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A number of external and internal factors can be named as having caused this tendency. The external ones are as follows: a worsening of terms and conditions for the purchase of energy carriers in Russia; an increase in competition on foreign markets, which has weakened the Belarusian manufacturers’ position in these markets; a worsening of conditions for access to Russian markets; and more intense competition on the global capital market, which reduces availability and worsens the terms and conditions for granting the country external loans. The internal factors which worsen prospects for growth include the following: a rapid accumulation of external debt, which places an additional burden on the national budget; a breach of discipline on the financial markets, because Minsk played an active role on them during the crisis; and the internal institutional structure’s noncompliance with the new requirements of the global economy.
It is worth noticing that a similar set of factors (except for the trade in energy carriers) is present in practically all the CEE countries. However, during the crisis, Belarus, unlike other countries of the region, has in many respects ignored the challenges of the time and has hardly adapted the national economy to shaping the post-crisis environment. In 2009, when the majority of CEE countries entered into a state of cyclical recession while still weakening or eliminating their structural disproportions (principally their current account deficits), Belarus concentrated exclusively on the current dynamics of production and incomes, by putting a great number of economic policy instruments in place with the aim of preventing a fall in GDP. Therefore, after analysing the results for 2009, it became obvious that some of the structural disproportions had even been intensified: the trade deficit, a decrease in competitiveness of enterprises as a result of the incomes policy, and the accumulation of excess risks in the banking sector. These disproportions became additional obstacles to long-term growth, and what is more, they posed the threat of macroeconomic disequilibrium. Yet at the same time, it is possible to find substantiations for such an economic policy in the period of 2009. In fact, a conscious choice was made to prevent a fall of the current level of income at the expense of a restriction in potential income growth in the future. A search for compromise between these two problems is a question of making a political choice in conditions of adverse external circumstances.

Regardless of the normative evaluation of such a policy, it is possible to state that this policy made it possible for Belarus to emerge from the cyclical recession at the beginning of 2010. However, in the course of that year, the stimulating mechanisms of the economic policy were not curtailed; on the contrary, they were rapidly intensified, as the political authorities assigned the objective of ensuring a certain level of income for the population, as well as high rates of economic growth (a range from 11% y/y to 13% y/y was the official target indicator of GDP growth). At the same time, as shown above, it was impossible to achieve such high rates of increase in the new circumstances by means of natural factors (long-term growth factors). For these reasons, the government and the central bank put in place a full spectrum of economic instruments: stimulating fiscal and monetary policies, income policy, quasi-fiscal operations through the state banks, and so forth. It should be mentioned that the policy of stimulation in the phase of economic recession and economic expansion has various consequences. If introduced in the phase of recession, it only impacts on the accumulation of structural disproportions, and poses an insignificant threat to macroeconomic equilibrium in the future (since the economic policy drives the business cycle in the direction of the level of equilibrium); but if it is introduced in the expansion phase, the structural disproportions are formed much faster, and the macroeconomic equilibrium is automatically shaken, which is reflected in an acceleration in inflation (as in this case, the policy of stimulation drives the development of economy away from the level of equilibrium).

In this situation, it is much more difficult to justify such an economic policy: at that time, it was not only a question of preventing a fall-off at the expense of future income, but also a problem of creating an artificial growth in income during the current period at the expense of future income. Thus, the further escalation of structural disproportions was the result of the Belarusian economic policy for 2010: a current account deficit, a burden of debt on the economy, insufficient competitiveness of enterprises from the non-financial sector, the accumulation of new risks in the banking sector, and a worsening of financial discipline. What is more, in 2010 the state of public finance significantly worsened, and for the first time in many years Belarus faced an significant budget deficit (2.6% of GDP). As a result, with the other problems added, there was no longer any room for manoeuvre in the fiscal sphere, which can also be considered as a factor for the worsening of long-term growth prospects.

Some of the factors responsible for the worsening of long-term growth prospects, in particular the current account deficit, the budget deficit, and potential problems in the banking sector, also pose direct threats in the short term, contributing to the macroeconomic disequilibrium. Apart from them, the expansionist income policy carried out in 2010 generated assumptions for significant acceleration in the rise in prices. The artificially created incomes of 2010 were fairly quickly redirected to the commodity markets, causing inflationary pressure; as a result, they became the reason for additional pressure upon the Belarusian rouble’s exchange rate.

Thus, in the beginning of 2011 the worsened prospects for growth must be considered as fact. Moreover, a long list of assumptions for macroeconomic disequilibrium has also been generated by this period. Under such fundamental conditions, even at the beginning of this year, the following seemed inevitable: a) a slowdown in GDP growth towards its natural level; b) the need to quickly curtail the internal demand stimulation mechanisms, in order to prevent a macroeconomic disequilibrium and the economy being dragged down into a new recession.

However, at the beginning of the year, the economic authorities continued to ignore the warning signs of macroeconomic disequilibrium; they continued to stimulate internal demand, and did not resort to any instruments to restrain internal demand and stimulate external demand (monetary and fiscal restrictions, devaluations, restrictions on incomes, etc.). Therefore, the accumulated disproportions in the circumstances of the fixed exchange rate were reflected in the severe fall in the National Bank’s gold and foreign currency reserves. The economic authorities reacted to this by introducing a number of currency restrictions and direct restraints on import.

As a result, within the last few months, the Belarusian internal currency market has, in fact, become paralysed, and a great number of different exchange rates have been generated. Access to the exchange auctions on which the official exchange rate of the Belarusian rouble to foreign currencies is established has been closed to the majority of firms, and in this segment of the market the demand for foreign currency has only been met in the area of purchasing so-called critical import supplies (power resources, pharmaceuticals, etc.). In this situation, in other segments of the market, economic agents have begun to include the expected devaluation rate and other accompanying risks in the currency purchase and sale prices. However, as the economic authorities’ official position on prospects for the exchange rate policy has not until now been clarified, the rate of the estimated devaluation risks and other risks is quite volatile. As a result, this asymmetry of information generates difficulties when it comes to determining a fair level (i.e. one compliant with fundamental economic assumptions) of exchange rate for the Belarusian rouble. In these circumstances, many firms prefer to suspend or lower the intensity of their economic activities, as an alternative to accepting excess risks connected with uncertainty, or including all risks in the prices of their products. As a result, Belarus is currently facing a rapid drop in production and a significant rise in prices (both due to these fundamental assumptions and the uncertainty with regard to the exchange rate policy).

The existing circumstances could potentially cause Belarus to fall into a fairly long-lasting recession (depression). The reason for this is the presence of both current (i.e. short-term) and structural problems in the national economy. For example, prolonging the present situation of uncertainty in the currency market will cause further rises in prices and the limiting of production by some manufacturers. As a result, this negative impulse could be transferred to the banking system, through which it could continue to spread across a wider spectrum of economic agents.

The minimum task which must be undertaken to prevent such a scenario is the elimination/reduction of the current disproportions, and, in the first instance, of the current account deficit. The basic instruments necessary to achieve this are the following: a reduction of internal demand (by toughening up monetary policy, fiscal and quasi-fiscal operations, and restraints on the income of the general population) and/or devaluation of the national currency. In other words, in this conjuncture, the further development of the situation depends entirely on the actions undertaken by the economic authorities, whose decisions are in turn greatly dependent on political factors. From their point of view, radical restraints on income and/or a significant devaluation of the rouble’s official rate seem to be unacceptable solutions of the problem.

In such a state of affairs, it is probable to see an attempt to combine all the policy instruments to a certain degree without putting in place any ‘radical’ scenarios of devaluation or income restraints. What is more, maintaining foreign loans is considered as an integral policy instrument, since bringing external trade into equilibrium in the short term is hardly realistic.

Until now, the economic authorities have declared themselves ready to implement fiscal and monetary restrictive measures, although the degree of rigidity of such a policy has not yet been clearly defined. Therefore,  within the framework of the economic policy, the key role will possibly be given to fiscal and monetary instruments, whereas essential devaluation will remain unacceptable, owing to a number of economic and political factors. Due to this situation, we may expect a slow fall in the official exchange rate within the declared corridor, while in other segments of the currency market, the national currency‘s rate will fall significantly faster. The curtailment of fiscal and monetary stimulus will cause the components of internal demand to struggle to obtain their long-term balanced level. This will gradually have a positive impact on improvement in net exports.

This scenario will very likely allow the authorities to avoid a rapid reduction of production in the immediate future, and it is very probable that this will secure the growth of real GDP by approx. 3.5-4.5% according to the results for 2011 with a fairly high average annual inflation rate. However, it must be emphasised that practically, the structural problems will not be solved in this scenario, and their gradual accumulation will continue. For this reason, if the economic authorities choose a similar algorithm of actions, the rate of potential growth will continue to decrease, and in the future Belarus will have to pay for this policy with stagnation in its economy and progressive backwardness in productivity, in comparison to other countries. Moreover, the presence of these structural problems will pose a continual threat that the national economy will be dragged down into recession.