The national debt puts the lukanomy on his knees

Dmitry Kruk

Important is not so much the size of the debt, as its structure.

Soon there may come a time when the national debt becomes a problem. This was told Dmitry Kruk, economist, researcher at the research center outreach:

— Belarus spent years saving up the national debt, which today is very often mentioned, describing the situation in the country as unfavorable. In absolute terms, the total state debt has grown for a long time — until the beginning of 2018, after which it stabilized. Today foreign creditors Belarus has about $16.5 billion, and taking into account obligations to domestic creditors, and debts of local authorities and guaranteed (Central and local governments) debt debt in the so-called extended definition is about $24.5 billion. Let’s try to understand how the national debt affects our lives, why some countries thrive “deep in debt”, and we are not, and why, in the foreseeable future will have to seek answers to the tough questions associated with public debt.

In General, the accumulation of public debt is quite adequate macroeconomic instrument in order to Finance the budget deficit or the trade deficit. But it is important that funded the deficit was moderate in size and/or had a kind of transitive (but not chronic) nature. In this case the increase in government debt supports economic growth. And if the momentum generated thus economic growth exceeds the rate of accumulation of public debt and the cost of its maintenance, despite the increase in debt in absolute terms, the burden of maintenance is not a problem.

In Belarus, technically, the national debt accumulated to Finance the trade deficit. The highest growth of debt occurred in 2007-2014 years, i.e. the period when the authorities maintained a fixed exchange rate despite a large and chronic trade deficit. But this practice is not encouraged by the future growth (on the contrary, he steadily faded), and only allowed in that period to maintain the current level of welfare that turned into a overstated.

From today’s perspective, it is important that as the national debt has increased to cover the external deficit, the accumulation occurred in a foreign currency (possible use of the Belarusian ruble for the payment of foreign payments is extremely limited). Therefore, after the devaluation of the 2015-2016 came out so that the load of servicing the public debt in our country has increased dramatically. After all, the main part of revenues denominated in the national currency, and to fulfill the obligations to foreign. And since new debts in foreign currency has already attracted primarily to repay old ones.

As a result, today the main problem of our national debt — it’s not so much the level of debt burdened and currency structure of government debt. In relation to debt-burdened developing countries, which include Belarus, there is a conditional critical point of 60% of GDP. From this position, we are in a relatively safe area: even according to the broad definition of debt, we are at the peak level in late 2016 — early 2017, it was about 50% of GDP.

However, the fact that over 95% of the national debt we have accumulated in a foreign currency, determines the need to service and repay these debts in foreign currency, whereas the currency stable revenues this is not enough. In recent years, the situation was under control, the national debt was even more reduced due to the “oil” and “gas” revenues — foreign currency revenue from export duties for oil products, the so-called “perenoske”, compensation etc. As you know, today this source of funds was called into question.

In principle, in 2020, the problem can be solved completely due to the accumulated reserves. Moreover, as stated by the Ministry of Finance, they are enough this year on a net basis to significantly reduce the national debt. But, first, such a move would have a negative impact on economic activity, as in this case you would have to cut funding elsewhere in the budget (in the current or subsequent years). Secondly, if the Ministry of Finance will start at the expense of their ruble resources to buy foreign currency to pay debt, it can lead to devaluation of the Belarusian ruble, adversely affecting the future state of the debt burdened.

What are the possible solutions to the problem?

The first is to try to maintain the status quo 2017-2019 years, that is, the gas-oil cash flow, which occurred due to the agreements with Russia. We see that the authorities today continue to bet on this scenario.

The second option would be a strategy based on a change in the currency structure of public debt. In simple words: currency debts must be converted into rubles. But this simple at first glance, the recipe is quite difficult to implement, especially without threats to financial stability. It is important to develop and implement a quite delicate procedure, “financial engineering”. But I guess this option is most promising if oil and gas revenues will not recover to the level of previous years.

The third, but obviously only a temporary solution to the problem could be the strategy “to take on new debts to pay old”. In fact, we partly follow this scenario for a long time, last years there was an unspoken rule that up to 25% of the national debt we repaid on a net basis, and 75% — refinance (in fact make it possible not always). You can try to focus on this strategy and beyond. But, first, in the new debts will have to refinance almost completely. Secondly, it is important to understand that we will constantly depend on the cost of servicing new loans. Moreover, in the case of any serious shocks in the foreign exchange market does not depend on Belarus reasons we may find ourselves in a situation similar to that happened in 2015-2016, when the national debt began to feel much stronger on the background of a significant drop in budget revenues.

Of course, the best option that would solve all the problems, would become a stable economic growth at least at the level of 4-5% within 7-10 years. But, unfortunately, there are no preconditions to ensure that this growth happens, I do not see. Today, even the official GDP growth forecasts from the government are limited to 2.5% and most international organizations believe that these projections are quite optimistic, inclined to estimate this figure is closer to 1%. And there is every reason to assume the situation has not changed in the coming years.