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Republic of Belarus: Staff Report for the 2014 Article IV Consultation

Author(s):
International Monetary Fund. European Dept.
Published Date:
July 2014
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Context

1. After two crises in four years, growth has slowed amid bouts of external pressures. Following average annual GDP growth of 8 percent during 1997–2008, in the aftermath of the 2008 and 2011 crises growth reached only 1.7 percent in 2012 and 0.9 percent in 2013 reflecting structural limitations of the economy and a weak external environment (Figure 1, Table 1). Repeated attempts by the authorities to boost activity through domestic policy stimulus, while delaying much-needed structural reform, have resulted in rapidly rising external imbalances and recurrent bouts of exchange rate pressures, which have in turn given rise to frequent, though modest, policy shifts in short-term efforts to maintain stability.

Figure 1.Belarus: Real Sector Developments, 2002–14

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

Table 1.Belarus: Selected Economic Indicators (Baseline Scenario), 2011–19
201120122013201420152016201720182019
Prel.Proj.
(Percentage change)
National accounts
Real GDP5.51.70.90.91.82.22.42.52.7
Total domestic demand3.42.68.91.42.21.72.12.12.4
Consumption1.08.29.21.72.51.92.22.22.3
Nongovernment2.310.712.12.02.82.12.52.42.6
Government−3.6−1.0−2.60.01.01.01.01.01.0
Investment7.8−6.68.40.81.71.31.82.12.5
Of which: fixed13.9−11.37.50.91.81.41.92.12.6
Net exports 1/3.4−0.9−7.6−0.9−0.60.1−0.1−0.1−0.1
Consumer prices
End of period108.721.816.516.315.415.916.316.516.5
Average53.259.218.316.815.815.816.116.516.5
Monetary accounts
Reserve money84.161.613.427.829.630.331.931.331.9
Rubel broad money64.157.216.428.430.530.832.331.632.2
(Percent of GDP, unless otherwise indicated)
External debt and balance of payments
Current account balance−8.5−2.9−10.1−8.8−7.5−6.2−5.6−5.2−5.0
Trade balance−5.80.9−6.3−6.8−6.2−4.9−4.3−3.5−3.2
Exports of goods68.571.651.043.943.341.640.338.837.1
Imports of goods−74.3−70.8−57.3−50.7−49.5−46.5−44.6−42.3−40.3
Gross external debt57.754.253.851.450.750.049.649.248.4
Public 2/25.023.122.020.518.418.117.917.517.2
Private (mostly state-owned-enterprises)32.731.031.831.032.331.931.831.731.1
Savings and investment
Gross domestic investment37.635.438.738.137.937.537.336.836.5
Government5.16.46.76.76.76.76.76.76.7
Nongovernment32.528.932.131.531.330.930.630.229.8
National saving29.232.528.629.330.431.331.731.631.5
Government 3/2.27.05.83.33.12.61.91.20.6
Nongovernment 3/26.925.522.726.027.428.829.830.431.0
Public sector finance
General government balance2.80.70.2−0.5−0.8−1.3−2.0−2.6−3.3
Augmented general government balance 4/−2.90.5−0.8−3.3−3.6−4.1−4.8−5.4−6.1
Augmented general government balance incl. new directed lending−12.1−4.0−6.3−7.0−9.0−9.5−10.2−10.9−11.5
Of which: new directed lending (incl. Development Bank) 5/9.34.55.43.75.45.45.45.45.4
Revenue38.840.542.041.842.342.542.742.843.0
Expenditure 6/41.640.042.845.245.946.647.448.349.1
Of which:
Wages6.36.56.97.07.17.27.37.47.5
Subsidies and transfers7.37.67.57.57.57.57.57.57.5
Investment5.16.46.76.76.76.76.76.76.7
Gross public debt 7/45.938.537.035.535.136.638.740.943.4
Memorandum items:
Nominal GDP (billions of U.S. dollars)606472
Nominal GDP (trillions of rubels)2975306378269861,1761,4021,6691,985
Terms of trade, percentage change6.06.81.71.91.30.91.30.50.1
Official reserves (billions of U.S. dollars)7.98.16.73.61.91.31.11.01.0
Months of imports of goods and services1.92.11.80.90.50.30.30.30.2
Percent of short-term debt56.963.847.125.313.29.07.26.86.6
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.

The augmented balance adds to the balance of the general government outlays for banks recapitalizations and related to called guarantees of publicly guaranteed debt.

Net changes in stock at current exchange rate.

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.

The augmented balance adds to the balance of the general government outlays for banks recapitalizations and related to called guarantees of publicly guaranteed debt.

Net changes in stock at current exchange rate.

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).

2. High external financing needs and dwindling buffers leave Belarus highly dependent on external financial support. Without more decisive policy changes to reduce imbalances, and with another year of large external payments ahead, Belarus is highly dependent on external support. Russia has promised $2 billion in loans, but modalities for this support are still being worked out and at the time of this report only $450 million has been disbursed. Meanwhile, the decision on the final $440 million tranche under the program with the Anti Crisis Fund (ACF) of the Eurasian Community has been suspended until the second half of 2014 because of noncompliance with program conditionality. Lack of progress on policies also continues to prevent discussions on a Fund program.

Gross International Reserves

(Billions of U.S. dollars)

Source: National Bank of the Republic of Belarus.

Recent Developments

3. The current account deteriorated sharply in 2013 reflecting expansionary policies and a weakening external environment. After the balance of payments position had improved on temporary factors in 2012 the current account balance worsened rapidly in 2013, reaching a deficit of 10 percent of GDP (Figure 2, Table 2). In part the deterioration reflected slowing growth in Russia, but it was further fueled by rapid wage and directed lending growth—which boosted domestic demand—and an ongoing real appreciation of the exchange rate. A disruption of potash exports compounded the deterioration.

Figure 2.Belarus: External Sector, 2010–14

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

Table 2.Belarus: Balance of Payments (Baseline Scenario), 2011–19 1/(In millions of U.S. dollars; unless otherwise indicated)
201120122013201420152016201720182019
Prel.Proj.
Current account balance−5,053−1,839−7,276−6,833−6,148−5,456−5,132−5,010−5,055
Trade balance (goods)−3,467565−4,540−5,275−5,103−4,323−3,947−3,364−3,241
Energy balance−4,343−1,675−707−572−1,227−1,272−1,577−1,857−2,418
Nonenergy balance8762,240−3,833−4,703−3,875−3,051−2,370−1,507−824
Exports40,92845,57436,57134,11635,58436,43437,16437,50637,819
Energy14,27216,08111,74011,99211,05810,85610,49310,23010,001
Nonenergy26,65529,49324,83122,12424,52725,57726,67127,27627,818
Imports−44,394−45,009−41,111−39,391−40,687−40,756−41,111−40,870−41,060
Energy−18,615−17,756−12,447−12,564−12,285−12,128−12,070−12,087−12,419
Nonenergy−25,779−27,253−28,664−26,827−28,402−28,628−29,041−28,782−28,641
Services, net2,2582,2922,5812,7302,9813,0553,1342,9763,025
Income, net−1,361−1,473−2,741−1,554−1,492−1,687−2,002−2,298−2,532
Transfers, net 2/−2,482−3,223−2,576−2,734−2,535−2,501−2,317−2,324−2,306
Capital and financial accounts4,5691,0737,0895,0634,5334,8734,8774,9635,033
Capital account4444815302930
Financial account4,5641,0697,0855,0594,5264,8584,8484,9345,003
Overall FDI, net3,8771,3082,0602,0242,3912,5022,5712,9073,057
Portfolio investment, net854−190−59000000
Trade credits, net575−1,7892299200168177171180
Loans, net5309444,3722,5801,5141,8031,7451,5641,482
Government and monetary authorities, net−3273141,5381,645385723742643629
Banks, net701251,396528681656625607544
Other sectors, net7885061,438406448424377314309
Other, net−1,272796690356421385355293285
Errors and omissions1,03587291000000
Overall balance551106−96−1,770−1,615−583−254−47−21
Financing−551−106961,7701,6155832544721
Gross official reserves (“-” denotes an increase)−2,791−818573,0511,7005832544721
Use of IMF credit (+)0−465−1,641−1,282−850000
Other donors and exceptional financing items2,240440880000000
Memorandum items:
Current account balance (in percent of GDP)−8.5−2.9−10.1−8.8−7.5−6.2−5.6−5.2−5.0
Total external debt (in percent of GDP)57.754.253.851.450.750.049.649.248.4
Gross official reserves (end-of-period)7,9168,0956,6513,6001,8991,3161,0621,015994
In months of imports of goods and services1.92.11.80.90.50.30.30.30.2
In percent of short-term debt56.963.847.125.313.29.07.26.86.6
Export volume (annual percentage change)33.011.0−17.41.11.41.71.41.41.5
Import volume (annual percentage change)15.99.4−7.21.92.00.91.31.21.5
Sources: Belarus authorities; and IMF staff estimates.

Data compiled based on BPM6.

Values for 2011-19 include transfer of export duty on oil products to the Russian budget.

Sources: Belarus authorities; and IMF staff estimates.

Data compiled based on BPM6.

Values for 2011-19 include transfer of export duty on oil products to the Russian budget.

Trade Balance of Goods

(Billions of U.S. dollars)

Source: National Bank of the Republic of Belarus.

4. As short-term risks increased, policies became more cautious from the second half of 2013. After the summer, when the scale of the current account deterioration became gradually apparent and the demand for dollar deposits rose sharply, the authorities made several policy changes. Specifically, wage increases were paused and the exchange rate was allowed to depreciate somewhat faster. Also, monetary policy was temporarily tightened during July–November, until the NBRB switched to direct control of credit volumes in the last quarter of the year. The latter caused a sharp squeeze in commercial credit, as directed lending continued unabated. The combined measures managed to stem deposit conversions and helped quell exchange market pressure, but they were insufficient to reduce inflation, which has persisted at around 16½ percent (Figure 3).

Figure 3.Belarus: Inflation and Wage Developments, 2010–14

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

Average Monthly Wages

(Nominal, economy-wide)

Sources: Belarusian authorities; and IMF staff calculations.

Credit tothe Economy

(Trillions of Belarusian Rubles)

5. Developments in early 2014 were mixed and affected by seasonal factors. The trade balance improved markedly, reaching a small surplus, mainly on a sharp decline in imports. While this improvement appears to large extent a seasonal phenomenon—the trade balance tends to improve sharply in the first quarter to then gradually deteriorate during the year—the turnaround may have been particularly pronounced owing to tight external financing conditions in early 2014. Meanwhile, first quarter growth surprised on the upside (+0.5 percent y-o-y), but this was influenced by a large investment project and unlikely to be sustainable. Policies were on hold in early 2014, with the notable exception of monetary policy which is gradually being loosened. The authorities continue to pursue GDP growth (3.3 percent) and real income (3 percent) targets in 2014, but in contrast to previous years, emphasis on these objectives in policy statements has been muted.

Contributions to GDP Growth

(Year-on-year, percent)

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

Trade Balance (Goods and Services), 2013-14

(Percent of GDP)

Outlook and Risks

6. The outlook is for continued slow growth and persistent external imbalances. With very weak Russian growth weighing on external demand and with domestic demand slowing, only 0.9 percent GDP growth is expected this year. Thereafter, activity remains constrained by structural deficiencies and structurally reduced growth prospects in Russia, which prompt a downward revision of Belarus’ medium-term growth to about 2¾ percent. Inflation is forecast to remain around 16 percent on rubel depreciation and high inflation expectations. The current account deficit is projected at 8¾ percent of GDP in 2014 on weak external demand, low competitiveness, and a policy mix that continues to be too loose. Going forward, limited financing and increasingly low reserves do not permit such high deficits. Therefore, the staff’s stylized baseline scenario assumes gradual exchange rate depreciation that brings about sufficient current account improvement to prevent full depletion of reserves, but not enough to address imbalances and rebuild buffers. Hence, the baseline scenario implies continued very high vulnerabilities throughout the forecast period. Without the stylized assumptions of the baseline, vulnerabilities and the risk of a disorderly adjustment are even higher.

7. Risks are high and tilted to the downside. The main risks are for further balance of payments deterioration and external financing shortfalls. Ongoing developments in Ukraine also pose risks—notably through their impact on Russia—as does possible protracted slow growth in other trade partners (Box 1). Meanwhile, banking sector risks remain substantial on weak loan portfolios and rapid FX lending growth. On the upside, higher-than-envisaged support from Russia or other donors, or successful privatization of a large Belarusian company could alleviate short-term financing constraints.

Policy Discussions

8. Discussions focused on policies to facilitate external adjustment and mitigate risks. The staff’s adjustment scenario illustrates that consistent implementation of sound macro policies and structural reform—in line with staff recommendations—would allow for a steady reduction of external imbalances, strengthening of reserve buffers, and higher medium-term growth (Figure 4, Table 3). Specifically, improving competitiveness and cautious management of domestic demand should prompt a sustained reversal in the current account, while positive confidence effects from structural reform would attract higher FDI. Under these conditions, reserves could be rebuilt and reach about 4 months of import cover by 2019. As reforms take hold, medium-term, sustainable growth could reach close to 5 percent in an environment of single-digit inflation.

Figure 4.Belarus: Baseline and Adjustment Scenarios, 2012–19

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

1/ The broadly constant 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.

Table 3.Belarus: Selected Economic Indicators (Adjustment Scenario), 2011–19
201120122013201420152016201720182019
Prel.Proj.
(Percentage change)
National accounts
Real GDP5.51.70.90.51.22.03.24.04.8
Total domestic demand3.42.68.90.50.71.01.92.83.5
Consumption1.08.29.20.60.70.81.72.83.7
Nongovernment2.310.712.10.50.70.61.83.04.2
Government−3.6−1.0−2.61.01.01.51.51.51.5
Investment7.8−6.68.40.30.51.42.42.83.1
Of which: fixed13.9−11.37.50.30.51.52.52.93.3
Net exports 1/3.4−0.9−7.60.00.40.80.90.80.7
Consumer prices
End of period108.721.816.516.210.29.38.27.15.8
Average53.259.218.316.310.79.18.27.16.0
Monetary accounts
Reserve money84.161.613.413.319.325.626.728.529.1
Rubel broad money64.157.216.413.419.926.227.329.029.6
(Percent of GDP; unless otherwise indicated)
External debt and balance of payments
Current account balance−8.5−2.9−10.1−8.1−6.6−4.7−3.2−2.0−0.6
Trade balance−5.80.9−6.3−5.7−4.0−2.3−0.90.71.8
Exports of goods68.571.651.053.353.651.248.647.644.2
Imports of goods−74.3−70.8−57.3−59.0−57.6−53.5−49.5−46.9−42.4
Gross external debt57.754.253.853.351.949.447.244.842.1
Public 2/25.023.122.023.521.721.220.820.218.1
Private (mostly state-owned-enterprises)32.731.031.829.830.228.226.524.624.0
Savings and investment
Gross domestic investment37.635.438.737.536.737.738.739.139.9
Government5.16.46.77.17.37.37.57.57.5
Nongovernment32.528.932.130.429.430.431.231.632.4
National saving29.232.528.629.430.133.035.537.139.3
Government 3/2.27.05.84.24.54.44.75.75.7
Nongovernment 3/26.925.522.725.225.628.630.831.433.6
Public sector finance
General government balance2.80.70.20.00.00.00.00.00.0
Augmented general government balance 4/−2.90.5−0.8−2.9−2.8−2.8−2.8−1.8−1.8
Augmented general government balance incl. new directed lending−12.1−4.0−6.3−4.9−3.8−3.8−3.8−2.8−2.8
Of which: new directed lending (incl. Development Bank) 5/9.34.55.42.01.01.01.01.01.0
Revenue38.840.542.042.042.042.042.042.042.0
Expenditure 6/41.640.042.844.944.844.844.843.843.8
Of which:
Wages6.36.56.96.96.96.96.96.96.9
Subsidies and transfers7.37.67.56.96.66.35.75.55.3
Investment5.16.46.77.17.37.37.57.57.5
Gross public debt 7/45.938.537.237.836.937.137.236.134.7
Memorandum items:
Nominal GDP (billions of U.S. dollars)606472
Nominal GDP (trillions of rubels)2975306377017919011,0111,1191,333
Terms of trade, percentage change6.06.81.73.51.20.51.00.50.4
Official reserves (billions of U.S. dollars)7.98.16.75.25.67.19.312.917.1
Months of imports of goods and services1.92.11.81.41.52.02.63.43.9
Percent of short-term debt56.963.847.136.438.848.863.687.2113.6
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.

The augmented balance adds to the balance of the general government outlays for banks recapitalizations and related to called guarantees of publicly guaranteed debt.

Net changes in stock at current exchange rate.

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.

The augmented balance adds to the balance of the general government outlays for banks recapitalizations and related to called guarantees of publicly guaranteed debt.

Net changes in stock at current exchange rate.

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).

Box 1.Belarus: Possible Spillovers from Regional Geopolitical Tensions

For now there are no clear spillovers to Belarus from the geopolitical tensions surrounding Russia and Ukraine. However, spillovers may occur through several channels (listed below in approximate order of importance).

  • Russian support. Belarus is highly dependent on Russian support, not only through loans but also via heavily discounted energy prices. It is unclear if the recent changes in Russia’s relationship with Ukraine have implications for Belarus, and if so in what direction (more, or less support).

Energy Support from Russia, 2012-13(In percent of GDP)
20122013
Total support14.912.7
Implied subsidy on oil imports12.610.9
Implied subsidy on gas imports8.36.6
Discounted oil product exports to Russia−0.1−0.2
Transfer to the Russian budget of the export duty on oil products−6.0−4.6
Sources: NBRB; Belstat; and IMF staff estimates and calculations.
Sources: NBRB; Belstat; and IMF staff estimates and calculations.
  • Trade. Growth in Russia—the destination of 35 percent of Belarus’ exports—is expected to suffer as a result of sanctions, reduced confidence, and higher interest rates. Ukraine—accounting for 12 percent of Belarus’ exports and a positive bilateral trade balance worth US$2 billion—is also a significant trade partner. It is, however, also a (potential) competitor, including for the transit of Russian gas to Europe, resulting in both up and downside risks from trade linkages.

  • Competitiveness. The Ukrainian hryvnia and Kazakhstani tenge have depreciated sharply and other CIS exchange rates—including the Russian ruble—may be affected thereby weakening Belarus’ competitiveness and further increasing pressures on the rubel.

  • Financial linkages. Subsidiaries of Russian banks account for a quarter of banking sector assets with two Russian subs being among the five largest banks. The Russian subs rely mostly on their parents for funding and capital and any weakening of the parent banks could have substantial spillovers to Belarus. Also, Russia accounts for about 70 percent of foreign direct investment in Belarus and any substantial declines in these flows could significantly affect Belarus’ balance of payments.

A. Fiscal Policy: Containing Lending Programs and Wages to Curb Demand

9. Quasi-fiscal directed lending operations and wage policies continue to be the key fiscal policy concerns.

  • Lending. The flow of new subsidized lending increased 35 percent—reaching 5½ percent of GDP—in 2013, thereby fueling domestic demand, raising the share of subsidized credit in overall lending, and adding to concerns about the efficiency of credit allocation. It also created contingent fiscal liabilities as a likely large share of lending was directed at ailing sectors and enterprises. While new lending has increasingly taken place through the Development Bank (DB), growth of directed lending in state banks also continues to be high, validating concerns that the DB has become an additional source of subsidized credit instead of a consolidating institution as originally envisaged. Faced with increasing financing constraints, for 2014 the authorities have adopted a “Financing Plan” that identifies and sets a binding limit on the combined subsidized lending volumes of the DB and other banks (though it excludes subsidized housing lending). Staff estimates that the plan implies a flow of new directed lending on the order of 3¾ percent of GDP.

Subsidized Lending Crowds Out Market Lending

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

  • Wages. Despite a marked moderation in the second half of the year, average economy-wide wages rose 6 percent in 2013 in real terms, thereby exceeding productivity growth (estimated at 1½ percent) by a large margin. The increases—led by government targets—translated into high consumption growth and a further decline in wage competitiveness (Box 2). For 2014, the authorities are planning a real income increase of 3 percent. However, the real wage increase over January—March (abstracting from the seasonal December spike) amounted already to 4.6 percent, pointing to upside risks to the official objective.

Unit labor costs, selected trade partners

2010Q1-2013Q4 (index, 2010Q1=100)

Source: IMF data.

10. Meanwhile, the authorities again aim to balance the headline budget in 2014. The headline budget posted a small surplus in 2013, despite a 2 percent of GDP revenue shortfall that was countered with ad hoc increases in regulated prices and deferral of expenditures on goods and services and public investment. Including contingent liabilities from quasi-fiscal operations, however, staff estimates that the budget was over 6 percent in deficit (Figure 5, Table 4). For 2014, the authorities are aiming again at a balanced headline budget, but risks are on the downside as the erosion of revenues from external trade is likely structural owing to tariff reductions in the context of the Eurasian customs union and declining exports on reduced external competitiveness.

Figure 5.Belarus: Fiscal Developments, 2008–13

Sources: Ministry of Finance of the Republic of Belarus; and IMF staff estimates and calculations.

Table 4.Belarus: Fiscal Indicators and Projections (Baseline Scenario), 2011–19(Percent of annual GDP, unless otherwise indicated)
201120122013201420152016201720182019
Prel.Proj.
1. State (republican and local) budget
Revenue28.829.829.729.429.729.729.729.729.7
Personal income tax3.13.64.24.24.24.24.24.24.2
Profit tax2.93.73.43.43.43.43.43.43.4
VAT8.98.68.88.88.88.88.88.88.8
Excises1.92.12.82.82.82.82.82.82.8
Property tax0.91.01.21.21.21.21.21.21.2
Customs duties5.14.83.73.43.73.73.73.73.7
Other4.34.55.05.05.05.05.05.05.0
Revenue of budgetary funds1.71.50.60.60.60.60.60.60.6
Expenditure (economic classification) 1/26.729.329.529.830.330.731.331.932.4
Wages and salaries6.36.56.97.07.17.27.37.47.5
Social protection fund contributions1.71.81.91.92.02.02.02.02.0
Goods and services5.25.45.65.65.65.65.65.65.6
Interest1.11.41.01.21.41.82.22.63.1
Subsidies and transfers7.37.67.57.57.57.57.57.57.5
Capital expenditures5.16.46.76.76.76.76.76.76.7
Net lending0.10.0−0.10.00.00.00.00.00.0
Other0.00.00.00.00.00.00.00.00.0
State Budget Balance2.10.50.2−0.4−0.6−1.0−1.6−2.1−2.7
2. Social Protection Fund
Revenue10.010.712.212.412.612.812.913.113.3
Expenditure9.310.612.312.512.813.113.313.613.9
Balance (cash)0.70.1−0.1−0.1−0.2−0.3−0.4−0.5−0.6
3. General government
Revenue38.840.542.041.842.342.542.742.843.0
Expenditure36.039.941.842.443.143.844.645.546.3
Balance2.80.70.2−0.5−0.8−1.3−2.0−2.6−3.3
Off-Balance sheet operations−5.6−0.2−1.0−2.8−2.8−2.8−2.8−2.8−2.8
Bank restructuring measures−4.90.0−0.6−2.0−2.0−2.0−2.0−2.0−2.0
Net lending to financial institutions0.00.00.00.00.00.00.00.00.0
Outlays related to guaranteed debt−0.7−0.2−0.3−0.8−0.8−0.8−0.8−0.8−0.8
Augmented balance 2/−2.90.5−0.8−3.3−3.6−4.1−4.8−5.4−6.1
Statistical discrepancy0.00.00.00.00.00.00.00.00.0
3. Financing (cash)2.9−0.50.83.33.64.14.85.46.1
Privatization7.30.00.10.31.01.01.01.01.0
Foreign financing, net3.1−0.7−0.9−1.4−1.00.80.70.50.6
Domestic financing, net 3/−7.50.21.74.43.52.33.14.04.5
Memorandum items:
Augmented general government balance with new directed lending−12.1−4.0−6.3−7.0−9.0−9.5−10.2−10.9−11.5
Of which: new directed lending (incl. Development Bank) 4/9.34.55.43.75.45.45.45.45.4
Gross public debt 5/45.938.537.035.535.136.638.740.943.4
GDP (trillions of Belarusian rubels)2975306378269861,1761,4021,6691,985
Sources: Ministry of Finance; SPF; and IMF staff estimates.

Includes changes in expenditure arrears.

The augmented balance adds to the balance of the general government outlays for banks recapitalizations and outlays related to called guarantees of publicly guaranteed debt. Projected bank recapitalization costs over the medium term are based on 2008-11 historical average.

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

Net changes in stock at current exchange rate.

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.

The augmented balance adds to the balance of the general government outlays for banks recapitalizations and outlays related to called guarantees of publicly guaranteed debt. Projected bank recapitalization costs over the medium term are based on 2008-11 historical average.

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

Net changes in stock at current exchange rate.

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

Box 2.Belarus. Wage Setting: The Role of the Government

Closer inspection of the role of targets suggests a large role for the government in setting wages.

Rapid economy-wide wage growth has been a key destabilizing factor in recent years. High wage increases—which far outstripped productivity growth—led to overheating, fueled inflation and external imbalances, and reduced competitiveness, and were a key contributing factor to the 2009 and 2011 crises.

Source: Belstat. Targets for 2001, 2002, 2004, 2005 and 2010 are from official plans, targets for 2006, 2007, 2008 and 2012 are from authorities’ press statements.

Note: Productivity is computed as GDP at constant prices in billion rubles/ employment. USD wage refers to the average economy-wide monthly wage measured in USD.

High wage growth in Belarus is not spontaneous but prompted by government policy through widely-applied wage targets.

  • Economy-wide wage targets in US dollars, and corresponding regional and town-level targets in local currency, have been set by the authorities in most years and apply to the entire economy, including the private sector (companies less than 50 percent state-owned).

  • Although the importance of mandatory wage targets appears to be decreasing, the targets have been closely adhered to and are a more important driver of wages than the government’s single pay grading system, which regulates wage-setting in budgetary organizations. Very low variation of wages between regions and sectors confirms the strong influence of official wage targets.

Sources: Belstat; and IMF staff calculations.

1/ Wage targets from annual plans.

2/ Both series exclude Minsk city for consistency as no targets were set for Minsk city in 2008-2010.

Policy Discussion

11. Staff urged a sharper reduction of subsidized lending and a halt to wage increases. Staff welcomed the authorities’ Financing Plan, which promises to be a helpful instrument in the control of overall directed lending volumes, and recommended that it become a recurring feature of the authorities’ policy framework. At the same time, given the associated cyclical and structural drawbacks, it urged the authorities to be more ambitious in scaling back directed credit and to limit new lending to 2 percent of GDP in 2014, fully channeled via the DB. Directed lending should be reduced further to 1 percent of GDP in 2015, with a view to a full phase out over the medium term. Staff also recommended forgoing the wage increases embedded in the official policy plans for 2014. Keeping wages constant in nominal terms would avoid fueling domestic demand growth and help make up for lost competitiveness from the excessively high wage growth of recent years.

12. If directed lending and wages are not adequately contained, fiscal balance objectives should be more ambitious. Staff advised that the authorities run a corresponding surplus for any new subsidized lending above the recommended 2 percent of GDP limit, to offset the expansionary effect of such excess lending and help build fiscal buffers to cope with implied contingent liabilities. Staff also urged the authorities to optimize fiscal savings from wages and reductions in subsidies, instead of balancing the budget by reducing capital expenditure. Such savings would also pay for improvements in social safety nets that should accompany reform.

13. The authorities argued that policies were already tightening and that scope for more ambitious cutbacks was limited. They suggested that given wage hikes in recent years, which had resulted in a large increase in average wage levels, the emphasis on meeting wage targets would be less pronounced this year. In addition, financing constraints would limit the scope for directed lending. In this context, the authorities explained that the Financing Plan was a temporary instrument aimed at ensuring sufficient financing for ongoing projects deemed critical, at the expense of lower-priority and new projects. Meanwhile, the authorities were planning to make the DB the main coordinator of all directed lending from 2015—an initiative that was welcomed by staff in principle although its modalities remain largely unclear. Regarding the headline fiscal balance, the authorities worried that achieving even the zero balance mandated by the budget would prove to be an uphill struggle if revenue performance continued to be weak. Further cuts in capital expenditure would be considered, but there was a considerable chance that a deficit would result.

B. Monetary Policy: Reducing External Imbalances and Inflation

14. Despite high risks to stability, the NBRB is relaxing monetary policy. Monetary policy effectiveness remains constrained by a suboptimal operational framework and the disruptive impact of subsidized lending. However, domestic interest rates have a direct impact on the population’s willingness to hold local currency. Therefore, in response to the pickup in demand for foreign currency deposits last summer, the NBRB increased the reserve requirement for foreign exchange deposits and raised the overnight credit rate by 10 percentage points to 45 percent (Figure 6, Tables 5 and 6). From November, however, the NBRB has started to loosen policy again by reversing the reserve requirement and cutting the overnight credit rate. In addition, in April and May, the NBRB also lowered the refinancing rate by two percentage points to 21.5 percent and put regulatory caps on the interest rates banks can charge their clients. The policy loosening risks reigniting exchange rate pressures in the context of large external imbalances and continued high inflation.

Figure 6.Belarus: Monetary Developments, 2011–14

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

Table 5.Belarus: General Government Accounts, GFSM2001 Presentation, 2011–13 1/(Percent of GDP)
201120122013
Prel.
Revenues39.842.042.0
Taxes24.726.024.1
Income, profits and capital gains7.08.27.6
Property0.91.01.2
Goods and services11.812.011.6
International trade5.14.83.7
Social security contributions9.710.512.2
Other revenues5.45.55.7
Expenses33.837.036.3
Compensation of employees8.48.98.8
Wages and salaries6.67.06.9
Social contributions1.81.91.9
Uses of goods and services6.47.25.6
Consumption of fixed capital0.10.10.1
Interest1.11.41.0
Subsidies4.65.17.5
Social benefits11.412.712.3
Other expenses1.81.71.0
Gross operating balance6.05.05.7
Net acquisition of nonfinancial assets3.34.56.6
Net borrowing/lending (overall balance)2.70.5−0.9
Transactions in financial assets and liabilities−2.70.5−0.9
Source: Belarusian authorities.

The GFSM presentation includes a very small amount of non-budgeted expenditures and revenues. These items include incidental sales and associated expenditures from non-market institutions.

Source: Belarusian authorities.

The GFSM presentation includes a very small amount of non-budgeted expenditures and revenues. These items include incidental sales and associated expenditures from non-market institutions.

Table 6.Belarus: Monetary Authorities’ Accounts (Baseline Scenario), 2011–19(Trillions of Belarusian rubels, unless otherwise indicated; end-of-period)
201120122013201420152016201720182019
Proj.
Reserve money18.830.334.444.057.074.398.0128.7169.7
Rubel reserve money16.929.933.342.755.672.796.2126.6167.4
Currency outside banks6.711.312.315.419.926.134.545.460.1
Required reserves7.413.815.422.029.739.653.573.496.0
Time deposits, NBB securities, and nonbank deposits2.84.85.65.35.97.08.27.811.3
Foreign currency reserve money1.90.41.11.31.41.61.82.02.3
Net foreign assets36.743.737.724.28.01.2−2.5−3.5−4.3
Billions of U.S. dollars4.45.14.02.30.70.1−0.2−0.2−0.2
Foreign assets83.778.368.444.129.325.024.426.929.9
Billions of U.S. dollars10.09.17.24.12.41.91.61.61.5
Of which gross international reserves66.169.463.238.322.817.716.217.519.3
Billions of U.S. dollars7.98.16.73.61.91.31.11.01.0
Foreign liabilities47.034.530.719.921.323.826.930.434.3
Net domestic assets−17.9−13.4−3.319.849.073.1100.5132.2174.1
Net domestic credit−29.5−29.9−20.117.241.860.889.5123.1166.9
Net credit to general government−62.9−56.0−47.7−16.4−6.9−16.3−26.3−34.2−34.2
Credit to economy33.426.127.533.548.777.1115.9157.3201.1
Credit to banks19.112.013.121.540.670.6109.2151.3195.6
National currency13.59.710.718.234.162.3100.1139.6180.8
Foreign currencies5.62.42.43.75.47.49.913.016.6
Billions of U.S. dollars0.70.30.30.40.50.60.70.80.9
Credit to nonbanks14.214.114.411.69.27.45.94.73.8
Other items, net11.616.416.82.67.212.310.99.17.2
Memorandum item:
12-month percent change in reserve money84.161.613.427.829.630.331.931.331.9
Sources: National Bank of Belarus; and IMF staff estimates.
Sources: National Bank of Belarus; and IMF staff estimates.

NBRB Policy Interest Rates

(Percent)

Source: National Bank of the Republic of Belarus.

15. Slow exchange rate adjustment compounds imbalances and poses risks. Over the past year, the NBRB has tightened control over the exchange rate through interventions, with the regime increasingly resembling a crawling peg (prompting a reclassification by the staff of the de facto regime to “crawl-like arrangement”). Although the pace of depreciation has accelerated from less than ½ percent per month in the first half of 2013 to about 1–1½ percent since, it remains less than what is needed given high inflation, fast wage growth, and depreciations in key trading partners. The rubel has depreciated 15 percent against the dollar since end-2012, consistent with a real effective appreciation of 9 percent, further weakening already low competitiveness and contributing to significant rubel overvaluation, on staff estimates (Box 3).

Exchange Rates

(End of 2013 = 100)

Sources: Bloomberg; and IMF staff calculations.

Rubel-Dollar Exchange Rate

(Daily data, thousands of rubles)

Box 3.Belarus: External Stability Assessment

A CGER-type assessment suggests that the rubel is now significantly overvalued.

Inflation differentials and an insufficiently flexible exchange rate have led to overvaluation of the rubel. Total REER appreciation in CPI terms of about 35 percent—and over 50 percent in ULC and GDP deflator terms—since the 2011 devaluations suggests a serious erosion of competitiveness.

Real Effective Exchange Rates

(Index, Average 2005=100)

Sources: INS; World Economic Outlook; IFS; and IMF staff calculations.

Applying CGER methodology to Belarus is challenging. The External Sustainability (ES) approach is less informative because stabilizing NFA at the current low reserve levels is not desirable. Meanwhile, data constraints render the Equilibrium Real Exchange Rate (ERER) approach infeasible for Belarus. The Macroeconomic Balance (MB) approach is best suited for an assessment of Belarus’ external stability, but needs to take into account the unsustainable nature of the current external imbalance, which reduces the accuracy and relevance of any projected medium-term current account balance. Given these challenges, the staff’s exchange rate assessment is mainly based on the MB approach using the projected 2014 current account balance (rather than the medium-term balance forecast) as a proxy for the underlying balance.

  • The MB approach estimates a further widened gap between the projected medium-term current account and the estimated norm to around -7 percent. This is consistent with a significant overvaluation.

  • Moreover, different from the assessment in the 2013 Article IV Consultation, the ES approach now indicates a negative gap, despite the deeply negative interest-growth differentials.

CGER-Based Current Account Gap 1/

1/ Estimates are based on the CGER methodology explained in Occasional Paper 261, IMF 2008. Note that the ES approach computes the current account position needed to stabilize NFA at its current level, which need not be the appropriate level for Belarus.

2/ Average of the gaps under the MB and ES approaches.

These estimates should be interpreted carefully. The high degree of state control in the Belarus economy and related administrative interference with price formation significantly weaken the role of price signals relative to a market based economy. This introduces considerable uncertainty in the estimated effectiveness of exchange rate adjustment.

Policy Discussion

16. Staff urged further reducing exchange rate intervention, thus allowing faster depreciation, accompanied by monetary policy tightening. Faster rubel depreciation would aid external adjustment, save reserves, and improve competitiveness. To contain inflationary pressures and guard against potential exchange rate overshooting, monetary policy should be simultaneously tightened. Increased exchange rate flexibility should be accompanied by a carefully crafted communication strategy to guide expectations of market participants and the public.

17. Staff also encouraged enhancing monetary policy effectiveness through a base money anchor. With Belarus not ready for a successful move to inflation targeting, staff urged the NBRB to start implementing base money targeting as a temporary policy anchor, in line with TA advice.

18. While agreeing on the need for exchange rate flexibility, the authorities were reluctant to increase the pace of depreciation. They remained deeply concerned about potential market reactions, arguing that the expectations of the general public are still shaped by the experience of the 2011 crisis and that faster depreciation could trigger a disorderly adjustment of the rubel. They also pointed to the high economic costs of the 2011 devaluation. The authorities expected that the arrival of the promised Russian loans would help support the balance of payments.

19. The NBRB planned to continue loosening monetary policy to alleviate credit constraints. The authorities argued that private enterprises had lived with high rubel interest rates for too long and that this was stifling investment. Lowering rates was therefore the key policy priority. They did not perceive such policy loosening as inconsistent with the challenge of reducing high inflation. While the NBRB agreed it was highly likely that inflation would remain well above the official 11 percent target this year, it argued this was mostly due to the impact of exchange rate depreciation and administrative price increases. Also, the NBRB planned to continue rationing credit volumes to avoid lower rates from resulting in a rapid acceleration of credit growth. The authorities were studying the recommendations to re-anchor monetary policy on base money.

C. Banking Sector: Safeguarding Stability and Curbing Dollarization

20. Rising risks in the banking sector require close attention. Prolonged weak economic performance and adverse external developments have increased financial stability risks (Box 4). NPLs at several key banks have increased rapidly in early 2014, even though system-wide NPLs remained stable on account of transfers of problem loans to the Development Bank, which is not included in the statistics and where NPLs have jumped to 7½ percent from very low levels earlier. Also, continued liquidity problems at a large bank, which started last summer, have resulted in an effectively open-ended extension of its exemption from regular reserve requirements and, at end 2013, the authorities injected new capital into another large state-owned bank to keep it from falling below minimum capital standards. On the upside, prior NBRB measures to contain FX lending have started to bear fruit with FX lending growing by a moderate 2.5 percent in the first quarter of 2014 (compared to 6.6 percent over the same period in 2013). Nonetheless, loan dollarization has continued to rise, reaching over 50 percent in early 2014, suggesting high FX risks for borrowers, many of which are believed to be unhedged.

Share of FX Loans

(Percent of Total)

Source: Belarusian authorities.

Box 4.Belarus: Potential Impact of Exchange Rate Depreciation

High financial dollarization makes the Belarusian economy and in particular the financial sector vulnerable to sharp exchange rate depreciation.

Direct effects from depreciation for the banking sector appear limited, even positive. Banks maintain a long position in foreign exchange (FX), with the net open position amounting to 12 percent of capital. Recent NBRB stress tests estimate that 20 percent depreciation would initially decrease capital ratios by 1.1 percentage point (regulatory capital is held in local currency) but increase profits.

However, high FX-related credit risk could have a large negative indirect impact on banks. FX loans account for a high share of corporate sector borrowing—with shares ranging from about one quarter in the agricultural sector to more than three quarters in manufacturing—likely including a significant number of borrowers without FX earnings (in some mainly domestically oriented sectors more than half of loans are in FX). NBRB estimates of 20 percent depreciation show strong increases in NPLs, significant losses in the banking sector and suggest that capital ratios of the system could fall close to the regulatory minimum (10 percent).

While the quantitative effects of a depreciation are uncertain, information about FX exposures indicates different impacts across sectors.

  • For the household sector the impact would be positive as these hold a large share of FX deposits, while FX loans to households are banned.

  • For the corporate sector the impact would be mainly negative. Overall, the corporate sector has a negative FX position, with a large amount of FX loans and relatively small FX deposits. Exporters, however, may be able to profit from depreciation.

  • The effect on the financial sector, on balance, would be negative, mainly because of its large FX exposure to corporates and through a negative position with non-residents in the form of largely short-term loans.

  • The government would be impacted through its foreign exchange denominated debt. Assuming a 20 percent depreciation, government and government-guaranteed debt would increase to 43 percent of GDP (from 37 percent at present). An increasing interest bill, and higher outlays for bank recapitalizations, would likely compound effects over time.

Net FX Claims of the Banking Sector

(Percent of GDP)

Sources: Belarusian authorities; and IMF staff calculations

Financial Soundness Indicators for the Banking Sector 1/
20102011201220132014
DecDecDecDecJanFebMar
Capital adequacy
Capital adequacy ratio 2/20.524.720.815.515.415.415.0
Tier I capital adequacy ratio 2/14.918.814.610.510.410.811.1
Foreign exchange loans to total loans21.739.545.550.250.751.051.1
Non-performing loans to gross loans 3/3.54.25.54.44.34.34.4
Watch loans 4/3.610.612.69.69.610.09.5
Recapitalization costs (SOBs, percent of GDP)1.35.30.00.20.00.00.0
Source: National Bank of the Republic of Belarus.

Official statistics do not adequately reflect risks because of pervasive evergreening and reporting weaknesses. Indicators do not include DB as it is a non-bank financial institution.

CARs fell in 2013 mostly on account of an increase in risk weights for FX loans that was introduced in October.

NPLs fell in 2013 mostly because of transfers of problem loans to the DB (which is not included in the statistics).

Watch loans include loans with delinquencies, negative information on the borrower or insufficient collateral.

Source: National Bank of the Republic of Belarus.

Official statistics do not adequately reflect risks because of pervasive evergreening and reporting weaknesses. Indicators do not include DB as it is a non-bank financial institution.

CARs fell in 2013 mostly on account of an increase in risk weights for FX loans that was introduced in October.

NPLs fell in 2013 mostly because of transfers of problem loans to the DB (which is not included in the statistics).

Watch loans include loans with delinquencies, negative information on the borrower or insufficient collateral.

21. A joint World Bank-IMF mission urged reduction of state control in the banking system. The mission assessed state lending, the DB, capital markets, and insurance, among other areas of the financial system. It stressed the developmental challenges from pervasive state influence in the financial system and cautioned against rapid growth of the DB (Box 5).

Policy Discussion

22. Staff urged close supervision of banks and adequate remedial measures. The NBRB should closely monitor the health of individual banks and decisively address any uncovered problems. In particular, it should ensure that all banks in the system comply with capital adequacy norms and reserve requirements. In addition, recent successes notwithstanding, the NBRB needs to continue to closely monitor FX lending and take further measures—e.g., further raising reserve requirements for FX loans or provisioning requirements for FX loans to unhedged borrowers—if FX loan growth rates do not continue to decrease. In this context, staff also emphasized that loan dollarization is closely tied to distortions from directed lending policies and the exchange rate regime that need to be addressed. Staff seconded the findings of the recent joint mission with the World Bank and urged the authorities to step up efforts to reduce state control of banks and lending to promote better resource allocation and risk management. It cautioned against further growth of the DB and called on the authorities to reverse the recent decision to make its debt eligible for refinancing at the NBRB, which raised the specter of monetary financing of DB lending.

23. The NBRB concurred that the situation in the banking sector bears close watching. Specifically, it indicated it was planning to agree on a plan for restoring liquidity at the aforementioned large bank by end May. The NBRB also shared staff’s concerns about remaining FX lending growth and had recently further restricted the issuance of FX loans further by permitting them only for settling transactions with non-residents. Further measures, including increased provisioning, would be considered if the share of FX loans in total credit continued to rise.

Box 5.Belarus: Key Recommendations from Joint World Bank-IMF Mission

A recent joint World Bank-IMF financial sector mission found that the main feature of the financial system remains the government’s pervasive influence at various levels including through (i) direct ownership of large market players in all segments; (ii) directed and subsidized lending programs and their distortive impact on capital allocation; and (iii) undermining institutions governing the development of the market (e.g. lack of competition framework, oversight).

The mission made recommendations in a wide range of areas, including the following:

Directed and subsidized lending

  • Develop a detailed and time-bound plan for curtailing directed lending programs.

  • Introduce formal mechanisms for monitoring and evaluating the effectiveness of directed lending programs.

  • Consolidate existing and future directed lending programs through the Development Bank.

Development Bank

  • Introduce external regulation and supervision of the Development Bank.

  • Prevent the Development Bank being used as an off-budget financing mechanism by ensuring that it operates within the resource envelope for state programs, counting its debt towards the debt ceiling, and reflecting the state’s contingent liabilities in the budget.

  • As a transitional institution the DB should not have an indefinite lifespan and as the commercial financial sector develops, the need for a state-run Development Bank should be reconsidered.

Capital market development

  • Adopt a framework law establishing operational independence of the securities supervisor.

  • Migrate the supervisory framework from a compliance-based to risk-based supervision of professional market participants.

  • Analyze in coordination with NBRB the need to implement rules governing the issuance of corporate bonds in FX by unhedged issuers.

D. Structural Reform: Raising Sustainable Growth

24. Some progress has been made on price liberalization, but in other areas the stalemate continues. Deep reform of the uncompetitive Belarus economy remains critical. Motivated by the requirements of the Customs Union with Russia and Kazakhstan, some progress was recently made in reducing the number of “socially important goods” subject to continuous price controls, though their share in the CPI basket was modest. In other areas there has been no apparent progress. In particular, despite increases in utility and transport tariffs, these remain far below cost recovery levels. Also, notwithstanding the objective in the authorities’ 2013 joint action plan of raising US$4½ billion through privatizations and the compilation of a new “privatization list” of 88 mostly small enterprises, no significant privatizations have taken place since 2011 and the tender of a controlling stake in mobile phone operator MTS has fallen through.

Socially Important Goods

(Number of categories subject to price controls by the Ministry of Economy)

Sources: Ministry of Economy of the Republic of Belarus; and IMF staff calculations.

Sources: Belarusian authorities; Russian Federal Statistics Service; Anti Crisis Fund; World Bank Country Economic Memorandum;www.energy.eu.; www.euroheat.org and IMF staff calculations.

1/ The privatization of the first 50 percent stake in Beltrans gas in 2007 refers to an annual sale of 12.5 percent stakes at USD 625 million over 4 years (2007-2010).

2/ Belarus refers to a weighted average of summer and heating season tariffs, weighted by their respective lengths.

Policy Discussion

25. Staff acknowledged steps in price liberalization, but emphasized the need for comprehensive and much more ambitious reforms. Staff urged leveraging the recent progress on price controls by stepping up efforts in other reform areas to improve resource allocation. Specific steps would include the initiation of a time-bound plan to reach full cost recovery of utility and transport tariffs, a detailed plan to reduce the role of the state in the economy, including a rapid phase out of mandatory targets (for output, exports, wages, employment, and other variables) for enterprises and credible plans for privatization. Staff also urged strengthening safety nets to cushion the impact of reforms on the most vulnerable.

26. The authorities recognize structural challenges but prefer strengthening the existing system. The authorities agreed that the current economic model was not producing favorable outcomes, and that falling competitiveness was posing a structural challenge. They argued that the challenge could be met through strengthened management and appropriate reform within the existing system. In this context, they pointed out that even though mandatory targets for enterprises continued to cover a wide range of variables, in practice emphasis was increasingly placed on targets for labor productivity, profitabiliy, and exports, while compliance with other targets was becoming less critical. The authorities also pointed to their recent privatization efforts, but indicated that market conditions had not been conducive.

Capacity to Repay and Fund Relations

27. Capacity to repay remains strained and subject to high risks. Belarus met its external obligations in 2013, but payment capacity will continue to be tested in 2014 given continued large debt repayments, a weak balance of payments position, limited market access, and precariously low reserves. As part of its obligations, Belarus needs to repay most of the remaining balance to the Fund in 2014 (access has already dropped below 200 percent of quota, thereby ending the expectation of Post-Program Monitoring). Russian support could mitigate risks in the very short-term, but staff projects that even with the promised loans fully disbursed reserves will continue to erode this year to below one month of imports. High uncertainty about capital flow projections and large FX liabilities at the NBRB compound the risks.

External Debt Service

(Billions of U.S. dollars)

Sources: Belarusian authorities; and IMF staff calculations.

1/ Loan guaranteed by the government.

28. The authorities are confident that bilateral loans will allow them to meet financing needs this year. Nonetheless, they continue to seek sources of additional financing. In this context, the Ministry of Finance expected to be able to issue US$700 million in FX-denominated domestic bonds this year (US$200 million of which had already been issued). At the same time, they conceded that realizing the official plan to issue a US$800 million Eurobond would prove a challenge given market conditions and unresolved technical problems. The authorities also noted that if they did not meet ACF conditionality, they would not receive the last remaining $440 million ACF tranche. They were more hopeful, however, regarding the prospects for significant privatizations, which they thought could bring substantial foreign exchange revenues.

Belarus: Financing Requirements, 2012–14(Millions of U.S. dollars)
201220132014
Est.Proj.
Gross Financing Requirements−10,449−17,138−17,870
Current account balance−1,839−7,276−6,834
Amortization (MLT debt)−2,556−5,386−5,205
of which IMF−465−1,641−1,282
Short-term debt−6,054−4,477−5,831
Financing Sources10,44917,13817,870
Capital account (net)444
FDI (net)1,3082,0602,024
Portfolio investment inflows (net)12−420
Borrowing (MLT)4,4177,4626,503
of which ACF4408800
of which Russian bilateral loan04501,500
Short-term financing4,4775,8315,831
Other net 1/−1,477989556
Projected change in reserves (+ decrease)−818573,051
Memo Item: Stock of Reserves8,0956,6513,600
Source: IMF staff calculations.

Includes portfolio, net trade credits and other net investment assets. For 2012 also includes errors and omissions and valuation effects.

Source: IMF staff calculations.

Includes portfolio, net trade credits and other net investment assets. For 2012 also includes errors and omissions and valuation effects.

Staff Appraisal

29. Large imbalances and low buffers call for decisive policy change. Expansionary policies, slowing trade-partner growth, and an insufficiently flexible exchange rate have undermined competitiveness and led to increasing external imbalances. Meanwhile, growth has remained low and inflation high. External financing needs are large while market access remains limited and reserves have fallen to a low level. Adverse developments in the region compound the already high risks. The authorities have started to tentatively change policies, but much stronger actions are needed to mitigate risks of disorderly external adjustment.

30. Directed lending should be reduced much faster than currently envisaged. The reduction of the volume of net new directed lending under the authorities’ Financing Plan is a welcome step, but the authorities should be more ambitious in limiting net new lending. This would help reduce domestic demand, generate budget savings, and contain contingent liabilities associated with lending to unviable projects and enterprises.

31. Wages should not rise any further in 2014. It will be critical to forgo the wage increases embedded in official policy plans to avoid fueling domestic demand growth and to regain lost competitiveness from the excessively high wage growth of recent years.

32. If directed lending and wages are not contained, fiscal objectives should be more ambitious. The authorities should run a corresponding budget surplus in 2014 for any new subsidized lending above the recommended 2 percent of GDP limit, so as to offset the expansionary effect of the excess lending and help build fiscal buffers to cope with implied contingent liabilities. Fiscal adjustment should be achieved by optimizing fiscal savings from wages and reductions in subsidies, instead of further reducing capital expenditure.

33. FX interventions should be further reduced and monetary policy tightened. Stepped up rubel depreciation—in a controlled manner—is needed to improve competitiveness, aid external adjustment, and save reserves. To contain inflationary pressures and limit potential for exchange rate overshooting, monetary policy should be simultaneously tightened. The effectiveness of monetary policy could be enhanced by moving to a base money anchor, in the context of a flexible exchange rate. Approval of remaining exchange restrictions and multiple currency practices, which the authorities are in the process of eliminating, is not recommended by staff.

34. Rising risks in the banking sector require close attention and action. Recent increases in NPLs and ongoing liquidity problems in a major bank call for very close supervision and adequate remedial measures. The NBRB should ensure that all banks in the system comply with capital adequacy norms and reserve requirements. While recently on a downward trend, FX lending growth also continues to bear close watching and the NBRB should consider taking additional measures—such as a further increase in reserve requirements for FX loans—if loan growth does not continue to come down.

35. Efforts to reduce the role of the state in the banking sector should be intensified. The mission welcomes the intention to increasingly free up commercial banks from lending under government programs by making the Development Bank (DB) the coordinator of all such lending from 2015. However, this step should be complemented with a detailed and time-bound plan for rapidly phasing out subsidized lending and developing a banking sector that works on a fully commercial basis. Debt of the DB should not be eligible for refinancing at the NBRB, so as to avoid monetary financing of its lending.

36. Broad structural reforms are needed to boost sustainable growth. Progress on price controls should be leveraged by stepping up efforts in other reform areas to improve resource allocation. Such efforts should include initiation of a time-bound plan to reach full cost recovery of utility and transport tariffs, a detailed plan to reduce the role of the state in the economy, and a strengthening of social safety nets. While the full benefits of such reforms accrue over time, bold upfront actions would help raise policy credibility and boost confidence even in the short run.

37. It is proposed that the next Article IV consultation be held on the standard 12-month cycle.

Table 7.Belarus: Monetary Survey (Baseline Scenario), 2011–19(Trillions of Belarusian rubels, unless otherwise indicated; end-of-period)
201120122013201420152016201720182019
Proj.
Broad money (M3)111.2160.8193.3277.3370.4490.2657.6890.61,177.7
Rubel broad money (M2)43.468.179.3101.9132.9173.8230.0302.7400.3
Currency in circulation6.711.312.315.419.926.134.545.460.1
Domestic currency deposits34.554.365.284.1109.8143.6190.1250.2330.9
Domestic currency securities2.22.51.82.43.14.15.47.19.3
Foreign currency deposits64.188.6107.8166.0224.7299.3404.5556.0735.3
Bank securities in foreign currency3.74.06.29.512.917.123.231.842.1
Net foreign assets5.84.7−26.2−52.6−78.4−97.2−123.2−150.9−181.3
Billions of U.S. dollars0.70.5−2.8−4.9−6.5−7.2−8.1−8.7−9.3
NFA of central bank36.743.737.724.28.01.2−2.5−3.5−4.3
NFA of deposit money banks−30.9−39.0−63.9−76.8−86.4−98.4−120.7−147.4−177.0
Net domestic assets105.4156.1219.5329.9448.8587.4780.81,041.51,359.0
Net domestic credit104.6159.3236.0355.3462.3575.8738.7960.81,275.5
Net credit to general government−67.1−70.5−61.8−38.5−29.1−38.5−48.5−56.4−56.4
Credit to economy171.7229.8297.8393.8491.3614.3787.21,017.31,331.9
Other items, net0.9−3.3−16.5−25.4−13.411.642.180.783.5
Memorandum items:
12-month percent change of credit to economy excl. valuation effect37.032.423.524.616.616.317.016.416.7
Sources: National Bank of Belarus; and IMF staff estimates.
Sources: National Bank of Belarus; and IMF staff estimates.
Table 8.Belarus: Capacity to Repay the Fund (Baseline Scenario), 2012–19 1/
20122013201420152016201720182019
Fund repurchases and charges
Millions of SDRs3501,112838550000
Millions of U.S. dollars5381,7111,297860000
Percent of exports of goods and services14300000
Percent of total debt service 2/15251910000
Percent of quota91288217140000
Percent of gross international reserves7263650000
Fund credit outstanding
Millions of SDRs1,9668865500000
Millions of U.S. dollars3,0251,3638500000
Percent of exports of goods and services63000000
Percent of quota5092291400000
Percent of gross international reserves3720200000
Memorandum items:
Exports of goods and services (millions of U.S. dollars)51,91043,87041,76943,52744,70545,53746,04446,816
Debt service (millions of U.S. dollars)3,6726,8706,7816,1684,9375,6186,8767,333
Quota (millions of SDRs)386386386386386386386386
Quota (millions of U.S. dollars at eop exchange rate)595594598604608614618623
Gross international reserves (millions of U.S. dollars)8,0956,6513,6001,8991,3161,0621,015994
U.S. dollars per SDR (period average)1.5321.5201.5421.5571.5681.5821.5941.607
U.S. dollars per SDR (eop)1.5391.5381.5491.5621.5741.5881.6001.612
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.

Table 9.Belarus: Indicators of External Vulnerability, 2009–13
20092010201120122013
Prel.
CPI inflation (end year)10.19.9108.721.816.5
Export volume of goods (percent change)−11.52.833.011.0−17.4
Import volume of goods (percent change)−12.68.015.99.4−7.2
Current account balance (percent of GDP)−12.6−15.0−8.5−2.9−10.1
Capital and financial account balance (millions of U.S. dollars)5,0666,4444,5691,0737,089
Of which:
Foreign direct investment, net1,7821,3523,8771,3082,060
Trade credits, net657568575−1,78922
Official Liabilities, net4,7391,9752,185−6321,163
Liabilities of the banking sector, net4832,296474291,193
Non-bank private liabilities (excl. trade credits) 1/349398564751,458
Gross official reserves (millions of U.S. dollars)5,6535,0317,9168,0956,651
Months of imports of goods and services1.81.31.92.11.8
Percent of broad money22.716.359.443.835.3
Gross total external debt (millions U.S. dollars)22,43928,77034,45434,45538,553
Percent of GDP45.652.157.754.253.8
Percent of exports of goods and services90.296.274.066.487.9
Gross short-term external debt (millions of U.S. dollars)9,34212,15514,11312,69314,110
Percent of gross total external debt4242413737
Percent of gross official reserves165242178157212
Debt service ratio (percent) 2/6.06.05.46.915.0
REER percent change (CPI based, period average)−4.5−5.0−11.7−8.27.5
Capital adequacy ratio (percent) 3/19.820.524.720.821.1
Nonperforming loans (percent of total)4.23.54.25.55.2
Banks’ net open FX position (percent of regulatory capital)−11.6−1.49.49.09.6
Sources: Belarus authorities; INS; 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.

Sources: Belarus authorities; INS; 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.

Appendix I. Belarus: Implementation of Past IMF Policy Recommendations

Belarus has a mixed record of implementing Fund policy advice and the recommendations from the previous Article IV Consultation were heeded only to limited extent.

Overview. During the 2009–10 Stand-By Arrangement, progress was made on macroeconomic policies and in a few structural reform areas, but many of the gains were reversed after the program ended, contributing to a severe currency crisis in 2011. Since the crisis, the authorities have selectively implemented Fund recommendations, but often in an inconsistent manner and only temporarily, when forced by mounting external pressures.

2013 Article IV Consultation. Since the previous consultation, the authorities allowed wage growth to slow but it continued to exceed targeted inflation—which staff had suggested as an upper limit—by a wide margin. Similarly, monetary policy was tightened in the summer of 2013, as recommended by staff, but progressively loosened later while inflation remained high. Moreover, the flow of directed lending increased and amounted to more than double the volume advised by staff in 2013. Also, in contrast to staff recommendation to maintain a flexible exchange rate, NBRB control over the rubel was tightened. In the financial sector, successful measures were taken to curb FX lending growth, as urged by staff, although considerable risks remain. Advice on the Development Bank was mostly not followed and the bank is becoming an additional source of macroeconomic and financial risks. On the structural front, the authorities proceeded to abolish some price controls in line with staff advice. However, no progress was made on privatization and state-owned enterprise restructuring or with the strengthening of safety nets.

Appendix II. Belarus: Risk Assessment Matrix1
Source of RisksRelative LikelihoodImpact if realizedPolicy Response
Protracted period of slower growth in advanced and emerging economies.HighHigh/Medium

Slower growth in advanced and emerging economies (especially Russia) would produce negative spillovers through trade and remittances causing further current account deterioration and raising external financing needs.
  • Increase exchange rate flexibility and tighten monetary policy.

  • Tighten macroeconomic policies to narrow external imbalances.

  • Speed up structural reforms to increase competitiveness.

Sovereign stress re-emerges in the Euro Area due to incomplete reforms, unanticipated outcomes from the asset quality review and stress tests in the absence of a fiscal backstop.Low
Sharp increase in geopolitical tensions surrounding Russia/Ukraine that creates significant disruptions in global financial, trade and commodity markets.MediumHigh

Slower growth in Russia, reduced confidence, and higher interest rates would produce negative spillovers. Tensions could also affect support from Russia (in negative or positive ways).
In case of upside shock:

  • Build reserves.

Sustained decline in commodity prices, triggered by deceleration of global demand and coming-on-stream of excess capacity (medium-term).MediumMedium

A negative shock would lower energy import prices, but also reduce exports because of likely lower growth in Russia.
Looser macroeconomic policies.MediumMedium

Stimulus efforts would boost demand and reignite inflation and fuel pressures on the exchange rate.
  • Tighten macroeconomic policies including monetary, wage, exchange rate, and directed lending policies.

Weakening economic environment could reduce banks’ asset quality.MediumMedium

Potential state-owned bank recapitalization costs could be substantial and exacerbate public debt dynamics.
  • Intensify supervision and oversight over large banks, including through more frequent onsite monitoring.

  • Reduce new subsidized and directed lending.

Appendix III. Belarus: External Debt Sustainability Framework, 2009–19

(Percent of GDP, unless otherwise indicated)

ActualProjections 1/
20092010201120122013201420152016201720182019Debt-stabilizing

noninterest current

account 7/
Baseline: external debt45.652.157.754.253.851.450.750.049.649.248.4−2.9
Change in external debt20.66.55.6−3.5−0.4−2.3−0.7−0.8−0.3−0.5−0.8
Identified external debt-creating flows (4+8+9)14.97.7−1.6−2.31.85.53.82.51.71.10.8
Current account deficit, excluding interest payments11.513.97.01.18.56.85.84.43.42.82.4
Deficit in balance of goods and services11.313.52.0−4.52.73.32.61.40.90.40.2
Exports50.554.277.981.661.253.853.051.149.447.645.9
Imports61.867.779.977.163.957.055.552.550.348.046.1
Net non-debt creating capital inflows (negative)−3.5−2.3−6.1−1.7−2.2−2.8−2.8−2.7−2.7−2.9−2.9
Automatic debt dynamics 2/6.9−3.8−2.5−1.7−4.51.60.80.81.01.21.3
Contribution from nominal interest rate1.01.11.41.81.72.01.71.92.12.42.6
Contribution from real GDP growth0.0−3.1−2.7−0.9−0.4−0.5−0.9−1.0−1.1−1.2−1.3
Contribution from price and exchange rate changes 3/5.9−1.8−1.3−2.6−5.7
Residual, incl. change in gross foreign assets (2-3) 4/5.7−1.27.2−1.2−2.2−7.8−4.5−3.2−2.0−1.6−1.6
External debt-to-exports ratio (percent)90.296.274.066.487.995.795.897.9100.5103.3105.3
Gross external financing need (billions of U.S. dollars) 5/14.718.818.918.425.426.125.123.223.324.324.7
Percent of GDP30.034.031.628.935.433.730.526.525.325.124.2
Scenario with key variables at their historical averages 6/46.842.339.637.736.234.9−6.6
Key Macroeconomic Assumptions Underlying Baseline
Real GDP growth (percent)0.17.75.51.70.90.91.82.22.42.52.7
GDP deflator in U.S. dollars (percent change)−19.14.22.54.711.77.43.94.32.72.42.6
Nominal external interest rate (percent)3.32.82.93.33.44.13.53.94.55.15.5
Growth of exports (U.S. dollar terms, percent)−32.920.355.611.5−15.5−4.84.22.71.91.11.7
Growth of imports (U.S. dollar terms, percent)−27.022.827.82.7−6.6−3.33.00.70.80.21.3
Current account balance, excluding interest payments−11.5−13.9−7.0−1.1−8.5−6.8−5.8−4.4−3.4−2.8−2.4
Net nondebt creating capital inflows3.52.36.11.72.22.82.82.72.72.92.9

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 III.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 IV. Belarus Public Sector Debt Sustainability Analysis (DSA)—Baseline Scenario

(in percent of GDP unless otherwise indicated)

Source: IMF staff.

1/ Public sector is defined as general government.

2/ Based on available data.

3/ EMBI.

4/ Defined as interest payments divided by debt stock at the end of previous year.

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

6/ The real interest rate contribution is derived from the denominator in footnote 4 as r - π (1+g) and the real growth contribution as -g.

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

8/ For projections, this line includes exchange rate changes during the projection period.

9/ 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 IV. Belarus: Public Debt Sustainability Analysis

Public sector debt dynamics in Belarus appear benign in the baseline but fail to capture large contingent liabilities associated with subsidized lending and guarantees. Belarus has also become more vulnerable to exchange rate shocks because of rising debt dollarization. Stress tests indicate that contingent liabilities and exchange rate risks have a major impact on fiscal sustainability.

Stress test assumptions and impact

Belarus-Specific Stress Tests

  • Exchange rate shock. The scenario assumes 30 percent devaluation in the real exchange rate in 2015. The debt ratio increases to over 37 percent of GDP by 2019, up 8 percent of GDP from the baseline. Meanwhile, gross financing needs rise to 19 percent of GDP in 2019.

  • Contingent liability shock. The shock assumes that half of the stock of outstanding directed and subsidized loans would not be repaid, leading to a one-off fiscal cost of 10 percent of GDP. The shock results in a sharp increase in the debt ratio to 43 percent of GDP by 2019. Meanwhile, gross financing needs would rise to 19 percent of GDP in 2015, and stay high over the medium-term.

Standard stress tests

  • Growth shock. Under this scenario, real output growth rates are lowered during 2015–16. The public debt ratio increases 8 percentage points by 2019, while the gross financing needs ratio in 2019 increases over 3 percent relative to the baseline.

  • Interest rate shock. This scenario examines the implications for debt sustainability of an increase in spreads by 500 basis points. The deterioration in the ratios for debt and gross financing need are back-loaded as old debt gradually matures and new higher interest rate debt is contracted. However, by 2019, the impact on financing needs is significant.

  • Primary balance shock. This scenario assumes a revenue shock and a rise in interest rates leading to a cumulative 1.4 percentage points of GDP deterioration in the primary balance. The combined shocks lead to deterioration in the debt ratio and gross financing needs, but the impact is more muted than in other scenarios under consideration.

  • Combined macro shock. This scenario comprises a recession in 2015–16, a 500 basis point increase in interest rates, and a sharp rise in expenditures. It pushes the debt to GDP ratio up towards 50 percent of GDP, and significantly increases gross financing needs.

Belarus Public DSA—Composition of Public Debt and Alternative Scenarios

Composition of Public Debt

Source: IMF staff.

Belarus Public DSA—Stress Tests

Macro-Fiscal Stress Tests

Source: IMF staff.

The Risk Assessment Matrix (RAM) shows events that could materially alter the baseline path (the scenario most likely to materialize in the view of IMF staff). The relative likelihood of risks listed is the staff’s subjective assessment of the risks surrounding the baseline (“low” is meant to indicate a probability below 10 percent, “medium” a probability between 10 and 30 percent, and “high” a probability of 30 percent or more). The RAM reflects staff views on the source of risks and overall level of concern as of the time of discussions with the authorities. Non-mutually exclusive risks may interact and materialize jointly.

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