The Impact of Directed Lending on Long-Run Growth in Belarus

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Summary 

This paper deals with a form of financial repression specifically used in Belarus – the mechanism of directed lending. Under selective or directed credit programmes, banks are required to allocate certain percentages of their asset portfolios to loans to priority sectors at subsidised loan rates of interest. In order to hedge against possible risks associated with directed loans, banks can offer higher interest rates or ration credit to non-favoured borrowers.

As a result, the paper suggests, the flexibility of the financial system is decreased and its fragility is increased. With the use of directed loans, the economy may benefit from more rapid capital accumulation, but faces losses in efficiency. Directed lending is justified until additional gains in rapid capital accumulation compensates losses in efficiency. This may be true in the case of extremely high capital output elasticity which might occur in the short-term. Nevertheless, the practice of directed lending, the paper explains, should not be seen as an effective tool over a longer time period. Firstly, gains in capital gradually decline and losses in efficiency might exceed them. Moreover, when the economy reaches a balanced-growth equilibrium the only losses are then caused by the mechanism of directed lending. Secondly, the mechanism of directed lending may be a cause of economic shocks and high-magnitude fluctuations in the economy. Finally, as the author demonstrates, the mechanism of directed lending in Belarus may result in the decline of economic growth in the long run.

Authors
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Year 
2011
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Last updated 04.02.2016
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