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

Dzmitry Kruk

No 14, BEROC Working Paper Series from Belarusian Economic Research and Outreach Center (BEROC)

Abstract: The study deals with a specific form of financial repression peculiar to Belarus – a mechanism of directed loans. Under selective or directed credit programs, banks are required to allocate certain percentages of their asset portfolios for loans to priority sectors at subsidized 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-favored borrowers. As a result, the flexibility of the financial system is decreased, while its fragility is increased. Under directed loans the economy may benefit from more rapid capital accumulation, but faces losses in efficiency. Directed lending may be justified until additional gains in capital accumulation compensate losses in. efficiency. This may be true in case of definitely high elasticity of output on capital, which might happen within a transitory period. Nevertheless, the practice of directed lending may not be recognized as effective tool for a longer time period. First, gains in capital gradually decline and losses in efficiency might exceed them. Moreover, when the economy reaches its balanced growth pass, only losses will be associated with the mechanism of directed lending. Second, the mechanism of directed lending may be a source of shocks and high-magnitude fluctuations in the economy. Finally, we show that in Belarus the mechanism of directed lending may result in the decline of growth rates of the economy in the long run.

Keywords: Belarus; directed lending; financial repression; economic growth (search for similar items in EconPapers)
JEL-codes: E37 E43 E61 G28 O41 O42 (search for similar items in EconPapers)
Pages: 26 pages
Date: 2011-08
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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