Nineteen ninety-seven was rather remarkable for the Republic of Belarus. The country achieved significant indicators of economic growth. During that year, the GDP increased by ten per cent and investments increased by 23 per cent. But the problems of effective market economy creation and achieving of effective macroeconomic balance are certainly far from being solved. Nevertheless, indicators are the evidence of positive tendencies in the development of the Belorussian economy.

Factors of success

Belarus is a fairly small country located in the geographic centre of Europe with a population of 10.2 million and with a developing democracy and a stable social and political situation. These factors allowed the country to resume its economic growth even in 1996 and to increase it considerably in 1997.

One key to Belarus' success is its location and high level of economy openness. The volume of foreign trade exceeds the size of its annual GDP. Belarus is the main transit passage between Eastern European and the Scandinavian countries on the west, and Russia and Ukraine on the east, and possesses great advantages in transport network development in comparison with the other CIS members. By forging strong economic and political ties with Russia, including signing a broad union treaty in early 1997, Belarus has established itself as the gateway into one of the world's most promising markets of the third millennium.

The country is highly urbanised and industrial. Almost 70 per cent of the population lives in towns and cities. The basis of industrial potential in Belarus is the manufacturing branch of industry, in which almost 30 per cent of the labour force is employed. The most highly developed industries are mechanical engineering (which makes up more than a quarter of all industrial production), the chemical and petrochemical industry (15 per cent) and the food industry (14 per cent). A tertiary sector which includes services, science, culture and education, infrastructure, finance and management employs 46.5 per cent of the labour force. On the whole, Belarus boasts a well developed economy structure - one of the most advanced in technology amongst countries of the former USSR.

One more important distinctive feature of Belarus in comparison with many other countries of the CIS and Eastern Europe is its social and political stability, as well as the absence of inter-ethnic and religious conflicts. One of the factors of this stability, in addition to the Belorussians' natural characteristics of goodwill, discipline and tolerance, is the balanced economic policy of the state.

Economic policy and development

The strategic purposes of the state's economic policy are generated in the 'Main Directions of Social and Economic Development of the Republic of Belarus' for the period 1996 to 2000, which were adopted by the All-Belorussian National Assembly and approved by the Decree of the President. They are as follows:

• gradual implementation of market-oriented reforms, including liberalisation of all forms of economic activity and ensuring of freedom of business activities;
• utmost activation of all factors of economic growth;
• keeping a high level of employment of the population and of social security;
• ensuring macroeconomic stability.

At the same time, the state is paying special attention to the provision of a balanced and systematic rate of reforms, striving to use the experience of other countries with transitional economies and achieving fundamental transformations of an economic structure without 'revolutionary shocks'.

In many respects and for these reasons, its economic crisis was not extensive, and economic growth which started in 1996 and extended in 1997 was very impressive.

In 1996, the real GDP had grown by 2.6 per cent and in 1997, by ten per cent. Last year the volume of industrial output increased by 16 per cent, agricultural production grew as much as two per cent and capital investment rose to 23 per cent. Production growth resulted in the population enjoying real growth of three to five per cent.

It is not possible to say that successes have been achieved on all parameters. The most serious macroeconomic problem is the significant foreign trade deficit. In 1997, the negative balance of export and import of goods and services was around eight per cent of GDP. Nevertheless, the state external debt is relatively low: about ten per cent of the annual GDP. Belarus services external debt in time. This fact attracts additional foreign capital to modernise infrastructure and increase production potential. Repayments of the principal debt and interest thereof do not exceed two per cent of the annual export of goods and services.

In 1998, some slowing of growth is forecast. This is partly connected with cyclical factors, but also to a great extent with the fact that the priorities of economic policy will be shifted in the direction of achieving internal and external balance. In particular, the National Bank intends to strengthen anti-inflationary measures of monetary policy. Nevertheless, GDP growth is expected to reach a level of seven to eight per cent, industrial production output eight to nine per cent and investments 12 to 13 per cent.

Development of export will become one of the priorities of economic policy for 1998. Being dependent on the import of energy and other raw materials, Belarus intends to actively develop export-oriented industries such as the production of mineral fertilisers and other chemical products, trucks, machines, textiles and other products of the processing branch of industry by the activation of industrial policy. This will involve introducing appropriate tax privileges as well as developing means of direct state support of export-oriented productions, including the new ventures created by the foreign and joint capital. It is forecast that the growth of export will exceed the growth of GDP and import by one to two and two to three percentage points accordingly.

Monetary policy and national banking system development

Monetary policy has been planned with the goal of solving a twofold task: that of ensuring the stability of prices and of the national currency (a moderate rate of inflation, stable and predictable exchange rate), with utmost support to economic growth.

In the short term, the National (central) Bank - on the basis of thorough analysis and the forecasting of economic processes - is carrying out a relatively flexible monetary policy aimed at stabilising the real Belorussian ruble exchange rate against the currencies of our main partners in foreign economic activity, encouraging moderate credit expansion and promoting economic growth and investment activity in line with simultaneous control over the stability of banking liquidity.

The success of the monetary policy has manifested itself in key macroeconomic figures. After the devaluation of the Belorussian rouble in the first half of 1997, in the second half of the year we managed to reduce the inflation rate on average to 2.4 per cent per month. Growth in the volume of exports has reached almost 18 per cent, which is especially important under the highly integrated economic conditions of Belarus.

In 1998, the National Bank will continue to implement its strategic policy, directed at ensuring a moderate rate of inflation (not more than two per cent per month), a stable foreign exchange rate and the creation of a modern banking system.

Legislative basis of a two-tier banking system in Belarus includes the laws 'On Banks and Banking in the Republic of Belarus' and 'On the National Bank of the Republic of Belarus' which were adopted at the end of 1990.

The 'extensive growth' of the commercial banks reached a peak in 1995 when there almost 50 commercial banks. Many were rather small and possessed insignificant financial, structural, professional and technical potential. Now, many have already closed or have been merged with the larger banks due to the fact that it was impossible for them to conduct competitive activity.

Today there are six core banks in the country: Belpromstroibank, Belvnesheconombank, Belagroprombank, Belarusbank, Priorbank and Belbusinessbank. These banks possess substantial financial resources, wide networks of correspondent relations and actively implement new banking operations and technologies.

The banking system of Belarus consists of 27 operating commercial banks, of which six are banks with foreign capital participation and one is the branch of foreign bank Mosbusinessbank, Russia. Commercial banks have almost 600 branches on the territory of the state.

Many well-known foreign banks from Germany, Russia, Poland and other countries have opened representative offices in Belarus, for example, Commerzbank, Dresdner Bank, Bank Depozytowo Kredytowy w Lublimie, Incombank, Rossiyskiy credit, and others.

In accordance with the requirements of the National Bank, the minimum authorised capital for a commercial domestic bank is ECU two million and ECU five million for a bank with foreign capital participation (this requirement extends to branches of foreign banks).

Share capital profitability of the banks in 1997 is almost 30 per cent on average. This fact permitted banks to achieve a stable increase of their own capital and to expand the scale of their operations. Thus, during the last year, total authorised capital and assets of the banking system have increased more than twice.

The National Bank of the Republic of Belarus pays much attention to ensuring the stable and reliable work of the commercial banks.

Prudential requirements correspond on the whole to the recommendations of the Basle Committee. Capital adequacy ratio is set up at the level which should be not less than ten per cent (as to the risk-weighted assets); liquidity ratio should be not less than one; maximum loan to a single borrower (including inter-bank credits) should not be more than 20 per cent of the bank's owned capital; limit to the open currency position should not be more than ten per cent of the bank's owned capital; and the total amount of investments in authorised capital of other subjects of economy of all forms of property should not exceed 15 per cent of the bank's owned capital.

The banks have created reserves for possible losses on doubtful debts. These reserves are assigned on an obligatory basis to all banks' active operations which are crediting transactions in their economic essence. Each bank has created a unit of internal audit. Banks' annual balances, profit and losses reports should be confirmed by an external auditing organisation and published.

The Natural Persons' Deposits Guarantee Fund is created at the cost of commercial banks' monthly irrevocable instalments to improve the security of depositors' interests.

In 1997 the National Bank adopted the Regulation on Natural Persons' Deposits and Accounts in Foreign Currency, according to which an anonymous bearer's accounts became effective.

At present the Banking Code is being prepared for adoption. It will develop and legally fix legislative rules which will meet with international standards and enable the conduct of banking activity in Belarus more effectively. A number of legislative regulations on taxation, bankruptcy and bank reorganisation, simplification of the mortgage utilisation procedure, financial restructuring of enterprises' and banks' debts and increasing of borrowers' responsibility for the timely repayment of debts are being worked out.

The National Bank is paying serious attention to the technological development of the banking system.

The structural and methodological basis of the Payment System Modernisation Project was created in 1997. Implementation of this project will ensure effecting inter-bank large and urgent settlements in real time with the use of the electronic payment document format. At the same time the clearing system software for other payments (not urgent, medium-sized and small amounts) is being introduced (test running has already started). It will allow settlements to be made in terms of banks' low current liquidity.

The field of plastic cards (a national and international application) is being expanded under the regulations of the corresponding decree of the Government and the National Bank.

Striving towards the international standards and principles of the banking system, on the whole the National Bank of Belarus welcomes the penetration of foreign capital into the Belorussian banking system. During the previous year, well-known Russian Oneksim-Bank became the largest shareholder of the MinskComplexbank, which is seventh in the list of Belarus' largest commercial banks.

It is notable that in 1997, the European Bank for Reconstruction and Development (EBRD) invested ECU 2.75 million in the authorised capital of the Priorbank (fifth in Belarus in terms of volume of assets). As Mr David Hexter, the EBRD Deputy Vice-President, said, this project is "the logical continuation of the Small and Medium Enterprises Credit Line, which is financed by the EBRD and is currently being implemented in Belarus".

There are many credit lines of the EBRD, the International Bank for Reconstruction and Development (IBRD) and other institutions and banks in Belarus which are being implemented against the guarantee of the Government (USD 1.2 billion in total) and directed at the development of infrastructure, small business and export-oriented enterprises.

On the whole, 1997 was the year of the adjustment of the monetary policy to make it to some extent more flexible ad strategically oriented. On the basis of international standards and experience, the National Bank of Belarus is going to achieve not just financial stabilisation but substantial improvements in banking development and the financial system as a whole.

Budget policy

Belarus has recorded several positive tendencies in budget reform. From 1998, budget preparation and implementation will be carried out on the basis of the internationally accepted rules of budget classification. Actual budget deficit for the 1997 financial year was approximately three per cent. In the republic, a treasure system of the state budget performance is now operating.

Economic growth and solid functioning of the budget and taxation systems provides complete collection of taxes and financing of state expenditures in time without substantial delays of payments for the provision of state needs, salaries for the state workers, pensions and allowances for the low-income categories of the population. These factors positively set Belarus apart from many of the CIS countries and secure social stability in the society.

Internal Government debt does not exceed five per cent of the GDP and, since 1997, is financed mostly by the issuance of state securities. The 1998 budget is oriented at maintaining economic growth with simultaneous control over the rate of inflation. The budget deficit for 1998 is approved at the level of 3.5 per cent of the GDP and will be financed by Government borrowings on the internal money market.

According to the European standards, the taxation rate is a medium one, ie, the VAT 20 per cent, the profit tax 30 per cent, the income tax nine to 50 per cent (depending on the taxable amount).

The Government is improving the taxation system in order to reduce the number of taxes and the level of state participation in the reallocation of incomes received by enterprises and population, to simplify the tax legislation, to prevent a non-payment of taxes and to increase the incentives of taxation system for the development of production effectiveness.

Investment climate

Fundamentally attractive reasons for investing in Belarus are its advantageous geographical location, relatively well-developed infrastructure, socio-political stability and the presence of a cheap yet highly qualified labour force. The Government is trying to realise long-term advantages for foreign investors both indirectly (by offering tax and customs privileges) and by means of direct support.

One example of the success of this policy is the recent opening of the Ford Motor Company plant just outside the capital Minsk. The Ford plant has already begun assembling Ford Escorts and minvans. Ford is taking advantage of the favourable conditions for foreign investors as well as of the strategic position which allows the company to export vehicles to Russia without customs duties.

Ford is not the only internationally-known corporation working in Belarus. There is also a number of other significant investment projects, including such well-known firms as MAN, Motorola, Bosch, Coca-Cola and others.

As far as the legal basis for investment activities is concerned, this area is well developed. There are now laws 'On investment activities in the Republic of Belarus' and 'On foreign investments in the Republic of Belarus' as well as the international treaties which have already been signed with Germany, Romania, Bulgaria, Kazakhstan, Sweden, Yugoslavia, France, the Netherlands, Italy and Turkey on co-operation in protecting investments.

The legislation in force ensures for foreign investors a firm guarantee and practicable possibilities for the repatriation of income, which they gain as a result of foreign economic activity on the territory of the country.

Foreign investors in Belarus enjoy legally confirmed rights:

• long-term lease of land (up to 99 years);
• to participate in the privatisation of state-owned property;
• to operate in the securities market;
• to freely transfer profits obtained as a result of operations in Belarus.

The Law On Foreign Investment in the Republic of Belarus, adopted in 1991 and amended in 1993, regulates the activity of enterprises with foreign investments. According to this law, the following privileges are granted to enterprises with foreign investments. Enterprises with more than 30 per cent foreign shareholding are exempt from profits tax within three years since the date of profit announcement including the first profitable year. If these enterprises produce goods of special priority for the republic, the Government of the Republic of Belarus has the right to reduce by 50 per cent a profits tax rate up to an additional three years under the established list of priorities. Property, raw and other materials imported by foreign shareholders to form stock capital of enterprises with foreign investments are exempt from customs duties and import tax.

Foreign investors are guaranteed to freely transfer abroad due amounts in foreign currency. After the liquidation of an enterprise, a foreign investor has the right to withdraw his share in money terms or in kind at residual value upon the date of liquidation. Foreign investments in the Republic of Belarus are not subject to requisition or any other measures equal in consequences.

It is important that the law provides for application within five years of the legislation active on the date of the enterprises' registration if the laws adopted after the registration of an enterprise with foreign investments worsen its activity conditions.

At present, the Law on Amendments and Additions to the Law of the Republic of Belarus On Foreign Investment in the Republic of Belarus has been adopted to harmonise legal treatment of foreign investments in the Republic of Belarus with international treaties to which it is a party and respective principles of the international law.

The said law provides for an invariable status of foreign investment irrespective of changes in their form, more thoroughly (with regard to the current legislation) defines the registration procedure of enterprises with foreign investments, allows enterprises with foreign investments to accelerate capital consumption. A new article added to the said law protects foreign investments from nationalisation (expropriation) as well as from unlawful actions of state bodies. It stipulates that damages incurred by foreign investors shall be paid promptly, adequately, and effectively.

Compensation includes actual cost of nationalised (expropriated) investments on the date immediately prior to the nationalisation (expropriation), including interest starting from the date of announcement of repayable disinvestment up to the date of compensation. The above-mentioned law will provide investment-friendly conditions in the Republic of Belarus.

Pursuant to the Law of the Republic of Belarus On Value Added Tax, property imported by foreign shareholders to form stock capital of enterprises with foreign investments is exempt from VAT.

VAT imposed on fixed assets imported into the territory of the Republic of Belarus is subject to reimbursement from the state budget upon the payer's request within a month since the date of their putting into operation.

The law also stipulates that VAT imposed on raw and other materials, semiproducts, components and energy resources imported into the territory of the Republic of Belarus by manufacturers is deemed as advance payment and included into VAT to be paid upon realisation of goods made out of imported raw and other materials, semiproducts, components and energy resources.

According to the Laws of the Republic of Belarus On Value Added Tax and On Excises, goods exported from the Republic of Belarus, excluding those exported to the CIS countries, are not subject to VAT or excises.

In conformity with Decree of the President of the Republic of Belarus No. 108 On Streamlining Foreign Economic Activity of 19 March 1996 and in the order established by the State Tax Committee and agreed by the Ministry of >Finance, components, spare parts, raw and other materials imported into the Republic of Belarus for manufacturing export products are granted by customs bodies an up to 6 months' deferment of customs duties and VAT with no interest charged. In case these products are exported as part of ready-made goods within the stated term or utilised for manufacturing export products, they are exempt from customs duties or VAT.

In accordance with the Decree of the President of the Republic of Belarus No. 6 On Streamlining Tax and Customs Privileges to Juridical and Physical Persons of 10 March 1997, tax and customs privileges are given to corporate persons involved in the implementation of investment projects passed state examination and approved by respective central government bodies. The property imported into the territory of the Republic of Belarus by foreign shareholders to form stock capital of enterprises with foreign investments are exempt from customs duties or VAT provided that they are related to fixed assets, are not subject to excises, and are imported in terms determined by company documents to form stock capital of enterprises with foreign investments.

Pursuant to Resolution of the Council of Ministers of the Republic of Belarus No. 967 On Streamlining Measures to Prevent Outstanding Debts under Loans extended by Governments of Other States, Foreign and International Financial Institutions and Banks under the Guarantees of the Government of the Republic of Belarus of 27 July 1997, the Ministry of Finance is authorised to repay outstanding debts within amounts allowed for these purposes in the state budget. The resolution also provides for higher responsibility of executives for purpose utilisation of the loan proceeds and prompt payments under these loans. According to the resolution, an insurance fund is to be created for payments of loans made available under the guarantees of the Government of the Republic of Belarus.

The government undertakes measures to create a single trade and economic area for Belarus and a number of the CIS countries. The Convention on Protecting the Rights of Investor, signed by a number of the CIS countries and ratified by the National Assembly of the Republic of Belarus, is a real move in this direction.

Development of free economic zones

Another aspect of the Belarus economy that has attracted the interest of foreign firms is the setting up of a free economic zone in Brest, a city on the western border with Poland.

Most of the dozen or so companies that operate in Brest free economic zone produce goods for export, taking advantage of special tax concessions. The state protects and guarantees that the favourable conditions of the free economic zone will remain positive for foreign investors.

The reasons for locating this zone in Brest are the fact that the government is improving the infrastructure, including the EBRD-funded road project from Brest to Moscow as well as the construction of a new customs terminal and a new river port which will be able to handle passenger and cargo goods on the shortest way between the Baltic and the Black Seas.

Privatisation

The Government privatisation programme, while not as radical as some of its neighbour countries, is nevertheless a key facet of the Belarus transformation from a state-run economy to a market-oriented one. The privatised sectors have been expanded from mainly industrial and agricultural companies in 1995 to construction, transport and communications enterprises in the last two years. This has brought increased revenues and investments into these industries.

The Government believes that it is important to learn from the mistakes of other privatisation programmes, not to rush in with haste and to use various methods of privatisation depending on the object to be privatised. The objects of primary privatisation in Belarus are the state trade enterprises, enterprises in public feeding and services, construction and building materials enterprises, timber and wood processing enterprises as well as enterprises processing agricultural products and providing services for the agricultural industry.

The most advanced area of privatisation is that of small enterprises, in which the International Finance Corporation has played an important role (Belarus was the first country of the former USSR to become a member of the IFC, in November 1992). As of 1 December 1997, 38 per cent of the objects of municipal property were privatised. For this purpose, different methods of privatisation were used, the most common being auctions and leasing. Reforming of medium and large-sized enterprises of the republican property is being accomplished in accordance with individual projects by means of their reorganisation into open joint-stock companies.

The Government considers privatisation of the large-sized enterprises not as a formal action of transference of property to private persons, but as a means of management improvement and increasing of the production effectiveness using the capital and experience of foreign and domestic investors.

On the whole, the significance of the private sector is growing. Thus, under the general auspices of GDP growth in 1997 of ten per cent, production of goods and services of non-state enterprises rose by 18 to 20 per cent and constituted almost 40 per cent of GDP.

The President of the Republic of Belarus Aleksandr Lukashenko, with the support of the population at the elections and referendum, has taken Belarus on a more measured road to reforms, putting a particular emphasis on forging strong ties with the country's eastern neighbour, Russia. In contrast to some gloomy predictions made by some politicians, this course has turned out to be highly successful.

The real practice shows that on the way to economic reforms, Belarus is one of the few Eastern European countries which has managed to reduce the recession to the maximum extent and, earlier than other CIS countries, to restore economic growth while maintaining the social stability and openness of the country for the mutually beneficial and fruitful co-operation with all countries of the world. With a desire to strengthen positive tendencies in economic and social development as well as to take advantage of all the benefits of a democratic state with an open economy, Belarus offers investors unique possibilities and conditions for highly effective and safe investments.