing competition for Belarus’ products in the Russian and domestic market – and increasing labor migration away from Belarus, especially of the higher-skilled,” the report says. “To cope with these trends, reforms are needed in several areas including the financial sector, where the role of the new Development Bank is critical, and the real sector. Structural reforms would bring improved macroeconomic stability, competitiveness gains, and increased flows of FDI.”

“Progress on real sector reforms is slow and has in some cases also been reversed,” the report says. “The government has made welcome progress with tax reform and a new bankruptcy law. The so-called Directive #4 that was adopted in 2010 contains a broad range of measures to improve the business environment, but has been only partially implemented. A reduction in the number of consumer goods subject to price controls was reversed during the 2011 crisis. The privatization agenda has stalled as the National Investment and Privatization Agency (NIPA) has yet to sell any of the eight small companies it was tasked to privatize, while other companies have been nationalized.”

The IMF staff team recommends that the government reduce controls on prices of goods and services with a view to fully eliminating them “on an ambitious time table,” that the privatization of small and medium-sized enterprises be sped up, and that “larger companies should be either privatized or restructured and brought on a commercial basis in a short time-frame.”

“The authorities agreed with the need for structural reform in principle, but emphasized trade-offs and risks,” the report says. “Policy makers stressed the importance of the overall economic environment, including external factors, for the speed and sequencing of structural reform, arguing that reform at the current juncture was fraught with risk. They also pointed out that price liberalization tended to conflict with efforts to reduce still-high inflation. The authorities therefore preferred a gradual approach to reform. As an example, regarding privatization efforts, following best-practice procedures that secured broad support from workers was viewed as more important than the speed or scale of the process. The authorities also emphasized that their enterprise modernization initiative includes modernizing the economic model of state-owned enterprises by introducing new elements of corporate governance, and improving incentives of management and personnel within the existing system.” //BelaPAN