The Belarusian authorities appreciate the useful dialogue with the Fund staff during the 2013 Article IV Consultation and the fourth Post-Program Monitoring discussions. They broadly agree with the staff’s assessment of the current macroeconomic situation and their recommendations on economic and financial policies. The Fund’s continuous technical assistance across the spectrum of macroeconomic management issues is also greatly appreciated.
Macroeconomic Developments in 2012
Since the fall of 2011, Belarus has been steadfastly pursuing a set of policies with a firm focus on macroeconomic stabilization. The floating exchange rate regime, monetary tightening, and disciplined fiscal stance have enabled the authorities to address vulnerabilities in a consistent manner. The implementation of these policies in 2012 has ensured financial stability and macroeconomic balance as is evidenced by:
- a drastic reduction in the rate of inflation—inflation was brought down to 21.8 percent in 2012, as compared to 108.7 percent in 2011, broadly in line with the authorities’ projections;
- stable and predictable exchange rate—the exchange rate has been determined by the demand and supply for foreign currency in the domestic market with limited central bank interventions; during 2012, the rubel depreciated by 2.6 percent against the U.S. dollar;
- preservation of international reserves—foreign exchange reserves have recovered from the 2011 slump and amounted to US$ 8.1 billion as of January 1, 2013 while all external and domestic foreign exchange obligations of the state were fully honored;
- improved balance of payments—the trade balance improved from a deficit of 2 percent of GDP in 2011 to a surplus of 4.6 percent of GDP in 2012; this in turn eased pressure on the current account deficit which narrowed from 8.5 percent of GDP at the end of 2011 to 2.9 percent of GDP in 2012 and was covered by a net inflow of foreign direct investments (2.2percent of GDP) and external borrowing;
- stable domestic financial market—the banks remained adequately capitalized at 20.85 with an admissible share of non-performing loans of 5.5percent as of January 1, 2013; in total, rubel deposits grew by 58percent, of which household deposits in the national currency grew by 75 percent, reflecting the growing confidence in the banking system and progress in addressing dollarization; and
- strengthened social stability—households’ incomes returned to the pre-crisis level.
On April 17, 2013, Standard & Poor’s revised its sovereign rating outlook on Belarus and, subsequently, the outlook on Belarus’ capital, Minsk, and major banks to positive from stable. On April 30, 2013, the Eurasian Anti-Crisis Fund made a fifth disbursement of US$ 440 million in recognition of the progress achieved by Belarus in meeting its targets under the US$ 3 billion stabilization arrangement.
In 2012, GDP grew by 1.5 percent. The modest growth pace in 2012 is attributable to policy tightening in line with the authorities’ commitment to maintaining stability as well as to adverse external developments that affected Belarus’ exports in the second half of 2012.
Developments in 2013 and Short-Term Outlook
In 2013, strengthening macroeconomic fundamentals for a balanced growth remains the overarching objective. The authorities reconfirm their commitment to building strong macroeconomic fundamentals as a pre-requisite for sustainable long-term economic growth. A balanced budget, conservative monetary policy, and flexible exchange rate will continue to be their principal macroeconomic policy instruments.
Growth has been moderate in the first four months of 2013. The economy expanded by 2.5 percent, mirroring both the continuous decline in demand in Belarus’ main trading partners and additional policy tightening aimed at containing inflation. On the positive side, labor productivity outpaced GDP growth in the first quarter (3.5 percent) and increased by 4.5 percent. The balance of trade in goods and services in January-March was positive at US$ 426.4 million, or 3 per cent of GDP.
The focus is on containing inflation. In response to a surge in inflation of 3.0 percent in January, remedial measures were taken to bring it down to 1.2 percent in February, 1.1 percent in March and further to 0.5 percent in April. This downward trend is expected to continue and allows the authorities to be confident that the inflation target for 2013 of 12 percent (December to December) will be met. An analysis shows that, as was the case in 2012, inflation has been largely fueled by the need to increase regulated utility and public transport tariffs and to raise excise taxes under the Common Economic Space price alignment agreements. Core inflation, in turn, rose by 2.8 percent in January and, following a prompt monetary response, dropped to 0.6 percent in February and 0.6 percent in March. In view of these factors, readjustments in the plan to increase utility tariffs may be warranted at this junction but the objective to reach full utility cost coverage in 2015 remains unchanged.
Real interest rates are firmly positive. Strengthened monetary and exchange stability, weak demand for credit and the evident downward inflation trajectory have increased the real value of the refinancing rate to above 10 percent p.a. In these circumstances, very high interest rates in the economy (at about 40 percent p.a. for new deposits in February-March) have led to the fastest growth in household rubel deposits over the last 10 years. While the demand for credit continues to be low, these developments begin to adversely affect the balance of assets and liabilities of the banking sector. In addition, a considerable growth of household deposits coupled with a high supply of foreign exchange in the market has boosted rubel liquidity of the banking system and necessitated costly remedial actions for draining excess liquidity. These factors facilitated a policy of gradual and careful decrease in interest rates. The current refinance rate of 25 percent is strongly positive in real terms relative to both the authorities’ and staff’s inflation projections. Nevertheless, the authorities are closely monitoring the developments and stand ready to tighten monetary policy if inflationary pressures resume or macroeconomic and financial stability is threatened.
Fiscal policy continues to be disciplined, resulting in a general government budget surplus of 2.9 percent of GDP in January-March 2013. The central government budget balance also showed a surplus of 0.7 percent of GDP. The authorities are committed to maintaining a prudent fiscal stance to ensure a balanced budget in 2013. In line with the overall stabilization effort of the government, lending under government programs with the use of public resources has been reduced and remains strictly limited at about 1 percent of GDP during 2013. The authorities remain committed to continue with this approach to government support, with the aim to pass the lending under government programs over to the Development Bank as it builds capacity in the regions while reducing such support to the minimum. The approach to wages in the budgetary sector continues to be prudent: while the budget envisions a 7 percent increase in real wages, a major restructuring of the government is underway, including a reduction of 13,600 civil servant positions at the central and local levels to be completed by July 1, 2013. As in 2012, there are no plans to recapitalize state owned banks.
The public debt remains at a sustainable level. As of January 1, 2013, the gross public debt amounted to 23.8 percent of GDP, of which the external debt accounted for 19 percent of GDP, far below the national economic security threshold of 45 percent of GDP and the Maastricht criterion of 60 percent of GDP. The government makes timely debt payments and has sufficient capacity to honor all its external and domestic obligations. A set of instruments to refinance the debt is also available. Since the yields on Belarus’ sovereign bonds have fallen markedly below the pre-crisis level, tapping the international markets remains an option open to the authorities. Since October 2012, the government has also been active in issuing foreign exchange denominated bonds in the domestic financial market.
Belarus has emerged from the macroeconomic crises of the past years, but these challenges have reinforced the need for structural reforms to regain competitiveness, diversify and modernize Belarus’ economic structure, and create sustainable and productive jobs. For Belarus to achieve further growth and social development, it needs to strengthen the environment to allow its enterprises to dynamically adapt to the demands of an increasingly competitive global economy.
In order to achieve these goals, the authorities’ priorities are to: (i) enhance economic efficiency; (ii) increase investment efficiency and facilitate the growth of FDI; (iii) promote innovations; (iv) increase the GDP share of SMEs; (v) reduce dependence on energy imports and energy intensity; (vi) provide incentives for productive labor; (vii) increase financial efficiency and mobilize resources for modernization in the real sector; and (viii) strengthen the institutional infrastructure to facilitate public/private interface (property rights, efficient rules, financial intermediation).
Following a fruitful dialogue among key stakeholders including the authorities, business associations, civil society and development partners, actions to achieve these objectives have been incorporated into a new World Bank Group Country Partnership Strategy (CPS) for Belarus, which is scheduled for the Bank Board consideration in early June 2013. The cornerstone of the CPS is to support reforms aimed at improving competitiveness of the economy by structural transformations, including reducing the size of the government, transforming the SOE sector, promoting private and financial sector development, and facilitating integration into the global economy. The CPS contains a combination of financial support. A wide range of analytical and advisory activities and a comprehensive results matrix with specific outcomes and milestones has been designed to measure progress. The authorities reiterate their view that a Fund program focusing on issues within the Fund’s purview to complement and reinforce reforms could be exceptionally useful.