A new World Bank report Belarus Public Expenditure Review: Fiscal Reforms for a Sustainable Economic Recovery was presented today in Minsk. The report is the first volume of a two-phase Public Expenditure Review, offering fiscal reform options available across priority areas of the budget. The policy recommendations aim to reduce the public sector footprint and deliver a more efficient and smaller public sector in Belarus, with appropriate mitigation measures for the most vulnerable.
“Despite a significant fiscal consolidation over the past three years, government continues to spend about 44 percent of GDP. This is about 3 percentage points higher than the regional average and about 5 percentage points above countries with similar per capita income. The resulting size and structure of the tax burden undercuts the competitiveness of the economy,” said Gallina Andronova Vincelette, World Bank Senior Economist, and lead author of the report. “Moving forward, comprehensive fiscal reforms, encompassing both the structure of expenditures and revenues are required.”
This report provides recommendations for the needed realignment in selected areas of the budget – pension, social assistance, energy services and agriculture – and suggests options that could generate savings of up to 4 percent of GDP annually in the medium term.
- Hardening budget constraints in agriculture. The unreformed and underperforming agricultural sector of Belarus is a burden on the state budget. The sector contributes 8 percent to GDP while absorbing as much as 5 percent of GDP in the form of state support. The sector is largely unprofitable, with enterprises registering soaring levels of debt that pose a significant fiscal risk. The reform agenda in agriculture requires a set of inter-related fiscal and structural reforms, including reduction of state support and agricultural subsidies.
- Achieving financial viability of energy services. The energy market is profoundly affected by rising prices for energy imports from Russia. The fiscal cost of underpriced energy has risen to about 2 percent of GDP. Energy subsidies are largely inequitable, discourage energy efficiency and deprive the energy sector of the financing needed for routine maintenance and investments. The analysis highlights the need to comprehensively reform the energy policy through tariff reforms and a strengthened regulatory environment to engender a climate conducive to private investments and competition.
- Improving targeting of social assistance. Belarus operates one of the most extensive social assistance systems in the region, with total spending equal to 2.7 percent of GDP and reaching about half of the population. Categorical transfers dominate social assistance programs, with income-tested programs accounting for negligible share of spending. As a result, substantial social assistance benefits flow to households with high income. The system requires realignment of spending from untargeted to targeted programs.
- Fostering sustainability of pensions. Belarus’ aging population will put growing pressure on the pension system. As a consequence, the pension fund is projected to move from surplus into a structural deficit as early as 2014, while income replacement rates for future pensioners would decline. The key challenge for the pension system in Belarus is to secure its long-term fiscal sustainability given the projected demographic changes. Increases in the retirement age, indexation of benefits to inflation (as opposed to wages), reduction in contribution rates, and introduction of notional accounts are among the key reform measures.
Belarus joined the World Bank in 1992. Since then, the Bank’s lending commitments in Belarus have totaled US$865 million for 12 projects; about thirty national programs received grant financing totaling US$22.8 million. Along with funding, the Bank provides economic and technical advice to inform the government’s structural reform efforts to lay the foundation for sustainable economic recovery.