External Debt Growth Factors: The Need for Stringent Monetary and Fiscal Policies

By Inna Bukshtynovich, Stockholm

Figure 1. Change in gross external debt and current account deficit
(Source: calculations based on NBB, Belstat data)

The issue of external debt has been high on the global agenda since the financial crisis shook the world economy. Many countries attempted to support long-term growth and constituent welfare systems by increasing their external debts. However the growth of these external debts negatively impacted the economic climate in these states and brought the threat of further credit crunch, which some countries in Europe had to address by cutting down on public spending. Belarus is also facing a growing external debt with its levels going up to 62.3% of GDP amid the devaluation of the Belarusian ruble in 2010. This exceeded the 55% threshold set out in the national security concept in 2011, as well as the suggested 60% threshold for external debt to start affecting long-term growth, as outlined in a study by Rogoff and Reinhart in 2010. BISS fellow Hleb Shymanovich presents an analytical report investigating Belarus’ external debt growth factors, which will be important for the elimination of these factors in the future.

The investigation starts with the analysis of external debt sustainability. Two indicators raise doubts about Belarus’ ability to manage its external debt without endangering its economic growth: gross external debt is forecasted to reach 85% by 2016 and anticipated servicing costs of external public debt becoming substantial in the long run (3.5% of GDP
in 2012).

External debt can impact a country’s economy in a number of ways. First, it might result in “debt overhang”, a situation where the level of external debt exceeds a country’s capacity to repay it, leaving incentives to invest in the economy nonexistent. Second, significant external debt servicing expenses create a crowding out effect. In the case of public external debt it means a reduced capacity of the state budget to finance alternative expenditures, including infrastructure, healthcare, and education, which undermines long-term economic growth.

Figure 2. Change in public external debt and servicing costs
(Source: calculations based on Finance Ministry, NBB, Belstat data)

Third, high external debt stocks cause uncertainties about the exact effect of external debt on the economy. Under such conditions, investors tend to postpone investment decisions.

The study finds that the main reason behind the growth in Belarus’ gross external debt is the active administrative regulation of the economy, including directed lending. This increase in external debt aims to maintain the high rate of economic expansion; yet, the inconsistency of this growth leads to the accumulation of structural imbalances.

Shymanovich concludes that Belarus needs to revise its economic policy in order to minimise external borrowing requirements. The country should aim to maintain macroeconomic stability rather than high growth rates, which calls for stringent fiscal and monetary policies This would help stabilize prices and the foreign exchange rate and secure a balanced current account.

The blitz in English and in Russian and the full version of this analytical report available on the BISS website.