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Republic of Belarus

Author(s):
International Monetary Fund
Published Date:
May 2012
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I. Context

1. Belarus has endured two crises in four years. The 2008–09 economic crisis was precipitated by the global financial crisis, which had led to the loss of external financing, a sharp decline in exports, and exacerbated by an already high current account deficit and low reserves. The 2011 economic crisis was self-inflicted, caused by the reversal of macro-stabilization policies implemented under the 2009–10 SBA. Expansionary credit and wage policies widened the current account deficit, while attempts to maintain the fixed exchange rate created pressures on official reserves and eventually led to the loss of control of the exchange rate and a sharp acceleration of inflation.

2. Belarus has now used up most of its safety margins. External debt has more than doubled since 2008, reaching 61.4 percent of GDP in 2011, as current account deficits were financed by external borrowing and the sale of state-owned assets. Public confidence in the authorities’ policies and in the rubel was eroded during the two crises. Belarus has become more dependent on Russia’s financial support in the form of low priced oil and gas imports, new loans, and purchase of Belarus’ assets. A crackdown on the opposition after the 2010 presidential elections led the EU and the U.S. to curtail official interactions with the authorities and tighten sanctions on individuals and companies, although the tightened sanctions are not expected to affect the economy significantly.

II. Near Term Policies: Rebuilding Confidence and Restoring Stability

A. Stabilization After the 2011 Crisis: Are We There Yet?

3. The last year was marked by a severe balance of payments crisis. Loose policies pursued after the end of 2009 Fund-supported program pushed the economy into an inflation-depreciation spiral. Expansionary wage and credit policies in 2010 and early 2011 widened the current account deficit, created pressures on reserves and eventually led to the loss of control of the exchange rate, sharply accelerating inflation and a contraction of economic activity in Q3 2011 (Box 1 elaborates on the crisis in more detail).

4. In response to the crisis, and consistent with Fund advice, the authorities adjusted policies in the second half of the year. The NBRB discontinued non-standard liquidity support to banks from June 2011; it also restrained the provision of standard liquidity support and raised policy interest rates substantially later in the year. These policy changes were consistent with Fund recommendations and led to a much needed slowdown in credit growth. Following staff advice during the first Post-Program Monitoring discussions, the authorities unified the exchange rate in October 2011. This allowed the FX market to resume functioning, and the shift towards a flexible exchange rate system allowed the realignment of the real effective exchange rate with fundamentals (Box 2). Expenditure restraint allowed the budget to finish the year with a fiscal surplus of 3.1 percent of GDP. For 2012, the authorities committed to a tight limit on financing of lending under government programs (LGP) and to run a balanced budget.

The NBRB allowed more exchanged rate flexibility since the unification of the exchange rate…

Sources: National Bank of the Republic of Belarus; and IMF staff estimates.

…and pursued policies to slow down credit growth,.

Box 1.The 2011 Crisis

After the 2009 SBA expired, the authorities loosened policies considerably, which led to a foreign exchange crisis in 2011. Heightened domestic demand resulting from expansionary wage and credit policies, as well as an overvalued real effective exchange rate, resulted in a loss of competitiveness and contributed to an expansion of the current account deficit in 2010. Facing strong demand for FX from households and enterprises, the NBRB intervened heavily to support the exchange rate. By the end of Q1 2011, gross reserves had fallen to around 3½ billion US dollars (less than one month of imports).

A collapse in the rubel led to a surge in inflation. After unsuccessful attempts to solve the unfolding foreign exchange crisis with administrative measures, the NBRB stopped intervening on the FX market in March 2011. As the authorities were not prepared to float the rubel, FX shortages led to the collapse of trade in the markets and the development of the parallel market. The NBRB devalued the official exchange rate from about 3000 to 5000 rubels per US dollar, but the move was largely irrelevant, as they did not have sufficient reserves for intervention. The parallel exchange rate depreciated further to about 9000 rubels per US dollar. Pass-through effects led to an acceleration of inflation to over 100 percent in late 2011.

The authorities took measures to stabilize the economy in the second half of 2011. The NBRB stopped providing liquidity at below market terms from June 2011 and gradually increased its policy rates increasing the rate of refinancing from 18 to 45 percent, and the overnight rate from 22 to 70 percent in the second half of the year. The NBRB unified the exchange rates on October 20 and switched to a flexible exchange rate regime with limited intervention. In addition, the authorities pursued tight budget policy. These measures helped to stabilize the exchange rate by the end of the year, and monthly inflation started to subside in December 2011.

The authorities have made progress in establishing stability, however, risks remain. In the first two months of 2012, consumer prices have increased only by 3.5 percent and the rubel has appreciated. Foreign exchange reserves have increased to more than 8 billion dollars, and the underlying net reserve position has improved accordingly. However, in the aftermath of the crisis inflation and devaluation expectations remain volatile, and the risk of resumed pressure on the exchange rate and reserves remains substantial if policies underlying stability change.

Box 2.Real Effective Exchange Rate Assessment

Indicators suggest that exchange rate unification in October 2011 corrected the misalignment and as of Q1 2012 the real effective exchange rate (REER) was broadly in line with fundamentals. The macro balance approach does not suggest misalignment as the underlying current account deficit—as suggested by the medium-term baseline current account balance corrected for a projected change in the REER—falls within the range of the estimated current account norms. At the same time, the external sustainability (ES) approach suggests that a somewhat larger current account deficit would be consistent with sustaining the end-2011 net external asset position (NEAP) of 52 percent of GDP. It should be noted, however, that ES approach does not necessarily suggest undervaluation as it would be prudent to stabilize the NEAP at a safer level.

Results from the Macroeconomic Balance Approach
CA norm (percent of GDP)Underlying CA (percent of GDP)GapREER elasticityREER Misalignment
REER as of Q1 2012
I. CGER pooled estimation model-2.2-2.8-0.7-0.381.7
II. CGER hybrid pooled estimation model 1/-4.2-2.81.4-0.38-3.6
Baseline REER expected to prevail by the end of 2012
I. CGER Pooled estimation model-2.2-6.0-3.8-0.3810.1
II. CGER hybrid poolded estimation model 1/-4.2-6.0-1.8-0.384.8
Source: IMF staff calculations.

CGER hybrid pooled estimation model is based on a CGER regression that includes a lagged current account balance instead of the initial NEAP position (IMF Occasional Paper 261).

Source: IMF staff calculations.

CGER hybrid pooled estimation model is based on a CGER regression that includes a lagged current account balance instead of the initial NEAP position (IMF Occasional Paper 261).

Results from the External Sustainability Approach
NEAP (percent of GDP)Real growth (percent, 2017)Inflation (percent, 2017)NEAP-stabilizing CAB (percent of GDP)Underlying CAB (percent of GDP)Gap (percent of GDP)REER elasticityMisalign. (percent)
Stabilizing the current level of NEAP 1/-525.06.0-5.3-2.82.4-0.38-6.4
No adjustment of the underlying CA-285.06.0-2.8-2.80.0-0.380
Source: IMF staff calculations.

NEAP at the end-2011.

Source: IMF staff calculations.

NEAP at the end-2011.

At the same time, the loosening of policies projected in the baseline scenario would reintroduce misalignment by the end of 2012. In the baseline scenario the REER would appreciate during the remainder of 2012 due to projected inflation being higher than projected depreciation. This is likely to increase the underlying current account deficit to 6 percent of GDP and reintroduce misalignment of 5–10 percent by the end of the year. In contrast, the sharp reduction in inflation targeted in the adjustment scenario and the absence of foreign exchange intervention would limit REER appreciation, maintain competitiveness and support current account adjustment.

Real Effective Exchange Rate Index (Baseline Scenario)

(2005=100)

Sources: National Bank of the Republic of Belarus; and IMF staff calculations.

1/ On October 20, 2011, exchange rates have been unified at the market exchange rate.

While these approaches provide a quantitative assessment of exchange rate’s misalignment, they should be interpreted with caution. Uncertainty about the effectiveness of exchange rate adjustment is particularly high in an economy with strong features of central planning. Belarus’ economy is characterized by significant state control (70 percent of total economy is controlled by the state) and rigidities that dampen the role of price signals (administrative interference with price formation, quantitative targets and soft budget constraints arising from the active role of the state in the financial sector), relative to a market based economy.

5. In addition, Belarus secured a significant improvement in terms of trade for 2012 and boosted its reserves in late 2011. The agreement with Russia signed in November 2011 provided a substantial discount on the price of gas,1 reducing the price by nearly a half from the level paid in Q4 2011 (at the last year’s gas import volumes, the reduction in price is equivalent to about 5 percent of GDP), and the authorities also secured an improvement in the terms of importing Russian oil. Official reserves rose to $7.9 billion due to privatization proceeds from the sale of a 50 percent of stake of Beltransgas ($2.5 billion), two tranches of the EurAsEC’s Anti-Crisis Fund (ACF) loan ($1.24 billion)2 and a $1 billion loan from Sberbank.

Belarus secured lower gas price from Russia…

Source: National Bank of the Republic of Belarus.

…and the reserves have recovered.

Source: National Bank of the Republic of Belarus.

6. The improvement in policies paid off by bringing initial macroeconomic stabilization (Figures 14). Monthly inflation rates fell sharply from an average 9.7 percent in August-November to less than 2 percent in December-March. Households and corporates sold dollars and increased their rubel deposits in banks, suggesting that inflation and depreciation expectations are subsiding. In order to avoid appreciation of the rubel, the NBBR intervened by purchasing FX in the market. Initial 2012 data suggest ongoing improvement in the external trade balance.

Figure 1.Belarus: Real Sector Developments, 2008–12

Sources: National Statistical Committee; and IMF staff estimates and calculations.

1/ Lagged 12-month moving average of industrial production.

Figure 2.Belarus: Inflation Developments, 2009–12

Sources: National Statistical Committee; and IMF staff estimates and calculations.

Figure 3.Belarus: External Developments, 2010–12

Sources: National Bank of the Republic of Belarus; Bloomberg; and IMF staff estimates and calculations.

1/ IMF staff estimates based on http://prokopovi.ch/random

Figure 4.Belarus: Monetary Developments, 2010–12

Sources: National Bank of the Republic of Belarus; and IMF staff estimates and calculations.

1/ December values show a large reduction on account of a transfer of claims on banks to the Development Bank.

Monthly inflation rates have been decling since December 2011…

Sources: Belarusian authorities; and IMF staff calculations.

…as the trade deficit has continued to improve.

Outlook and Risks

7. However, these early successes may be undermined by inconsistencies in the macroeconomic framework. In staff’s view, the ambitious GDP growth target of 5-5.5 percent set by the authorities for this year is not consistent with the objective to reduce inflation to 20 percent this year. Moreover, the expected growth of real wages of 4 percent as well as statements by high level officials that the average wage would reach $500 per month by mid-2013 signal a possibility of loosening domestic demand policies. After raising the refinancing rate and the NBRB overnight rate by 27 and 48 percentage points respectively in the second half of 2011, the NBRB is under pressure to bring down interest rates. The NBRB has already begun the process by reducing the refinancing rate by 7 percentage points in the first quarter and 2 percentage points so far in the second quarter. The baseline scenario set out in Tables 1-5 assumes that policies would remain tight for now, but relaxed later in the year when it becomes apparent that economic activity and wages underperform relative to the targets.3 Attempts to pursue incompatible objectives would result in higher-than-planned inflation and lower-than-planned growth. The baseline scenario assumes that scheduled debt repayments would be financed by drawing down reserves leading to both a reduction of the debt-to-GDP ratio and a much lower level of reserves over the medium term.4

Table 1.Belarus: Selected Economic Indicators (Baseline Scenario), 2008–17
2008200920102011201220132014201520162017
Prel.Proj.
National accounts(Annual percentage change, unless otherwise specified)
Real GDP10.20.27.75.33.03.44.44.84.95.0
Total domestic demand17.8-1.111.22.93.03.74.14.85.05.1
Consumption12.50.07.42.93.93.94.04.85.25.3
Nongovernment16.40.09.03.53.84.75.05.96.36.5
Government0.3-0.12.31.04.01.20.50.50.50.5
Investment28.2-2.918.43.01.63.34.34.64.64.6
Of which: fixed23.85.017.511.11.53.24.24.54.54.5
Net exports 1/-9.21.3-3.73.8-0.3-0.7-0.1-0.4-0.6-0.6
Consumer prices
End of period13.310.19.9108.738.427.520.013.08.06.0
Average14.813.07.753.266.035.823.616.110.26.9
Monetary accounts
Reserve money11.7-11.549.584.134.933.526.623.314.011.8
Rubel broad money22.50.927.464.142.833.427.523.514.611.8
Growth of credit to the economy excluding valuation effect53.630.838.837.042.730.721.918.210.89.3
(Percent of GDP)
External debt and balance of payments
Current account balance-8.2-12.6-15.0-10.5-6.2-6.6-6.4-6.2-6.0-6.0
Trade balance-10.3-14.1-16.4-6.7-1.9-3.7-4.2-4.8-5.4-5.7
Exports of goods54.043.446.075.179.678.477.675.974.673.6
Imports of goods-64.3-57.5-62.4-81.8-81.5-82.0-81.8-80.7-80.0-79.3
Gross external debt25.045.651.161.460.459.557.356.656.355.7
Public 2/6.818.921.627.825.124.521.920.920.720.2
Private (mostly state-owned-enterprises)18.126.729.533.635.235.035.535.635.635.4
Savings and investment
Gross domestic investment37.637.341.236.334.935.135.034.834.534.2
Government10.08.18.35.55.76.16.26.36.56.5
Nongovernment27.629.232.930.829.329.028.828.528.027.7
National saving29.424.726.225.828.728.528.628.628.528.2
Government 3/6.57.44.02.53.33.42.92.72.82.7
Nongovernment 3/23.017.322.223.325.425.225.725.925.625.5
Public sector finance
General government balance1.3-0.7-1.83.10.0-0.4-0.9-1.3-1.3-1.5
Augmented general government balance-3.5-0.7-4.3-3.0-2.3-2.7-3.3-3.6-3.6-3.8
Revenue50.645.741.642.039.239.238.938.538.438.1
Expenditure 4/54.146.445.945.041.541.942.142.142.041.9
Of which:
Wages6.66.77.06.86.76.86.86.86.86.8
Subsidies and transfers11.511.78.37.87.57.47.47.27.07.0
Investment10.08.18.35.55.76.16.26.36.56.5
Gross public debt 5/21.734.941.050.637.733.629.026.925.824.8
Memorandum items:
Nominal GDP (billions of U.S. dollars)60.849.255.255.1
Nominal GDP (trillions of rubels)129.8137.4164.5274.3495.2685.3873.81,052.91,207.01,349.8
Terms of trade, percentage change8.8-10.30.55.97.1-0.6-0.9-0.4-0.30.2
REER (official exchange rate), percentage change1.6-4.5-5.0-11.7-5.70.00.00.00.00.0
Official reserves (billions of U.S. dollars)3.15.75.07.95.54.83.22.52.93.3
Months of imports of goods and services1.21.81.21.91.21.00.60.50.50.5
Percent of short-term debt40.463.242.056.938.932.420.815.717.519.0
Quota (2010): SDR 386.4 million (589.7 million U.S. dollars)
Sources: Belarusian authorities; and IMF staff estimates.

Contribution to growth.

Gross consolidated external debt of the public sector (central bank and general government debt including publicly guaranteed debt).

The reduction in government saving and a corresponding increase in nongovernment saving include bank recapitalization and layouts related to public guaranteed debt in amount of 2.5 percent of GDP in 2010 and 6.1 percent of GDP in 2011.

Refers to the augmented expenditure of the general government.

Gross consolidated debt of the public sector (central bank and general government debt including publicly guaranteed debt).

Sources: Belarusian authorities; and IMF staff estimates.

Contribution to growth.

Gross consolidated external debt of the public sector (central bank and general government debt including publicly guaranteed debt).

The reduction in government saving and a corresponding increase in nongovernment saving include bank recapitalization and layouts related to public guaranteed debt in amount of 2.5 percent of GDP in 2010 and 6.1 percent of GDP in 2011.

Refers to the augmented expenditure of the general government.

Gross consolidated debt of the public sector (central bank and general government debt including publicly guaranteed debt).

Table 2.Belarus: Balance of Payments (Baseline Scenario), 2008–17 1/
2008200920102011201220132014201520162017
Prel.Proj.
(Millions of U.S. dollars)
Current account-4,988-6,178-8,278-5,775-3,563-4,042-4,148-4,249-4,456-4,739
Trade balance (goods)-6,237-6,957-9,078-3,716-1,088-2,248-2,719-3,311-3,960-4,520
Energy balance-2,000-3,378-5,131-4,551-1,072-1,809-2,106-2,642-3,096-3,489
Nonenergy balance-4,237-3,579-3,946834-16-439-612-669-864-1,031
Exports32,80521,36125,40541,41045,65348,02750,27952,38255,01458,289
Energy11,8667,8446,85114,07816,69215,83515,47314,55013,90213,477
Nonenergy20,93913,51718,55527,33228,96132,19234,80737,83341,11144,812
Imports-39,042-28,318-34,483-45,126-46,741-50,275-52,998-55,693-58,974-62,809
Energy-13,865-11,222-11,982-18,629-17,764-17,644-17,579-17,192-16,998-16,966
Nonenergy-25,176-17,096-22,501-26,497-28,977-32,631-35,419-38,502-41,975-45,843
Services1,6291,3891,6232,0782,1782,4482,6362,8683,1043,459
Receipts4,2583,5044,5015,2615,6976,4106,9337,5388,1939,014
Payments-2,630-2,116-2,878-3,183-3,519-3,963-4,297-4,669-5,089-5,555
Income, net-551-883-1,163-1,558-2,055-1,879-1,770-1,869-1,866-2,105
Transfers, net 1/171274340-2,579-2,597-2,363-2,295-1,938-1,734-1,573
Capital and financial accounts4,2875,0666,4444,7711,6714,1093,9393,6424,8675,105
Capital account137160145190198211223140150161
Financial account4,1504,9066,2994,5811,4733,8973,7163,5024,7174,944
Overall FDI, net2,1501,7821,3523,9282,0342,3922,5882,8233,2023,327
Portfolio investment, net5191,186854-23400000
Trade credits, net289657568561-180400400400400400
Loans, net2,0851,0673,0624865191,8931,3251,2671,7011,846
Government and monetary authorities, net1,266727717-3275721,489619467810862
Banks, net603212,18170-2580252289317337
Other sectors, net216319163804205404454511575646
Other, net 2/-3801,381131-1,248-666-787-597-988-587-630
Errors and omissions-3013195581,555000000
Overall balance-1,003-793-1,276551-1,89266-208-607411366
Financing1,0037931,276-5511,892-66208607-411-366
Reserves ("-" denotes an increase)879-2,443809-2,7912,3967211,575691-411-366
Net use of Fund resources02,8386650-384-1,667-1,367-8400
Other donors and exceptional financing items124398-1982,240-1208800000
Memorandum items:
Stock of reserves3,0615,6535,0317,9165,5204,7993,2242,5332,9443,309
Reserves (months of next year’s imports of goods and services)1.21.81.21.91.21.00.60.50.50.5
Reserves (percent of short-term debt)40.463.242.056.938.932.420.815.717.519.0
Real effective exchange rate (annual percentage change of period average, "+" denotes appreciation)1.6-4.5-5.0-17.81.30.00.00.00.00.0
Export volume (annual percentage change)1.5-11.52.829.56.82.44.53.03.03.2
Import volume (annual percentage change)14.3-12.68.015.86.13.14.03.23.53.6
Domestic demand growth (annual percentage change)17.8-1.111.22.93.03.74.14.85.05.1
Partner country growth (percent) 3/
Russia5.2-7.84.34.34.04.03.93.93.83.8
(Percent of GDP)
Current account-8.2-12.6-15.0-10.5-6.2-6.6-6.4-6.2-6.0-6.0
Trade balance (goods and services)-7.6-11.3-13.5-3.01.90.3-0.1-0.6-1.2-1.3
Trade balance (goods)-10.3-14.1-16.4-6.7-1.9-3.7-4.2-4.8-5.4-5.7
Of which: energy balance-3.3-6.9-9.3-8.3-1.9-3.0-3.3-3.8-4.2-4.4
Nonenergy balance-7.0-7.3-7.11.50.0-0.7-0.9-1.0-1.2-1.3
Exports54.043.446.075.179.678.477.675.974.673.6
Of which: energy exports19.515.912.425.529.125.823.921.118.917.0
Imports-64.3-57.5-62.4-81.8-81.5-82.0-81.8-80.7-80.0-79.3
Of which: energy imports-22.8-22.8-21.7-33.8-31.0-28.8-27.1-24.9-23.1-21.4
Services2.72.82.93.83.84.04.14.24.24.4
Income, net-0.9-1.8-2.1-2.8-3.6-3.1-2.7-2.7-2.5-2.7
Transfers, net 1/0.30.60.6-4.7-4.5-3.9-3.5-2.8-2.4-2.0
Capital and financial accounts7.110.311.78.72.96.76.15.36.66.4
Capital account0.20.30.30.30.30.30.30.20.20.2
Financial account6.810.011.48.32.66.45.75.16.46.2
Overall FDI3.53.62.47.13.53.94.04.14.34.2
Portfolio investment, net0.00.02.11.5-0.40.00.00.00.00.0
Trade credits, net0.51.31.01.0-0.30.70.60.60.50.5
Loans, net3.42.25.50.90.93.12.01.82.32.3
Government and monetary authorities, net2.11.51.3-0.61.02.41.00.71.11.1
Banks, net1.00.04.00.1-0.50.00.40.40.40.4
Other sectors, net0.40.60.31.50.40.70.70.70.80.8
Other (excluding arrears), net 2/-0.62.80.2-2.3-1.2-1.3-0.9-1.4-0.8-0.8
Errors and omissions-0.50.61.02.80.00.00.00.00.00.0
Overall balance-1.7-1.6-2.31.0-3.30.1-0.3-0.90.60.5
Financing1.71.62.3-1.03.3-0.10.30.9-0.6-0.5
Reserves (“-” denotes an increase)1.4-5.01.5-5.14.21.22.41.0-0.6-0.5
Net use of Fund resources0.05.81.20.0-0.7-2.7-2.1-0.10.00.0
Other donors and exceptional financing items0.20.8-0.44.1-0.21.40.00.00.00.0
Sources: Belarus authorities; and IMF staff estimations.

Values for 2011-17 include transfer of export duty on oil products to the Russian budget.

Includes 2009 SDR allocation.

Based on latest projection available.

Sources: Belarus authorities; and IMF staff estimations.

Values for 2011-17 include transfer of export duty on oil products to the Russian budget.

Includes 2009 SDR allocation.

Based on latest projection available.

Table 3.Belarus: Fiscal Indicators and Projections (Baseline Scenario), 2008–17 1/

(Trillions of Belarusian rubels, unless otherwise indicated)

(Percent of annual GDP, unless otherwise indicated)

2008200920102011201220132014201520162017
Prel.Proj.
1. State (republican and local) budget
Revenue50.946.648.885.6144.6199.9253.2302.7346.0385.0
Personal income tax4.24.35.49.316.422.728.934.839.944.6
Profit tax6.04.65.68.713.718.924.129.033.337.2
VAT11.412.116.226.545.162.479.595.8109.8122.8
Excises3.93.64.45.610.114.017.821.524.627.6
Property tax1.31.61.92.54.66.48.19.811.212.5
Customs duties10.68.05.815.127.839.150.962.272.379.5
Other7.87.76.712.720.428.133.738.142.347.6
Revenue of budgetary funds5.74.72.95.16.68.510.211.512.413.1
Expenditure (economic classification) 1/50.949.053.079.1145.6201.5258.0309.7352.5391.3
Wages and salaries8.69.311.518.633.146.559.371.581.991.6
Social protection fund contributions2.32.53.15.08.912.616.019.322.124.7
Goods and services8.78.710.015.427.737.748.057.966.474.2
Interest0.71.11.13.310.512.616.619.820.019.5
Subsidies and transfers14.916.013.721.336.950.464.375.383.993.9
Capital expenditures13.011.213.615.228.041.853.865.978.187.4
Net lending2.60.4-0.10.40.40.00.00.00.00.0
Other0.00.00.00.00.00.00.00.00.00.0
Balance (economic classification)0.0-2.4-4.26.5-1.0-1.6-4.8-7.0-6.5-6.3
Bank restructuring measures2.00.02.114.57.410.313.115.818.120.2
Net lending to financial institutions4.30.00.00.00.00.00.00.0
Outlays related to guaranteed debt2.12.24.05.67.18.69.811.0
Augmented balance-6.3-2.4-8.4-10.3-12.4-17.4-25.0-31.3-34.4-37.5
2. Social protection fund
Revenue14.716.119.729.649.668.586.4103.1117.0129.4
Expenditure13.014.718.427.548.769.889.9109.3126.5142.9
Balance (cash)1.71.41.32.10.9-1.3-3.4-6.3-9.6-13.4
Balance of the general government1.7-1.0-2.98.6-0.1-2.9-8.3-13.2-16.1-19.7
Augmented balance of the general government-4.6-1.0-7.1-8.2-11.6-18.7-28.5-37.6-44.0-50.9
Statistical discrepancy0.0-0.30.4-0.40.00.00.00.00.00.0
3. Financing (cash)4.61.36.78.611.618.728.537.644.050.9
Privatization1.31.91.120.37.912.516.219.624.125.0
Foreign financing, net 2/3.011.54.69.14.226.68.47.114.314.7
Domestic financing, net0.3-12.01.0-20.8-0.4-20.43.910.85.711.2
Banking system-1.6-11.70.8-27.1-0.4-20.43.910.85.711.2
Central bank0.2-11.71.0-48.36.4-32.19.74.518.89.6
Deposit money banks (including SPF)-1.8-2.2-1.04.9-15.2-12.3-12.7-11.4-10.9-9.8
Revaluation effect2.20.816.3
Nonbank1.9-0.30.26.30.00.00.00.00.00.0
Memorandum items:
Fiscal deficit including lending under government programs17.623.326.435.945.953.459.164.4
Of which: lending under government programs10.615.214.917.117.515.815.113.5
1. State (republican and local) budget
Revenue39.333.929.631.229.229.229.028.828.728.5
Personal income tax3.23.13.33.43.33.33.33.33.33.3
Profit tax4.63.43.43.22.82.82.82.82.82.8
VAT8.88.89.99.79.19.19.19.19.19.1
Excises3.02.62.62.02.02.02.02.02.02.0
Property tax1.01.21.10.90.90.90.90.90.90.9
Customs duties8.25.83.55.55.65.75.85.96.05.9
Other6.05.64.04.64.14.13.93.63.53.5
Revenue of budgetary funds4.43.41.81.91.31.21.21.11.01.0
Expenditure (economic classification) 1/39.235.732.228.829.429.429.529.429.229.0
Wages and salaries6.66.77.06.86.76.86.86.86.86.8
Social protection fund contributions1.81.81.91.81.81.81.81.81.81.8
Goods and services6.76.36.15.65.65.55.55.55.55.5
Interest0.60.80.71.22.11.81.91.91.71.4
Subsidies and transfers11.511.78.37.87.57.47.47.27.07.0
Capital expenditures10.08.18.35.55.76.16.26.36.56.5
Net lending2.00.30.00.20.10.00.00.00.00.0
Other0.00.00.00.00.00.00.00.00.00.0
Balance (economic classification)0.0-1.8-2.62.4-0.2-0.2-0.6-0.7-0.5-0.5
Bank restructuring measures1.50.01.35.31.51.51.51.51.51.5
Net lending to financial institutions3.30.00.00.00.00.00.00.0
Outlays related to guaranteed debt1.30.80.80.80.80.80.80.8
Augmented balance-4.8-1.8-5.1-3.7-2.5-2.5-2.9-3.0-2.9-2.8
2. Social Protection Fund
Revenue11.311.712.010.810.010.09.99.89.79.6
Expenditure10.010.711.210.09.810.210.310.410.510.6
Balance (cash)1.31.10.80.80.2-0.2-0.4-0.6-0.8-1.0
Balance of the general government1.3-0.7-1.83.10.0-0.4-0.9-1.3-1.3-1.5
Augmented balance of the general government-3.5-0.7-4.3-3.0-2.3-2.7-3.3-3.6-3.6-3.8
Statistical discrepancy0.0-0.30.2-0.20.00.00.00.00.00.0
3. Financing (cash)3.51.04.03.12.32.73.33.63.63.8
Privatization1.01.40.67.41.61.81.91.92.01.9
Foreign financing, net 2/2.38.42.83.30.83.91.00.71.21.1
Domestic financing, net0.2-8.80.6-7.6-0.1-3.00.41.00.50.8
Banking system-1.2-8.50.5-9.9-0.1-3.00.41.00.50.8
Central bank0.1-8.50.6-17.61.3-4.71.10.41.60.7
Deposit money banks (including SPF)-1.3-1.6-0.61.8-3.1-1.8-1.4-1.1-0.9-0.7
Revaluation effect1.60.56.0
Nonbank1.5-0.20.12.30.00.00.00.00.00.0
Memorandum items:
Fiscal deficit including lending under government programs10.78.55.35.25.35.14.94.8
Of which: lending under government programs6.45.53.02.52.01.51.31.0
Gross public debt 3/21.734.941.050.637.733.629.026.925.824.8
GDP (trillions of Belarusian rubels)129.8137.4164.5274.3495.2685.3873.81,052.91,207.01,349.8
Revenue50.645.741.642.039.239.238.938.538.438.1
Taxes33.228.325.626.625.125.125.125.125.225.0
Social contributions11.311.712.010.810.010.09.99.89.79.6
Grants
Other revenue6.05.64.04.64.14.13.93.63.53.5
Expenditure48.846.144.744.040.741.141.341.341.241.1
Expense41.040.339.539.936.436.536.736.636.336.2
Compensation of employees8.58.58.98.68.58.68.68.68.68.6
Use of goods and services6.76.36.15.65.65.55.55.55.55.5
Consumption of fixed capital0.10.10.10.10.10.10.10.10.10.1
Interest0.60.80.71.22.11.81.91.91.71.4
Subsidies13.613.911.49.18.88.88.88.78.58.5
Grants0.00.00.00.00.00.00.00.00.00.0
Social benefits10.010.711.210.09.810.210.310.410.510.6
Other expense1.50.01.35.31.51.51.51.51.51.5
Net acquisition of nonfinancial assets7.85.85.24.14.24.64.64.74.84.8
Acquisitions of nonfinancial assets7.85.85.24.14.24.64.64.74.84.8
Disposals of nonfinancial assets
Consumption of fixed capital
Gross operating balance9.65.32.12.12.82.62.21.92.01.9
Net lending (+) / borrowing (–)1.8-0.4-3.1-2.0-1.4-1.9-2.4-2.8-2.8-3.0
Net acquisition of financial assets6.01.56.4-0.62.0-1.5-2.1-1.7-1.9
Domestic5.37.42.113.81.03.80.4-0.20.30.0
Currency and deposits7.10.912.80.13.0-0.4-1.0-0.5-0.8
Debt securities
Loans5.30.31.21.00.90.80.80.80.80.8
Equity and investment fund shares
Insurance, pensions, and standardized guarantee schemes
Financial derivatives and employee stock options
Other accounts receivable
Foreign-1.0-1.4-0.6-7.4-1.6-1.8-1.9-1.9-2.0-1.9
Monetary gold and SDRs
Currency and deposits
Debt securities
Loans
Equity and investment fund shares-1.0-1.4-0.6-7.4-1.6-1.8-1.9-1.9-2.0-1.9
Insurance, pensions, and standardized guarantee schemes
Financial derivatives and employee stock options
Other accounts receivable
Net incurrence of liabilities1.03.511.20.83.91.00.71.21.1
Domestic0.0-1.71.55.20.00.00.00.00.00.0
Currency and deposits
Debt securities-1.71.55.20.00.00.00.00.00.0
Loans
Equity and investment fund shares
Insurance, pensions, and standardized guarantee schemes
Financial derivatives and employee stock options
Other accounts payable
Foreign2.32.72.06.00.83.91.00.71.21.1
SDRs
Currency and deposits
Debt securities0.02.21.5-0.40.00.00.00.00.0
Loans2.32.7-0.34.61.23.91.00.71.21.1
Equity and investment fund shares
Insurance, pensions, and standardized guarantee schemes
Financial derivatives and employee stock options
Other accounts payable
Statistical Discrepacy0.0-5.4-1.12.80.00.00.00.00.00.0
Memorandum items:
General government balance1.3-0.7-1.83.10.0-0.4-0.9-1.3-1.3-1.5
Augmented general government balance-3.5-0.7-4.3-3.0-2.3-2.7-3.3-3.6-3.6-3.8
Domestic liabilities of the general government14.916.019.422.712.69.17.15.95.24.6
Foreign liabilities of the general government5.910.010.915.115.418.318.217.817.817.7
Sources: Ministry of Finance; SPF; and IMF staff estimates.

Includes changes in expenditure arrears.

Includes unidentified financing that is assumed to be filled by government borrowing from abroad.

Gross consolidated debt of the public sector (central bank and general government debt including publicly guaranteed debt).

Sources: Ministry of Finance; SPF; and IMF staff estimates.

Includes changes in expenditure arrears.

Includes unidentified financing that is assumed to be filled by government borrowing from abroad.

Gross consolidated debt of the public sector (central bank and general government debt including publicly guaranteed debt).

Table 4.Belarus: Monetary Authorities’ Accounts (Baseline Scenario), 2008–17 1/(Trillions of Belarusian rubels, unless otherwise indicated; end-of-period)
2008200920102011201220132014201520162017
Feb.Dec.
Prel.Prel.Proj.Proj.
Reserve money7.76.810.218.820.925.333.842.852.760.167.1
Rubel reserve money7.36.610.216.920.724.132.241.050.758.165.0
Currency outside banks3.83.64.56.76.99.112.115.519.121.924.5
Required reserves2.21.74.07.411.011.016.320.827.731.737.4
Time deposits, NBB securities, and nonbank deposits1.21.31.72.82.74.03.74.83.94.53.1
Foreign currency reserve money0.40.20.01.90.21.21.61.72.02.02.2
Net foreign assets7.014.010.765.771.456.088.592.499.2105.0122.1
Billions of U.S. dollars3.24.93.67.98.85.96.86.66.06.56.8
Net foreign assets (convertible)5.815.09.552.952.641.468.671.073.880.194.7
Billions of U.S. dollars2.65.23.26.36.54.35.35.14.54.95.3
Foreign assets8.015.316.378.983.567.382.366.567.272.686.5
Billions of U.S. dollars3.65.35.49.410.37.16.34.84.14.54.8
Of which gross international reserves6.716.215.166.164.752.762.445.141.947.859.1
Billions of U.S. dollars3.15.75.07.98.05.54.83.22.52.93.3
Foreign liabilities1.01.25.613.212.111.3-6.3-25.9-32.0-32.4-35.6
Billions of U.S. dollars0.40.41.91.61.51.2-0.5-1.8-1.9-2.0-2.0
Of which: use of IMF credit (billions of U.S. dollars)0.02.93.53.53.53.11.50.10.00.00.0
Net domestic assets0.7-7.2-0.5-47.0-50.5-30.7-54.8-49.6-46.5-44.9-54.9
Net domestic credit1.2-4.716.8-29.5-27.8-9.2-9.416.127.725.316.9
Net credit to general government-4.0-15.5-14.6-62.9-61.1-56.5-88.6-78.9-74.5-55.7-46.1
Net credit to local government and state enterprises0.00.01.11.00.61.01.01.01.01.01.0
Net credit to central government-4.0-15.5-15.7-64.0-61.7-57.6-89.7-80.0-75.5-56.8-47.2
Claims on government (loans and government securities)1.71.01.01.01.01.01.01.01.01.01.0
Deposits of central government5.716.616.764.962.758.690.781.076.557.848.2
Credit to economy5.210.931.333.433.347.379.295.0102.281.063.0
Credit to banks3.48.628.019.118.733.065.782.290.069.452.0
National currency3.18.226.013.513.326.657.072.878.958.652.0
Foreign currencies0.30.41.95.65.46.48.79.411.110.90.0
Billions of U.S. dollars0.10.10.60.70.70.70.70.70.70.70.0
Credit to nonbanks1.82.33.414.214.614.213.512.912.211.611.0
Claims on private sector1.82.23.00.30.20.30.30.30.30.30.2
Credit to nonfinancial public enterprises0.00.00.30.10.20.10.10.10.10.00.0
Credit to other financial institutions0.00.10.113.914.213.913.212.511.911.310.7
Other items, net-0.6-2.6-17.2-17.4-22.7-21.5-45.4-65.7-74.2-70.2-71.8
of which banks’ FX deposits excluded from monetary base-0.1-12.1-33.1-32.9-37.9-50.4-52.5-59.3-54.8-55.9
Memorandum items:
12-month percent change in reserve money11.7-11.549.584.1114.834.933.526.623.314.011.8
Velocity of rubel money (average)7.07.77.18.28.78.99.29.39.08.78.6
Velocity of broad money (including foreign exchange part) at current exchange rate (average)4.74.13.93.73.83.53.43.33.02.82.7
Ruble broad money multiplier2.83.12.62.62.22.62.62.62.62.62.6
Currency-to-deposit ratio0.230.210.200.180.180.180.180.180.180.180.18
Real GDP growth (annual)10.20.27.75.33.03.44.44.84.95.0
End-of-period CPI inflation (year-on-year percent change)13.310.19.9108.7107.338.427.520.013.08.06.0
Sources: National Bank of Belarus; and IMF staff estimates.

Data for 2009-2011 have been revised in accordance with STA recommendations. The most significant revisions included (i) excluding banks’ FX deposits and NBRB’s securities issued for the purpose of absorbing liquidity from the monetary base and (ii) re-classifying the Deposit Insurance Agency from general government to non-bank financial instututions.

Sources: National Bank of Belarus; and IMF staff estimates.

Data for 2009-2011 have been revised in accordance with STA recommendations. The most significant revisions included (i) excluding banks’ FX deposits and NBRB’s securities issued for the purpose of absorbing liquidity from the monetary base and (ii) re-classifying the Deposit Insurance Agency from general government to non-bank financial instututions.

Table 5.Belarus: Monetary Survey (Baseline Scenario), 2008–17(Trillions of Belarusian rubels, unless otherwise indicated; end-of-period)
2008200920102011201220132014201520162017
Feb.Dec.
Prel.Prel.Proj.Proj.
Broad money (M3)31.038.150.3111.2114.9159.3235.1299.7399.4457.8539.3
Rubel broad money (M2)20.520.726.443.445.961.982.6105.3130.0149.0166.6
Currency in circulation3.83.64.56.76.99.112.115.519.121.924.5
Domestic currency deposits16.016.520.934.536.249.766.384.5104.3119.6133.7
Domestic currency securities0.70.51.02.22.83.14.25.36.67.58.4
Foreign currency deposits10.216.222.164.165.192.1144.2183.9254.7292.0352.4
Bank securities in foreign currency0.21.11.73.73.95.38.310.614.716.820.3
Memo: Total deposits at constant exchange rate54.763.982.598.6103.6130.2158.9194.2233.0269.9298.5
Net foreign assets3.18.0-2.134.840.724.749.755.467.077.797.3
Billions of U.S. dollars1.42.8-0.74.25.02.63.84.04.14.85.5
NFA of central bank7.014.010.765.771.456.088.592.499.2105.0122.1
NFA of deposit money banks-3.9-6.0-12.7-30.9-30.7-31.3-38.9-37.0-32.2-27.2-24.7
Net domestic assets27.930.152.376.474.2134.6185.4244.3332.4380.1442.0
Net domestic credit39.245.172.6104.6107.9177.9249.3341.0458.4524.1616.1
Net credit to general government-9.8-23.6-23.7-67.1-66.8-75.9-120.2-123.2-130.2-122.3-122.6
Net credit to central government-7.2-22.6-24.4-66.2-65.3-75.0-119.4-122.4-129.3-121.5-121.7
Claims on central government7.03.73.410.911.110.910.910.910.910.910.9
Deposits of the central government14.326.327.877.176.585.9130.3133.3140.2132.4132.6
Net credit to state and local governments-2.6-1.00.8-0.9-1.4-0.9-0.9-0.9-0.9-0.9-0.9
Credit to economy48.968.796.2171.7174.6253.8369.5464.2588.5646.4738.7
Credit to public nonfinancial corporations11.417.021.839.864.994.0139.7177.1226.1249.1285.5
Claims on private sector37.250.872.6114.892.4141.1209.5265.6339.0373.3427.9
Claims on other financial corporations0.40.91.817.017.418.720.321.623.524.025.3
Other items, net-11.3-15.0-20.2-28.2-33.7-43.3-63.9-96.7-125.9-144.0-174.2
Capital-13.0-16.2-21.7-11.5-20.7-18.9-29.7-44.9-75.0-93.6-126.0
Other net assets1.71.21.5-16.7-12.9-24.4-34.2-51.7-50.9-50.4-48.1
Memorandum items:
12-month percent change in broad money excluding valuation effect25.410.129.034.836.932.222.221.619.416.110.3
12-month percent change of credit to economy excluding valuation effect53.630.838.837.030.842.730.721.918.210.89.3
12-month percent change of LGP excluding valuation effect30.136.922.220.416.212.410.28.3
12-month percent change of non-LGP credit excluding valuation effect46.237.155.835.824.220.410.99.6
12-month percent change of real credit to economy excluding valuation effect, end of period35.618.826.2-34.3-36.93.02.51.64.62.53.1
Deposits of the central and local governments in commercial banks at constant exchange rate17.816.318.218.420.333.344.757.167.878.888.2
Stock of loans under government programs at constant exchange rate41.351.867.081.999.0116.5132.3147.3160.8
Dollarization ratio at constant exchange rate70.874.174.765.165.161.858.356.555.255.755.2
Dollarization ratio at current exchange rates38.949.551.465.164.365.068.568.570.970.972.5
Sources: National Bank of Belarus; and IMF staff estimates.

Projections are shown at current exchange rates.

Sources: National Bank of Belarus; and IMF staff estimates.

Projections are shown at current exchange rates.

8. Downside risks to the baseline scenario are significant: the risk assessment matrix (Appendix II) provides a summary.

  • The most significant risk is a possibility of relaxation of domestic demand policies in an attempt to pursue the growth target. Stimulating domestic demand would re-ignite the inflation-depreciation spiral and erode external competitiveness. Attempts to contain inflation and depreciation by price controls or large-scale intervention would deepen distortions and deplete reserves. The macroeconomic uncertainty increases financial sector risks: it puts pressure on banks’ capital and leaves them exposed to sudden changes in depositors’ sentiment (Box 3 elaborates on banking sector risks in more detail).

Box 3.Banking Sector Risks

Belarusian banks have weathered the 2011 crisis and their capital has been replenished. All banks managed to continue their operations throughout the year even given a practical freeze of the FX markets for half of 2011. As a consequence of worsening environment and dramatic exchange rate devaluation, the banking system capital adequacy ratio (CAR) dropped from 20.5 percent at the beginning of the year to 14.9 percent at end-November. Recapitalization of SOBs in amount of 14.5 trillion rubels (5 percent of GDP) helped to increase the system CAR to 24.7 percent at end-2011 by local standards. Banks continued to repay their foreign obligations which stood at around $6 billion at end-2011 (half of which were short term). Russian bank subsidiaries who represent major foreign banks in the country have received capital injections and support pledges from their parent banks. Direct exposure to euro area banks is limited.

Deposits have been growing, but non-performing loans (NPLs) are also on the rise. Deposits have stabilized and resumed growth since October at most banks; however, the competition for funds among banks has led to erosion of interest margins as average rates on new deposits match or exceed those on new loans. System-wide NPLs increased modestly to 4.2 percent at end-2011, but this increase may not capture all underlying vulnerabilities in loan portfolios due to likely lagged effects from the real economy; NPLs could be also underestimated due to loan restructuring, in particular at SOBs. As an indication of credit quality worsening, loans in the “watch” category that are one notch from being included in NPLs increased from 3.6 percent of total loans at end-2010 to 10.6 percent at end-2011. Due to high interest rates in rubels, FX loans to corporates increased by five percent in the first two months of 2012; NBRB is introducing a special provision for loans to borrowers without FX income from July 1, 2012. The risk on corporate FX loans is limited as they primarily were given to exporters. The stock of FX loans to households is low due to the ban introduced since 2009.

The main risks for banks come from the domestic economy slowing down and potential spillovers from the crisis in Europe. As the economy slows, NPLs are expected to increase which would put pressure on banks’ capital and could call for new recapitalizations. External factors could hurt Belarusian banks primarily via lower demand for goods by exporters, decreased trade and project financing from European banks, and reduced support to their domestic subsidiaries from Russian parent banks. Besides, banks hold significant FX claims on the NBRB largely via deposit exchanges, which could put pressure on reserves in case of substantial FX deposit withdrawals.

Financial Soundness Indicators for the Banking Sector
20102011
Dec.Sep.Oct.Nov.Dec.
Capital adequacy
Capital adequacy ratio20.516.514.314.924.7
Tier I capital adequacy ratio14.911.99.910.318.8
Capital to assets13.710.28.48.614.1
Foreign exchange loans to total loans 1/21.729.839.539.039.5
Non-performing loans to gross loans3.54.24.34.44.2
Watch loans3.68.48.710.210.6
Provisions to total non-performing loans61.972.272.275.179.0
Source: National Bank of the Republic of Belarus.

The change in the ratio is due primarily to valuation effects.

Source: National Bank of the Republic of Belarus.

The change in the ratio is due primarily to valuation effects.

  • On the external side, an escalation of the euro area crisis would pose significant risks, although the extent of the shock would depend on the impact on Russia. An economic slowdown in Belarus’ trading partners would reduce demand for Belarus’ exports and an increase in global risk aversion could trigger a reduction in the rollover rates of the external borrowing. Given strong ties with Russia, both trade and financial transmission channels would depend on the extent to which the Russian economy is affected by the crisis—strong commodity prices could dampen the effects of a possible euro area crisis on the Russian economy and therefore reduce spillover effects on Belarus.
  • Gas prices may not stay low forever. The recent gains in the terms of trade obtained on account of the new gas contract with Gazprom could disappear over the medium term if Russia decides to increase the domestic gas price to which the contract with Belarus is linked.

Staff Recommendations

9. In order to achieve external and domestic stability, macroeconomic framework and policies should be made consistent with the inflation objective. Reducing the emphasis on achieving high GDP growth and avoiding setting targets for wages in dollar terms would boost confidence that strong policies will continue. Pursuing tight policies would keep a lid on inflation and therefore preserve competitiveness gains obtained through devaluation. A reduction of the trade deficit—as well as better prospects for the financial account—would allow an increase in reserves to more than 3 months of imports in the medium term (Table 6).

Table 6.Belarus: Selected Economic Indicators (Adjustment Scenario), 2008–17
2008200920102011201220132014201520162017
Prel.Proj.
(Annual percentage change, unless otherwise specified)
National accounts
Real GDP10.20.27.75.32.02.94.95.35.76.0
Total domestic demand17.8-1.111.22.90.23.04.55.35.76.0
Consumption12.50.07.42.91.22.94.45.55.75.9
Nongovernment16.40.09.03.51.33.55.46.76.97.1
Government0.3-0.12.31.01.01.00.50.50.50.5
Investment28.2-2.918.43.0-1.63.14.65.25.76.2
Of which: fixed23.85.017.511.1-1.53.04.55.05.56.0
Net exports 1/-9.21.3-3.73.81.8-0.30.0-0.5-0.4-0.5
Consumer prices
End of period13.310.19.9108.719.111.37.56.05.85.5
Average14.813.07.753.255.715.89.36.75.95.6
Monetary accounts
Reserve money11.7-11.549.584.114.916.114.212.311.811.6
Rubel broad money22.50.927.464.126.416.114.312.411.911.6
Growth of credit to the economy excluding valuation effect53.630.838.837.019.912.99.27.07.56.1
(Percent of GDP)
External debt and balance of payments
Current account balance-8.2-12.6-15.0-10.5-3.6-3.6-3.4-3.4-3.2-2.9
Trade balance-10.3-14.1-16.4-6.70.6-0.8-1.2-1.9-2.4-2.6
Exports of goods54.043.446.075.182.982.081.279.478.076.7
Imports of goods-64.3-57.5-62.4-81.8-82.3-82.8-82.4-81.3-80.4-79.3
Gross external debt25.045.651.161.462.361.861.360.860.258.4
Public 2/6.818.921.627.826.225.824.023.122.822.2
Private (mostly state-owned-enterprises)18.126.729.533.636.135.937.337.737.436.2
Savings and investment
Gross domestic investment37.637.341.236.333.834.033.833.733.533.4
Government10.08.18.35.55.76.26.26.36.46.5
Nongovernment27.629.232.930.828.127.927.627.427.126.9
National saving29.424.726.225.830.230.430.430.330.330.4
Government 3/6.57.44.02.53.63.53.12.93.02.9
Nongovernment 3/23.017.322.223.326.627.027.327.427.427.5
Public sector finance
General government balance1.3-0.7-1.83.10.0-0.6-1.0-1.3-1.3-1.5
Augmented general government balance-3.5-0.7-4.3-3.0-2.1-2.7-3.1-3.4-3.4-3.6
Revenue50.645.741.642.038.639.239.038.738.438.2
Expenditure 4/54.146.445.945.040.741.942.142.141.941.7
Of which:
Wages6.66.77.06.86.56.86.86.86.86.8
Subsidies and transfers11.511.78.37.87.17.47.47.27.06.9
Investment10.08.18.35.55.76.26.26.36.46.5
Gross public debt 5/21.734.941.050.639.637.234.132.231.029.5
Memorandum items:
Nominal GDP (billions of U.S. dollars)60.849.255.255.1
Nominal GDP (trillions of rubels)129.8137.4164.5274.3465.7547.1618.3686.7761.2849.6
Terms of trade, percentage change8.8-10.30.55.97.2-0.6-0.9-0.4-0.30.2
REER (official exchange rate), percentage change1.6-4.5-5.0-11.7-9.10.00.00.00.00.0
Official reserves (billions of U.S. dollars)3.15.75.07.98.010.012.014.017.020.0
Months of imports of goods and services1.21.81.21.91.82.12.42.73.03.3
Percent of short-term debt40.463.242.056.957.469.380.088.8102.5114.8
Quota (2010): SDR 386.4 million (589.7 million U.S. dollars)
Sources: Belarusian authorities; and IMF staff estimates.

Contribution to growth.

Gross consolidated external debt of the public sector (central bank and general government debt including publicly guaranteed debt).

The reduction in government saving and a corresponding increase in nongovernment saving include bank recapitalization and layouts related to public guaranteed debt in amount of 2.5 percent of GDP in 2010 and 6.1 percent of GDP in 2011.

Refers to the augmented expenditure of the general government.

Gross consolidated debt of the public sector (central bank and general government debt including publicly guaranteed debt).

Sources: Belarusian authorities; and IMF staff estimates.

Contribution to growth.

Gross consolidated external debt of the public sector (central bank and general government debt including publicly guaranteed debt).

The reduction in government saving and a corresponding increase in nongovernment saving include bank recapitalization and layouts related to public guaranteed debt in amount of 2.5 percent of GDP in 2010 and 6.1 percent of GDP in 2011.

Refers to the augmented expenditure of the general government.

Gross consolidated debt of the public sector (central bank and general government debt including publicly guaranteed debt).

Belarus: Baseline and Adjustment Scenarios, 2011–17

Sources: Belarusian authorities; and IMF staff estimates and calculations.

1/ The decline in the external debt-to-GDP ratio in the baseline scenario is explained by an assumption that the gaps in the balance of payments are financed by drawdown of foreign exchange reserves rather than by external borrowing. Thus, the decline in the debt ratio is consistent with the decline in the reserves.

10. The NBRB should be guided by the twin goals of restoring domestic and external stability. External stability requires further reserves increases and avoiding significant real appreciation; while domestic stability requires limiting credit growth to about 20 percent, which is a value implied by the monetary program and is consistent with the inflation objective. Both credit growth and interest rates are important in Belarus. The choice of credit growth as an intermediate target is warranted given the relative importance of the credit channel and since some credit is not sensitive to interest rate changes. However, interest rates influence the behavior of depositors and some borrowers. Therefore, the staff called for caution in reducing the rate of refinancing—in staff’s view, the reduction of the refinancing rate by 500 basis points in the beginning of March was premature as it brought the rate of refinancing below the March estimate of the expected rate of inflation.5 While there will be scope to lower rates further as inflation continues to moderate, rapid rate cuts would risk resurgence of inflation. Staff believes that the recent appreciation pressures would be better addressed by a combination of sterilized intervention and additional exchange rate flexibility rather than interest rate reductions.

Authorities’ Views

11. The authorities considered the staff’s view of the baseline scenario pessimistic. The NBRB stressed its commitment to pursue tight monetary policy and the government argued that the planned reduction in “emission-based” financing of LGP (i.e., financing of LGP with resources from the budget) would prevent excessive credit growth. They considered that staff’s adjustment scenario (Table 6) describes the outlook more accurately than the baseline scenario. At the same time, they considered their framework consistent and claimed that structural changes in the economy—such as improving energy efficiency in production—would allow them to meet the growth objective. The authorities agreed with staff assessment of the real effective exchange rate as being in line with the fundamentals but pointed out that estimates are subject to a wide margin of error. The NBRB viewed the current monetary policy as appropriate. In the authorities’ view, the cut in policy interest rates was justified by a fall in inflation expectations. They were also concerned that high interest rates were encouraging rapid conversion of FX-denominated assets into rubel-denominated assets, which they viewed as speculative in nature and subject to risk of abrupt reversal.

12. The authorities objected to staff’s assessment of the likelihood of risks and their potential impact on the economy. They argued that the painful experience of 2011 would prevent another policy loosening, and therefore tight policies would continue even if the growth and wage targets are not met. The authorities also see a risk of systemic bank run as low as confidence in banking system is sustained by state-guarantees of full deposits. On the external side, the authorities reiterated the importance of developments in Russia for the Belarus economy and the low risk of a significant downturn in Russia. They are trying to reduce energy intensity in production to reduce dependence on low-priced natural gas imported from Russia. In addition, they reiterated that they would use all policy instruments to counteract external shocks, thereby reducing possible across-the-border spillover effects.

B. The Paradox of Fiscal Policy: Low Deficits, Rapidly Rising Debt

13. The general government balance has been in moderate deficit or surplus over the last few years, but debt has increased rapidly. In the last four years the general government balance has recorded a cumulative surplus of about 2 percent of GDP, while total public debt (including the NBRB and guaranteed debt) has grown from about 22 percent of GDP in 2008 to above 50 percent in 2011. The increase reflects mainly external borrowing to increase reserves and the impact of the significant real depreciation on the debt-to-GDP ratio.

General Government Debt Increased by 28.8 Percent of GDP Between 2008 and 2011

14. Below-the-line and quasi-fiscal operations are the culprits. Below-the-line operations comprising banks recapitalizations and outlays for government guaranteed debt amounted to 13.5 percent of GDP in 2008–11 (6.1 percent of GDP in 2011 alone). The government also conducted significant quasi-fiscal activities in the form of LGP in the amount of 12 percent of GDP in 2010–11, which boosted domestic demand, widened the current account deficit and hence created the need for governments’ external borrowing to close the external financing gap. Since LGP has been extended by commercial banks, it is likely that the government would fill any shortfall in repayments by recapitalizing the banks, as has happened in three of the last four years. This rapid buildup of implicit and explicit liabilities should be assessed in the context of a rapidly increasing total public debt.

15. A clear limit on quasi-fiscal operations and wage restraint should support macroeconomic stabilization. To this end, staff welcomed authorities’ decision to limit government financing of LGP to 7 trillion rubels (1.4 percent of GDP) in 2012 and to balance the amount of planned LGP with the sources of their financing. The staff recommended that the DB should not be allowed to borrow to finance additional LGP. Consistent with staff recommendations, the authorities approved a balanced budget for 2012. This implies a fiscal contraction of about 2 percent of GDP, as measured by the change in the primary cyclically adjusted augmented fiscal balance. On the other hand, overly ambitious wage targets are inconsistent with macroeconomic stabilization. After the 30 percent increase in January, budget sector wages should grow less than 10 percent in nominal term during the remainder of the year, which is consistent with no change in the real wage in period average terms. Significant budget sector wage increases could create expectations of similar increases in the rest of the economy. Large wage increases in SOEs could reignite price pressures, erode competitiveness and increase inflationary expectations. The mission advised that public communications should make clear that any wage increases should follow rather than anticipate productivity growth.

Authorities Views

16. The authorities agreed with the need for tight control of quasi-fiscal operations. They pointed out that financing for LGP from the public sector sources will be strictly limited. At the same time, they pointed out that SOBs may finance LGP using their own resources on a competitive basis. The authorities believe that the DB should be allowed to borrow in the market for efficient long-term projects.

17. The authorities reiterated their commitment to the balanced budget in 2012 but expressed concerns about wage policy. They argued that budget sector wages are significantly below the private sector ones and that increases are necessary in order to avoid losing the best employees. In turn, wages in the rest of the economy are lower than in Russia and therefore many employees are moving out as there are no restrictions on labor mobility within the Common Economic Area. Regarding below-the-line operations, the authorities pointed out that transactions in 2011 were exceptionally high due to the crisis and they will be much lower in the future.

III. The Medium-Term Agenda: Maintaining Stability and Securing Sustainable Growth

A. Medium-Term Policies to Maintain Stability

18. Fiscal policy should focus on stabilizing the debt level and rationalizing government spending. Total government debt needs to be put on a downward path. Phasing out generalized subsidies to households, including by raising the cost recovery ratio of household utility tariffs to at least 40 percent this year, would reduce expenditure by about 0.5 percent of GDP, of which 0.1–0.2 percent of GDP should be used for augmenting the targeted social assistance program. Interest rate subsidies on LGP should be reduced. Staff supported the government’s intention to reform the civil service, aiming at a smaller and better paid workforce. Finally, pension reforms would help contain expenditure and address the issue of a rapidly aging population. The President’s recent proposal to increase pension benefits for workers postponing retirement goes in the right direction, but there is a need to ensure that the financial equilibrium of the system is not achieved via increases in the already high contribution rate.

19. Developing an inflation targeting (IT) framework would strengthen the credibility of the NBRB’s policy and shield the economy against external shocks. The authorities have already taken important steps toward the IT regime, namely changing the exchange rate regime from a de-facto peg to a managed float in October 2011, setting a low inflation objective, and enhancing NBRB independence by divesting the NBRB of non-core assets. Over the medium term, the authorities should develop the essential elements of an IT regime, namely enhancing the operational autonomy of the NBRB, reducing the share of regulated prices, imposing hard budget constraints on enterprises, which will increase their responsiveness to price and interest rate signals, removing quasi-fiscal activities from commercial banks, and deepening the financial system.

Authorities’ Views

20. The authorities broadly shared staff’s views but thought they would be difficult to implement. They argued that reducing subsidies to households is politically and socially difficult. They also pointed out that the Targeted Social Assistance program is still at an early stage and has limited funds: therefore, in the short-term, it might not be ready to fully support vulnerable households if utility tariffs were increased to the cost recovery level. The authorities believe it is difficult to reduce interest rate subsidies on existing loans, as these are specified in the lending contracts and cannot be renegotiated. The authorities agreed with a move towards inflation targeting over the medium term but stressed that the current “manual control” of the economy distorts the transmission mechanism and the need to fulfill key prerequisites make the quick transition to IT challenging.

B. Can the Current Model Produce Sustainable Growth?

21. Belarus’ economic model has long relied on high investment supported by subsidized energy inputs from Russia, directed credit and ample foreign financing. The model produced high growth rates—generally outperforming peers—while the external environment remained benign (Figure 5) but was subject to significant vulnerabilities: the slow pace of structural reform reduced productivity growth and left Belarus dependent on subsidized energy inputs and external support. Even in the CIS markets, Belarus’ share has been shrinking.6 External debt started to increase rapidly in the second half of the last decade while reserves remained at a dangerously low level.

Figure 5.Belarus: Performance Among Peers, 2002–11 1/

Sources: IMF, World Economic Outlook; IMF, International Financial Statistics; and IMF staff calculations.

1/ CEE includes Albania, Bosnia and Herzegovina, Bulgaria, Croatia, Czech Rep., Estonia, Hungary, Latvia, Lithuania, Macedonia, Montenegro, Poland, Romania, Serbia, Slovak Rep., and Turkey. CIS includes Russia, Armenia, Azerbaijan, Georgia, Kazakhstan, Kyrgyz Rep., Moldova, Tajikistan, Turkmenistan, Ukraine, and Uzbekistan. The 5th and 95th percentiles include the entire CEE and CIS samples excluding Belarus.

22. Structural reforms have been slow, with occasional reversals. Belarus has made less progress in market reforms than most Eastern European and Central Asian economies (Figure 6). It has performed poorly on large- and small-scale privatization and enterprise reform. Little has been done to harden SOEs’ budget constraints; promote competition and improve corporate governance. Banking sector reform, trade liberalization and competition policies have been slowly improving. Price liberalization was partially reversed in 2011.

Figure 6.Belarus: EBRD Transition Indicators, 2010 1/

Sources: EBRD, Transition Indicators.

1/ Higher indicators corresponds to greater transition.

23. Government interference in the economy has led to a misallocation of resources. Administrative price controls interfere with market signals, distorting resource allocation. Mandatory output targets shift companies’ objectives from maximizing profits to maximizing output, regardless of the cost. This depresses productivity growth, while attempting to meet specific wage targets increases the gap between real wages and productivity (Box 4 elaborates on wage and productivity developments). Even with continued access to cheap energy from Russia, a persistent gap between wages and productivity would undermine Belarus’ external competitiveness and will eventually lead to pressure on the balance of payments and a possible repeat of the previous crises.

Box 4.Wage and Productivity Developments

Real wages in Belarus have persistently grown faster than productivity with the exception of 2003 and 2009. At the end of 2011, real GDP per worker was 85 percent higher than its 2002 level, while real wages were about 140 percent higher.

Productivity and Real Wages

(2002=100)

Sources: Belarusian authorities; and IMF staff estimates.

During the 2009 SBA the authorities in Belarus were committed to wage restraint. The program included a commitment by the authorities to strictly limit wage increases in state controlled enterprises, which covered about 80 percent of all employees in the Republic of Belarus. However, wage policies have been loosened after the program expired.

The increase in real wages in 2010 was particularly pronounced with real wages rising by 33 percent, while productivity has increased only by 7 percent. Similarly, wages in US dollar terms increased by 37.6 percent y/y in December 2010. This mismatch was among the key factors behind the 2011 balance of payments crisis. Depreciation during the crisis has brought dollar wages back to their 2008 level. The authorities recognize the importance of keeping real wage growth in line with productivity growth. However, their policy of declaring wage targets in dollar terms, and the resulting wage pressures in SOEs, could lead to a repeat of the crisis.

Wages

(Jan., 2008 = 100)

Sources: Belarusian authorities; and IMF estimates.

Average Nominal Wage

(U.S. dollars)

Sources: Belarusian authorities; and IMF estimates.

Achieving Efficient Resource Allocation via Privatization and Enterprise Reform

24. Structural reforms could support macroeconomic stabilization and enhance Belarus’ medium-term prospects for sustainable growth. Better resource allocation in the economy can be achieved by price and external trade liberalization, state owned enterprise reform and privatization. Adjustment costs will be minimized if strong and well-functioning institutions are in place, including an adequate social safety net. Pursuing reforms integral to WTO accession would raise Belarus’ medium-term growth prospects.

25. Price liberalization will impose market discipline and strengthen competition. Belarus has lagged behind other countries in price liberalization (EBRD) with prices regulated primarily through price and trade margin ceilings. In 2011 the list of socially important goods subject to price controls was expanded to cover 25 to 30 percent of the consumer price basket. In competitive markets price liberalization makes resource allocation more efficient by providing an incentive to direct capital and labor to producing scarce and valuable outputs. Increasing market competition by removing opaque state support to uncompetitive enterprises should limit excessive price increases after liberalization. Targeted social assistance should be used to mitigate the effects of price liberalization on the poor.

26. Transforming SOEs into commercially-run corporations will improve the efficiency of the allocation of resources. Managers should be given greater autonomy and should be fully responsible for the performance of the SOEs within hard budget constraints. Government’s interference in their operations should be reduced and the system of state support streamlined and made transparent. Corporate governance needs to be strengthened by developing a program for SOEs’ transition to IFRS accounting. Introducing performance-based contracts for managers and performance-based bonuses for workers would raise productivity. Removing quantitative targets for employment would help reduce labor hoarding in SOEs and free up resources for more efficient and profitable enterprises.

27. A privatization process consistent with best international practices would facilitate economic modernization. Evidence from Russia suggests that privatized enterprises are more innovative, more productive and adopt new technology and new management techniques faster than SOEs.7 The capacity for the National Investment and Privatization Agency (NIPA) to implement privatization in a professional and transparent manner could be demonstrated by bringing the first eight companies selected for privatization with the support of the World Bank to the point of sale. The NIPA should be vested with the full authority to carry out this privatization and success fees for financial advisors should be permitted. The list of enterprises to be privatized by the NIPA should be expanded by at least 20 companies to provide a pipeline for future privatization.

Authorities’ Views

28. The authorities agreed that structural reform is needed. They are implementing President’s Directive #4 “On the Development of Entrepreneurship and Business Activity in the Republic of Belarus” which sets out a blueprint of economic liberalization. They have been working toward gaining a higher rating in the World Bank’s “Doing Business” survey. The authorities said that strengthening competition; removing red tape; improving the tax system; and moving to international accounting standards are their priorities.

29. They disagreed, however, with Fund staff on the scope and the pace of reforms. The authorities believe that structural reforms should not incur excessive social costs and should only be implemented after macroeconomic stabilization takes hold. They were not prepared to embark on enterprise reform due to possible labor dislocation and argued that the reform could only be started after the targeted social assistance and unemployment benefit schemes were strengthened. The authorities believe that price liberalization should only be resumed when inflation expectations were firmly under control. The authorities were not convinced that privatization would improve economic efficiency and preferred to improve management of the SOEs.

C. Can the Financial System Support Sustainable Growth?

30. The financial system is inefficient and causes a growing contingent liability for the government. Currently, SOBs dominate the banking system holding about two thirds of all assets. They are primarily engaged in LGP with government guarantees or subsidies on interest rates and in lending to SOEs. With little emphasis on analyzing borrowers’ credit, many loans are being rolled over, resulting in consistent liquidity shortfalls at major SOBs. Annual recapitalizations of SOBs averaged 1 percent of GDP during 2007–10, but were up at 5.3 percent of GDP in 2011. While a major part of the latest recapitalization compensated for a deterioration in capital adequacy ratios due to a depreciation (as rubel value of FX-denominated risk-weighted assets increased and capital is held in rubels), it also indicated increasing asset quality deterioration. Other banks are primarily left to compete for a small pool of private businesses. This setup results in distorted incentives for SOBs and undermines private sector development.

Financial Sector Reforms

31. Establishing a strong DB and giving it responsibility for LGP would free up the commercial banks to make market-based loans. All LGP should be done via the Development Bank (DB) to make it transparent. The DB should operate within the resource envelope consistent with the government’s ceiling on LGP and it should be precluded from borrowing to support additional activities in the immediate future: this would contain the risk of losing control over LGP. The mission advised that budget financing of the DB should be reflected in a government document to be integrated in the budget process and approved alongside the budget. The risks of the DB’s operations should be recognized in the budget and it should regularly report to the public and financial supervisor. Banks could competitively bid to become on-lending agents for LGP for commission fees, but the DB should bear the credit risk. However, even with these measures, risks would remain that credit growth will not be adequately contained. The remaining LGP stock on SOBs balance sheets should be gradually phased out possibly using an asset management company. After major SOBs would be relieved from their quasi-fiscal function legacy, they should be prepared for privatization with investors who would receive major controlling shares in them. This would help creating a level playing field for all banks and lead to a more efficient resources allocation. The full independence of NBRB supervision staff and use of risk-based supervision would make the financial system more robust.

Authorities’ Views

32. The authorities considered that the banking system remains resilient, and favored less fundamental changes. They agreed that SOBs need to shift toward more commercial lending and they plan to sell major SOBs to well-reputed international banks in the medium-term. The authorities will continue improving their supervision including with support from the Fund’s technical assistance. They noted that large SOB recapitalization in 2011 brought their capital ratios far above prudential requirements and that banks are successfully increasing their provision levels providing them with better buffers against shocks in 2012. They expected that tightened liquidity provision to SOBs since end-2011 would improve their liquidity management practices. The authorities were open to a possibility that all LGP should be done by the DB over the medium term. In 2012, however, they planned to increase opportunities for private banks to participate in LGP relying on banks’ own resources.

IV. Capacity to Repay and Relationship with the Fund

33. Belarus’ capacity to repay has become strained due to a sharp increase in debt in recent years (Tables 7 and 8) and policies should be geared toward enhancing it. External debt has been rising rapidly during the last years, reaching over 61 percent of GDP by the end of 2011 from 25 percent at the end of 2008. Staff projects that external debt ratio would decline only gradually (falling to 56 percent of GDP by the end of 2017) and reserves would remain at significantly low levels (covering only less than 1 month of imports and about 20 percent of short-term debt during 2014–17), indicating the presence of significant repayment risks. The proposed stabilization policies would reduce the risks by building up reserves to sufficient levels over the medium term (covering about 3 months of imports and short-term debt), which would enhance external creditors’ confidence.

Table 7.Belarus: Indicators of External Vulnerability, 2007–11
20072008200920102011
CPI inflation (end year)12.113.310.19.9108.7
Export volume of goods (percent change)5.21.5-11.52.829.5
Import volume of goods (percent change)7.214.3-12.68.015.8
Current account balance (percent of GDP)-6.7-8.2-12.6-15.0-10.5
Capital and financial account balance (millions of U.S. dollars)5,3534,2875,0666,4444,771
Of which
Foreign direct investment, net1,7902,1501,7821,3523,928
Trade credits, net690289657568561
Official Liabilities, net2,0101,2414,7391,9752,185
Liabilties of the banking sector, net1,0755314832,296474
Non-bank private liabilities (excl. trade credits) 1/86031534939839
Gross official reserves (millions of U.S. dollars)4,1823,0615,6535,0317,916
Months of imports of goods and nonfactor services1.21.21.81.21.9
Percent of broad money19.211.222.716.359.4
Gross total external debt (millions U.S. dollars)11,99515,16822,43928,20233,881
Percent of GDP26.525.045.651.161.4
Percent of exports of goods and nonfactor services43.440.990.294.372.6
Gross short-term external debt (millions of U.S. dollars)7,3657,5719,34212,17014,113
Percent of gross total external debt6150424342
Percent of gross official reserves176247165242178
Debt service ratio (percent) 2/3.14.15.96.05.7
REER appreciation (CPI based, period average)-3.91.6-4.5-5.0-17.8
Capital adequacy ratio (percent) 3/19.321.819.820.524.7
Nonperforming loans (percent of total)0.71.74.23.54.2
Banks’ net open FX position (percent of regulatory capital) 4/-3.08.5-11.6-1.42.2
Real broad money at constant exchange rates (percent change) 5/29.513.37.918.2-42.6
Real credit to economy at constant exchange rate (percent change) 5/37.022.76.812.6-38.1
Sources: Belarus authorities; and IMF staff estimates and projections.

Includes loans, currency and deposits and other flows.

Interest plus medium- and long-term debt repayments in percent of exports of goods and services.

Regulatory capital in percent of risk-weighted assets.

2011 column shows the value as of September 2011.

Deflated by the CPI.

Sources: Belarus authorities; and IMF staff estimates and projections.

Includes loans, currency and deposits and other flows.

Interest plus medium- and long-term debt repayments in percent of exports of goods and services.

Regulatory capital in percent of risk-weighted assets.

2011 column shows the value as of September 2011.

Deflated by the CPI.

Table 8.Belarus: Capacity to Repay the Fund (Baseline Scenario), 2009–17 1/
200920102011201220132014201520162017
Fund repurchases and charges
Millions of SDRs843552951,1138935500
Millions of U.S. dollars1367854561,7181,3788500
Percent of exports of goods and nonfactor services0.10.20.20.93.22.40.10.00.0
Percent of total debt service 2/0.93.63.28.530.525.91.60.00.0
Percent of quota2.111.214.176.4288.1231.114.30.00.0
Percent of gross international reserves0.21.31.18.335.842.73.40.00.0
Fund credit outstanding
Millions of SDRs1,8322,2702,2702,02194155000
Millions of U.S. dollars2,8983,4853,5093,1191,45284000
Percent of exports of goods and nonfactor services11.711.77.56.12.70.10.00.00.0
Percent of quota474.0587.3587.3522.9243.414.20.00.00.0
Percent of gross international reserves51.369.344.356.530.22.60.00.00.0
Memorandum items:
Exports of goods and nonfactor services (millions of U.S. dollars)24,86529,90646,67051,35054,43757,21259,92063,20767,303
Debt service (millions of U.S. dollars)1,4791,8482,6585,3865,6295,3195,4354,5625,202
Quota (millions of SDRs)386386386386386386386386386
Quota (millions of U.S. dollars at eop exchange rate)611593597596596596596595594
Gross international reserves (millions of U.S. dollars)5,6535,0317,9165,5204,7993,2242,5332,9443,309
Financing gap (millions of U.S. dollars)000000000
U.S. dollars per SDR (period average)1.5431.5261.5791.5431.5441.5431.5421.5411.539
U.S. dollars per SDR (eop)1.5821.5361.5461.5431.5431.5431.5421.5401.538
Source: IMF staff calculations.

Assumes repurchases are made on obligations schedule.

Debt service includes interest on the entire debt stock and amortization of medium-and long-term debt.

Source: IMF staff calculations.

Assumes repurchases are made on obligations schedule.

Debt service includes interest on the entire debt stock and amortization of medium-and long-term debt.

34. Agreement on a new program would require, as the next step, full commitment by the authorities to a consistent strategy based on stabilization and reform. The authorities request for a new Fund arrangement remains active. Staff advised that program negotiations would require agreement among all policymakers—including at the highest level—to adopt a comprehensive package to restore stability and to embark on the path of deep structural reform.

V. Staff Appraisal

35. The Belarusian economy is emerging from its latest crisis. Responding to monetary tightening, credit growth slowed, demand pressures subsided, and inflation began slowing down. Expenditure and wage restraint further supported stabilization. Exchange rate unification and a move toward a flexible exchange rate regime helped restore the foreign exchange market and bring down the current account deficit. The loan agreement with the ACF supplied discipline (especially in encouraging the authorities to limit LGP) and external finance. Sale of assets to Gazprom and new loans by Russian banks boosted reserves further. The economy, however, has been weakened by the crises of 2008–09 and 2011, with rapidly increasing debt, diminished public confidence in government’s policies, reduced market access and increased dependence on Russia.

36. Inconsistent policy goals could jeopardize stability. The authorities say that their priority is restoring macroeconomic stability: bringing inflation down, narrowing the current account deficit and maintaining official reserves. However, the growth target is inconsistent with other macroeconomic objectives, and senior government officials have repeatedly promised to raise dollar wages. There is a risk that they will pursue high growth and high wages, as they did in 2010: policies which led directly to the 2011 crisis.

37. The authorities have adopted many of the policies needed for stabilization, but they need a consistent framework to provide confidence that good policies will be maintained. The NBRB has floated the exchange rate, but will need to continue allowing it to move flexibly to shield the economy from external shocks. Despite recent wavering, the authorities have generally kept a tight monetary policy, but still need to embed it in monetary targets in the short term, and inflation targeting over the medium term. The government is targeting a balanced budget and a sharp reduction in LGP, but their fiscal stance could be undermined once again by failure to stay within the limits set for LGP and by other quasi-fiscal activities. In a still uncertain macroeconomic environment, a consistent and disciplined wage policy is needed this year in both the budgetary sector and the SOEs.

38. The authorities should also aim to restore the economy’s safety margins. The government should aim to stabilize and then reduce the debt level over the medium term. The fiscal plan—reducing general subsidies, reforming the civil service and implementing pension reform—is welcome, but there are areas of ambiguity and excessive caution in the authorities’ plans. They need to speed up improvement to the Targeted Social Assistance program and the unemployment benefit scheme. Quasi-fiscal operations should be phased out by making the DB the sole provider of new LGP, with LGP financing reflected above the line in the budget. Most urgently, the authorities need to increase reserves. To do this, they need continued exchange rate flexibility and macroeconomic discipline.

39. The main source of growth over the medium term lies in improvements in productivity, which requires structural and financial sector reforms. The authorities are torn between trying to make their old model function better and adopting a new one. At the moment, large state enterprises’ exports have been boosted by the exchange rate depreciation. Lower prices on gas imports from Russia have eased budget and balance of payments constraints. At the same time, Belarus’ export share in CIS markets keeps shrinking, and dependence on low-priced energy imports and external support has increased recently. To improve growth prospects and reduce vulnerabilities, the authorities need to take the bold step of reducing direct control over the economy. Reducing the government’s role in the economy through price liberalization, privatization and enterprise reform would improve resource allocation and strengthen market incentives. The financial sector—at present largely a vehicle for implementation of government priorities—should become market-based. Relieving SOBs of the obligation to undertake directed lending after the DB becomes operational (and at the same time, making sure that the DB itself is run on prudent and transparent principles) is the crucial next step in the process.

40. Initiating new program negotiations would require consensus among the authorities on a strong and consistent stabilization and reform strategy. The mission exchanged views with the authorities on the prospects for a Fund-supported program, which was requested by the authorities in May 2011. In view of the loss of policy credibility following the loosening of policies in 2010, the main barrier to beginning negotiations has been the absence of a clear commitment by all of the key players. The authorities have been doing most of the right things, but cannot commit to give up growth and wage targets that are inconsistent with stability. They are also ambivalent about the deep structural reform that would be needed. The staff believes that a new program must be sufficiently strong and credible to garner the support of the IMF’s membership. Unequivocal commitment by all leading policymakers to strong program objectives would be an essential first step.

41. It is recommended that the next Article IV consultation with Belarus be held on the standard 12-month cycle.

Appendix I. Table 1.Belarus: External Debt Sustainability Framework, 2007–17(Percent of GDP, unless otherwise indicated)
ActualProjections 1/
20072008200920102011201220132014201520162017Debt-stabilizing noninterest current account 7/
Baseline: external debt26.525.045.651.161.460.459.557.356.656.355.7-6.2
Change in external debt9.0-1.520.65.510.4-1.1-0.9-2.2-0.7-0.3-0.6
Identified external debt-creating flows (4+8+9)-0.1-1.814.97.73.81.10.90.0-0.4-0.8-0.7
Current account deficit, excluding interest payments6.17.411.513.98.73.14.24.44.24.44.2
Deficit in balance of goods and services6.27.611.313.53.0-1.9-0.30.10.61.21.3
Exports61.061.050.554.284.689.588.888.386.985.885.0
Imports67.268.661.867.787.687.688.588.587.586.986.3
Net non-debt creating capital inflows (negative)-3.6-3.3-3.5-2.3-6.7-3.4-3.8-3.9-4.0-4.2-4.1
Automatic debt dynamics 2/-2.6-5.96.9-3.81.91.30.5-0.5-0.7-0.9-0.8
Contribution from nominal interest rate0.60.81.01.11.83.12.42.01.91.71.8
Contribution from real GDP growth-1.2-2.0-0.1-3.1-2.7-1.8-1.9-2.5-2.6-2.6-2.6
Contribution from price and exchange rate changes 3/-2.0-4.75.9-1.82.8
Residual, incl. change in gross foreign assets (2-3) 4/9.10.35.7-2.26.6-2.1-1.8-2.2-0.30.50.1
External debt-to-exports ratio (percent)43.440.990.294.372.667.467.064.965.265.665.5
Gross external financing need (billions of U.S. dollars) 5/8.013.414.718.819.621.322.623.224.024.125.2
Percent of GDP17.722.029.934.035.637.136.835.834.932.731.8
Scenario with key variables at their historical averages 6/60.456.651.949.447.846.2-8.1
Key Macroeconomic Assumptions Underlying Baseline
Real GDP growth (percent)8.610.20.27.75.33.03.44.44.84.95.0
GDP deflator in U.S. dollars (percent change)12.721.7-19.14.2-5.21.03.31.21.61.82.4
Nominal external interest rate (percent)4.04.33.32.83.55.24.33.53.53.23.4
Growth of exports (U.S. dollar terms, percent)24.234.2-32.920.356.110.06.05.14.75.56.5
Growth of imports (U.S. dollar terms, percent)28.037.0-27.022.829.34.07.95.65.46.16.7
Current account balance, excluding interest payments-6.1-7.4-11.5-13.9-8.7-3.1-4.2-4.4-4.2-4.4-4.2
Net nondebt creating capital inflows3.63.33.52.36.73.43.83.94.04.24.1

Projections are shown at the official exchange rate.

Derived as [r - g - r(1+g) + ea(1+r)]/(1+g+r+gr) times previous period debt stock, with r = nominal effective interest rate on external debt; r = change in domestic GDP deflator in U.S. dollar terms, g = real GDP growth rate, e = nominal appreciation (increase in dollar value of domestic currency), and a = share of domestic-currency denominated debt in total external debt.

The contribution from price and exchange rate changes is defined as [-r(1+g) + ea(1+r)]/(1+g+r+gr) times previous period debt stock. r increases with an appreciating domestic currency (e > 0) and rising inflation (based on GDP deflator).

For projection, line includes the impact of price and exchange rate changes.

Defined as current account deficit, plus amortization on medium- and long-term debt, plus short-term debt at end of previous period.

The key variables include real GDP growth; nominal interest rate; dollar deflator growth; and both non-interest current account and non-debt inflows in percent of GDP.

Long-run, constant balance that stabilizes the debt ratio assuming that key variables (real GDP growth, nominal interest rate, dollar deflator growth, and non-debt inflows in percent of GDP) remain at their levels of the last projection year.

Projections are shown at the official exchange rate.

Derived as [r - g - r(1+g) + ea(1+r)]/(1+g+r+gr) times previous period debt stock, with r = nominal effective interest rate on external debt; r = change in domestic GDP deflator in U.S. dollar terms, g = real GDP growth rate, e = nominal appreciation (increase in dollar value of domestic currency), and a = share of domestic-currency denominated debt in total external debt.

The contribution from price and exchange rate changes is defined as [-r(1+g) + ea(1+r)]/(1+g+r+gr) times previous period debt stock. r increases with an appreciating domestic currency (e > 0) and rising inflation (based on GDP deflator).

For projection, line includes the impact of price and exchange rate changes.

Defined as current account deficit, plus amortization on medium- and long-term debt, plus short-term debt at end of previous period.

The key variables include real GDP growth; nominal interest rate; dollar deflator growth; and both non-interest current account and non-debt inflows in percent of GDP.

Long-run, constant balance that stabilizes the debt ratio assuming that key variables (real GDP growth, nominal interest rate, dollar deflator growth, and non-debt inflows in percent of GDP) remain at their levels of the last projection year.

Appendix I. Figure 1.Belarus: External Debt Sustainability: Bound Tests of the Baseline Scenario 1/

(External debt in percent of GDP)

Source: IMF staff estimates.

1/ Shaded areas represent actual data. Individual shocks are permanent one-half standard deviation shocks. Figures in the boxes represent average projections for the respective variables in the baseline and scenario being presented. Ten-year historical average for the variable is also shown. Projections are shown at the official exchange rate.

2/ Permanent 1/4 standard deviation shocks applied to real interest rate, growth rate, and current account balance.

3/ One-time real depreciation of 30 percent occurs in 2012.

Appendix I. Table 2.Belarus: Public Sector Debt Sustainability Framework, 2007–17(Percent of GDP, unless otherwise indicated)
ActualProjections
20072008200920102011201220132014201520162017Debt-stabilizing primary balance 9/
Baseline: public sector debt 1/18.321.734.941.050.637.733.629.026.925.824.80.3
Of which: foreign-currency denominated6.56.818.921.627.825.124.521.920.920.720.2
Change in public sector debt10.13.413.16.19.5-12.8-4.1-4.6-2.1-1.0-1.0
Identified debt-creating flows (4+7+12)-13.9-14.70.2-0.93.7-22.6-10.4-6.7-4.0-2.6-1.6
Primary deficit-11.0-14.5-0.11.1-4.3-2.1-1.4-1.0-0.6-0.30.0
Revenue and grants49.550.645.741.642.039.239.238.938.538.438.1
Primary (noninterest) expenditure38.536.145.642.737.737.137.737.937.938.038.1
Automatic debt dynamics 2/-1.0-4.11.7-3.99.3-20.4-8.6-5.4-3.1-1.8-1.3
Contribution from interest rate/growth differential 3/-1.0-4.0-0.4-5.1-15.2-20.4-8.6-5.4-3.1-1.8-1.3
Of which: contribution from real interest rate-0.5-2.6-0.4-2.8-13.9-19.6-7.7-4.2-1.9-0.6-0.1
Of which: contribution from real GDP growth-0.6-1.40.0-2.3-1.3-0.8-0.9-1.2-1.2-1.2-1.2
Contribution from exchange rate depreciation 4/0.00.02.11.224.6
Other identified debt-creating flows-1.93.9-1.41.9-1.3-0.1-0.3-0.4-0.4-0.5-0.4
Privatization receipts (negative)-2.6-1.0-1.4-0.6-7.4-1.6-1.8-1.9-1.9-2.0-1.9
Recognition of implicit or contingent liabilities0.00.00.00.00.00.00.00.00.00.00.0
Other (specify, e.g. bank recapitalization)0.74.90.02.56.11.51.51.51.51.51.5
Residual, including asset changes (2-3) 5/24.018.012.97.05.89.86.32.01.91.60.6
Public sector debt-to-revenue ratio 1/37.142.976.498.6120.496.285.974.669.767.465.2
Gross financing need 6/-0.80.31.15.05.18.57.07.27.25.35.4
Billions of U.S. dollars-0.40.20.52.72.84.94.34.65.03.94.3
Scenario with key variables at their historical averages 7/37.730.723.618.615.211.1-0.2
Scenario with no policy change (constant primary balance) in 2011–1637.728.725.019.818.113.3-0.6
Key Macroeconomic and Fiscal Assumptions Underlying Baseline
Real GDP growth (percent)8.610.20.27.75.33.03.44.44.84.95.0
Average nominal interest rate on public debt (percent) 8/7.24.23.82.34.97.66.77.27.87.16.2
Average real interest rate (nominal rate minus change in GDP deflator, percent)-5.6-17.0-1.9-8.8-53.4-67.7-27.1-14.9-7.1-2.2-0.3
Nominal appreciation (increase in U.S. dollar value of local currency, percent)0.30.5-23.5-6.9-64.1
Inflation rate (GDP deflator, percent)12.821.25.711.158.375.333.922.114.99.26.5
Growth of real primary spending (deflated by GDP deflator, percent)6.93.726.51.0-6.91.65.24.94.95.25.3
Primary deficit-11.0-14.5-0.11.1-4.3-2.1-1.4-1.0-0.6-0.30.0

Gross debt of general government (including guarantees) and of monetary authorities.

Derived as [(r - π(1+g) - g + αε(1+r)]/(1+g+π+gπ)) times previous period debt ratio, with r = interest rate; π = growth rate of GDP deflator; g = real GDP growth rate; α = share of foreign-currency denominated debt; and e = nominal exchange rate depreciation (measured by increase in local currency value of U.S. dollar).

The real interest rate contribution is derived from the denominator in footnote 2/ as r - π (1 +g) and the real growth contribution as -g.

The exchange rate contribution is derived from the numerator in footnote 2/ as απ(1+r).

For projections, this line includes exchange rate changes.

Defined as public sector deficit, plus amortization of medium and long-term public sector debt, plus short-term debt at end of previous period.

The key variables include real GDP growth; real interest rate; and primary balance in percent of GDP.

Derived as nominal interest expenditure divided by previous period debt stock.

Assumes that key variables (real GDP growth, real interest rate, and other identified debt-creating flows) remain at the level of the last projection year.

Gross debt of general government (including guarantees) and of monetary authorities.

Derived as [(r - π(1+g) - g + αε(1+r)]/(1+g+π+gπ)) times previous period debt ratio, with r = interest rate; π = growth rate of GDP deflator; g = real GDP growth rate; α = share of foreign-currency denominated debt; and e = nominal exchange rate depreciation (measured by increase in local currency value of U.S. dollar).

The real interest rate contribution is derived from the denominator in footnote 2/ as r - π (1 +g) and the real growth contribution as -g.

The exchange rate contribution is derived from the numerator in footnote 2/ as απ(1+r).

For projections, this line includes exchange rate changes.

Defined as public sector deficit, plus amortization of medium and long-term public sector debt, plus short-term debt at end of previous period.

The key variables include real GDP growth; real interest rate; and primary balance in percent of GDP.

Derived as nominal interest expenditure divided by previous period debt stock.

Assumes that key variables (real GDP growth, real interest rate, and other identified debt-creating flows) remain at the level of the last projection year.

Appendix I. Figure 2.Belarus: Public Debt Sustainability: Bound Tests of Baseline Scenario 1/

(Public debt in percent of GDP)

Source: IMF staff estimates.

1/ Shaded areas represent actual data. Individual shocks are permanent one-half standard deviation shocks. Figures in the boxes represent average projections for the respective variables in the baseline and scenario being presented. Ten-year historical average for the variable is also shown.

2/ Permanent 1/4 standard deviation shocks applied to real interest rate, growth rate, and primary balance.

3/ One-time real depreciation of 30 percent and 10 percent of GDP shock to contingent liabilities occur in 2012 with real depreciation defined as nominal depreciation (measured by percentage fall in dollar value of local currency) minus domestic inflation (based on GDP deflator).

Appendix II: Risk Assessment Matrix
Nature/Source of Main ThreatsOverall Level of Concern
Likelihood of severe Realization of Threat in the Next 1-3 Years (high, medium, low)Expected Impact if Threat is Realized (high, medium, low)
HighHigh
1. Loosening of macroeconomic policies to achieve growth targets.The authorities could loosen policies (increase wages and/or increase credit growth) in the attempt to accelerate economic growth.Loosening of domestic demand policies will lead to significant pressures on the exchange rate and will result in either loss of reserves (if the authorities resist the depreciation) or a resurgence of inflation (if they allow flexible exchange rate).
MediumMedium
2. An external shock in case of intensification of the euro zone crisis.An intensification of the euro zone crisis would produce a spillover effect on Belarus along both trade and financial channels.Belarus does not have sufficient buffers to protect itself from an external shock: the level of reserves is low and gross financing need is high. The effect would depend on the extent to which Russia is affected by the euro area crisis.
Low to MediumMedium
3. Substantial reduction in non-official external debt rollover rates.A worsening of the economic conditions in Belarus and/or in Russia or an increase in global risk aversion could trigger a reduction of the rollover rates of non-official external debt.As about a half of banks’ external debt is short-term (on the residual maturity basis) and the reserves buffer is low, a reduction in the rollover rates would imply strong pressures on the exchange rate.
Low to MediumMedium
4. Weakening bank profitability.Slowdown in economic activity could increase NPLs and require bank recapitalization.Bank recapitalization costs could be significant (in the past, they ranged between 1 and 5 percent of GDP).
Low to MediumMedium
5. Increase in price of gas and oil imported from Russia.Russia could increase domestic price of natural gas, which will increase price of gas for Belarus. In the medium term, the agreement could be renegotiated.As the Belarusian economy is highly dependent on Russian gas, a substantial increase of gas prices would increase gross financing needs. The magnitude of the impact would depend on the pace of gas price increases.
1

The gas agreement covers the period from 2012 to 2014.

2

A $3 billion loan for balance of payments support was approved by the ACF in June 2011. The balance of the loan will be disbursed in four equal disbursements of $440 million in 2012 and 2013. The loan has a 10-year maturity, including a three-year grace period, and was extended at a variable interest rate referenced to the cost of sovereign borrowing by Russia and Kazakhstan. The major elements of the policy package required by the ACF included raising interest rates to positive levels in real terms, exchange rate unification; fiscal discipline; the reduction of LGP to 4 percent of GDP in 2011, 3 percent of GDP in 2012 and 1 percent of GDP in 2013; and privatization generating $2.5 billion in proceeds a year from 2011 to 2013.

3

The baseline scenario assumes a relaxation of monetary policy (a reduction of policy interest rates leading to an acceleration of non-LGP credit), higher-than-planned bank LGPs, and continued growth of budget sector and SOE wages.

4

This approach differs from the one used on earlier staff reports, which assumed that external financing gaps were filled by external borrowing (for example, see 2011 staff report on the first Post-Program Monitoring discussions).

5

In March 2012, staff’s annualized 6-month ahead inflation projection was more than 40 percent.

6

World Bank (2012). Belarus Country Economic Memorandum: Economic Transformation for a Sustained Growth. Report No.66614-BY (forthcoming).

7

Conway et al., 2009, “Product Market Deregulation in Russia,” OECD Economics Department Working Papers, No. 742, pp. OECD Publishing.

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