1. Performance and Prospects for Belarus Agro-Food Sector Country Economic Memorandum

2. Recently approved Program on the Revival of Rural Areas 2005-2010 has two objectives: development of rural areas and creation of competitive agro-food sector Recently approved Program on the Revival of Rural Areas 2005-2010 has two objectives: development of rural areas and creation of competitive agro-food sector The study was focused on the second objective and its recommendations are contained in the framework of the declared agricultural policy of the Program The study was focused on the second objective and its recommendations are contained in the framework of the declared agricultural policy of the Program The Approach

3. Objectives of the study What are the sources of this impressive performance? What are the sources of this impressive performance? Has recent performance improved competitiveness? Has recent performance improved competitiveness? Is it sustainable? Is it sustainable?

4. Impressive performance 2000-04 Agriculture output growth Agriculture output growth Agriculture productivity growth Agriculture productivity growth Agro-food industry growth Agro-food industry growth Agriculture and food trade growth Agriculture and food trade growth

5. Cumulative production volume index (1999=100)

6. The growth in land and labor productivity was impressive (2000=100)

7. Food-processing output growth has exceeded agricultural output growth (2000=100)

8. Agriculture and food exports grew faster then imports

9. Sources of improved performance Private sector output growth Private sector output growth Improved efficiency of production in the non-private sector Improved efficiency of production in the non-private sector Reduction in relative price distortions Reduction in relative price distortions Supported by subsidies Supported by subsidies

10. Private sector accounted for about 49% of output growth Private sector has different specialization Private sector has different specialization Value of products produced by the private sector grew strongly in real terms Value of products produced by the private sector grew strongly in real terms Responded well to increased access to agricultural land and price incentives Responded well to increased access to agricultural land and price incentives

11. Volume of output by private and non-private sectors

12. Significantly different production profile

13. Strong price incentives drove efficiency gains On average producer prices increased in real terms only marginally, but the reduction in relative price distortions was substantial. On average producer prices increased in real terms only marginally, but the reduction in relative price distortions was substantial. Producers responded to worsening “internal terms of trade” by improving efficiency of production Producers responded to worsening “internal terms of trade” by improving efficiency of production Negative profitability overall necessitating larger budgetary support to sustain output growth Negative profitability overall necessitating larger budgetary support to sustain output growth

14. Agricultural prices increased moderately while “internal terms of trade” declined substantially

15. Relative price distortions have declined substantially

16. Agro-Food Sector is competitive Primary sector subsidizes agro- processing sector – the main source of competitiveness Primary sector subsidizes agro- processing sector – the main source of competitiveness Consumer subsidy is lost in processing and marketing inefficiencies Consumer subsidy is lost in processing and marketing inefficiencies

17. Primary sector is disadvantaged compared to the processing and the retail sub-sectors Lower than international farm-gate prices subsidize agro-processors Lower than international farm-gate prices subsidize agro-processors Lower prices inflict financial losses which have to be covered by the budget support Lower prices inflict financial losses which have to be covered by the budget support Despite subsidization agro- processors have very low returns Despite subsidization agro- processors have very low returns

18. Agricultural producers are being taxed relative to producers in Russia (Ratio)

19. Estimated implicit tax on agricultural producers 2000200120022003 Estimated implicit tax on agricultural producers from lower than international prices (%) 5-5-4-7 Profitability of agricultural production (%) 3-7-4-6 Profitability of food processing (%) 9866

20. Agro-processing sector is inefficient Small and inefficiently sized Small and inefficiently sized Low capacity utilization Low capacity utilization High depreciation High depreciation The extent of marketing inefficiencies is disguised by controls on trading margins The extent of marketing inefficiencies is disguised by controls on trading margins Consumer subsidy is very small as retail price levels in Belarus are broadly in line with Russian prices Consumer subsidy is very small as retail price levels in Belarus are broadly in line with Russian prices

21. Agro-processing efficiency 2000200120022003 Capacity utilization in meat processing enterprises (%) 4041 45 Capacity utilization in dairy processing enterprises (%) 54525055 Depreciation rate of the capital stock in meat and dairy processing sector (%) 46484950

22. Consumer prices are broadly similar with Russian retail prices (Ratio)

23. Budget Support has increased substantially Over 2000-2004, the level of Budget Support has increased by 164% to support the growth in output by 26% Over 2000-2004, the level of Budget Support has increased by 164% to support the growth in output by 26% WTO “Amber Box” measures are fixed at US$57/Ha. WTO “Amber Box” measures are fixed at US$57/Ha. Credit Subsidy the fastest growing element of State Support creates serious future liabilities Credit Subsidy the fastest growing element of State Support creates serious future liabilities

24. Growth in state budgetary support (constant millions US$)

25. Categories of budget support (constant million US Dollars)

26. Is the recent performance sustainable? Risks Risks Opportunities Opportunities

27. Risks to sustainability Exchange rate devaluation effect already exploited Exchange rate devaluation effect already exploited Worsening “input terms of trade” will require increasing levels of state support for output expansion, which is already limited by WTO commitments Worsening “input terms of trade” will require increasing levels of state support for output expansion, which is already limited by WTO commitments Capital constraints Capital constraints

28. Opportunities Increasing farm-gate prices – modernization of the agro-processing sector is necessary Increasing farm-gate prices – modernization of the agro-processing sector is necessary Private sector – 49% of growth, could expand further, however needs higher farm gate prices Private sector – 49% of growth, could expand further, however needs higher farm gate prices

29. Recommendations (1) Expansion of the export-oriented food-processing sector Expansion of the export-oriented food-processing sector Reduction in the number of plants and modernization Reduction in the number of plants and modernization Abolish price controls and trading restrictions Abolish price controls and trading restrictions A joint study of the Government of Belarus and interested donors regarding the feasibility of such investment A joint study of the Government of Belarus and interested donors regarding the feasibility of such investment

30. Recommendations (2) Bring producer prices in line with international prices; Bring producer prices in line with international prices; Output prices – scope for increase; Output prices – scope for increase; Input prices – scope for increase Input prices – scope for increase

31. Recommendations (3) Permit greater autonomy in decision making by farm managers willing to take risks; Permit greater autonomy in decision making by farm managers willing to take risks; Put private farmers on equal footing with agricultural co-operatives; Put private farmers on equal footing with agricultural co-operatives; Transfers to households to be made more transparent Transfers to households to be made more transparent

32. Recommendations (4) Investment in extension, education and training Investment in extension, education and training Enforce repayments of rural credit; Enforce repayments of rural credit; Make state support more transparent (calculated according to OECD methodology) Make state support more transparent (calculated according to OECD methodology)