Republic Of Belarus: Staff Report for the 2005 Article IV Consultation

This 2005 Article IV Consultation reports that Belarus experienced strong economic growth in 2004, supported by policies aimed at raising incomes and credit, and a favorable external environment. Inflation was halved during 2004, and slowed down further to 11 percent in April 2005, aided by a balanced budget, exchange rate stability, and continued remonetization. Although the economy’s current momentum is likely to result in significant growth in 2005, its long-term prospects are uncertain in the absence of wide-ranging structural reforms and a phasing out of massive quasi-fiscal activities.

Abstract

This 2005 Article IV Consultation reports that Belarus experienced strong economic growth in 2004, supported by policies aimed at raising incomes and credit, and a favorable external environment. Inflation was halved during 2004, and slowed down further to 11 percent in April 2005, aided by a balanced budget, exchange rate stability, and continued remonetization. Although the economy’s current momentum is likely to result in significant growth in 2005, its long-term prospects are uncertain in the absence of wide-ranging structural reforms and a phasing out of massive quasi-fiscal activities.

I. Background and Recent Developments

1. Belarus’s political life is dominated by President Lukashenko. With a political base strengthened by rapidly rising real wages, the president—who first took office in July 1994—solidified his position in a 2004 referendum that lifted presidential term limits. The state retains direct control over at least three-quarters of the economy through a highly centralized economic management approach that combines, inter alia, (i) centrally-mandated wage targets; (ii) rapidly increasing directed lending; (iii) an extreme golden share rule; and (iv) administrative price controls, caps on trade mark-ups and producer profit margins.

2. Recent macroeconomic performance was strong. Supported by robust domestic demand and a favorable external environment, real GDP grew at 11 percent in 2004 and 9½ percent in January-April 2005.1 Meanwhile, twelve-month inflation declined from 28 percent at end-2003 to 11.1 percent by April 2005, falling below inflation in Russia since March. Nominal depreciation has slowed down under the crawling band regime, leading to a 2.5 percent real effective exchange rate depreciation in 2004 that was partially reversed in the first four months of this year. The current account deficit reached 4.6 percent of GDP in 2004 reflecting in part temporary factors, but swung into a surplus in the first quarter of 2005. Gross official reserves have doubled since end-2003, but remain precariously low at US$987 million (0.6 months of imports) at end-April 2005.2 Belarus’s income distribution is remarkably equal (with the lowest Gini coefficient in the CIS), and its poverty head count measure has fallen by 2004 to less than half its 1997 level.

A01ufig01

Domestic demand drove growth…

Citation: IMF Staff Country Reports 2005, 214; 10.5089/9781451805161.002.A001

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…while all components of inflation declined…

Citation: IMF Staff Country Reports 2005, 214; 10.5089/9781451805161.002.A001

Source: National Bank of Belarus and IMF.
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…and nominal exchange rates have stabilized.

Citation: IMF Staff Country Reports 2005, 214; 10.5089/9781451805161.002.A001

Source: National Bank of Belarus; and press reports.

3. Growth and disinflation benefited from strongly supportive macroeconomic policies and favorable external factors. While the budget was in balance and monetary policy became tighter with the strengthening nominal anchoring role of the exchange rate, the authorities’ centralized economic management approach was underpinned by widespread government intervention. Average real wages grew by 24 percent in the twelve months through March 2005, accompanied by similar increases in budgetary social transfers, boosting consumption. High investment rates were supported by the surge in lending, and—as inflation fell—declining interest rates. Price controls have helped disinflation and bolstered demand, but have stored up tensions for the future. On the external side, Belarus benefited from the strong regional upswing, the customs union providing privileged access to Russia’s large market, and Russian financial support. Belarus also enjoyed low energy import prices. With three-fourths of its exports to the EU consisting of energy or energy-intensive products sold at rapidly rising world market prices, this resulted in a favorable terms of trade shock with positive income effects on domestic consumption and investment (SI paper).

4. Fiscal policy in 2004 was tighter than envisaged. Revenues rose as higher profit tax receipts more than compensated for lost revenues from a VAT rate cut. Expenditures fell by a percentage point of GDP owing to lower spending on education and net lending. Budget implementation was complicated by frequent amendments through presidential decrees, and the delay until late December of a US$175 million Russian government loan. This loan, when disbursed, facilitated spending of 6.2 percent of GDP in December, eliminating the surplus built up owing to the binding financing constraint and leading to a balanced general government budget for the year.

General Government Fiscal Developments, 2001–04

(In percent of GDP)

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Sources: Ministry of Finance and staff estimates.

5. Preliminary data point to a large surplus in the first quarter of 2005. Usual seasonality, combined with larger than budgeted VAT receipts stemming from the switch to the destination principle in trade with Russia boosted revenues. Nevertheless, an April Presidential Decree amending the budget left revenue projections unchanged, while increasing investment expenditures by 0.3 percentage points, raising the deficit to 1.8 percent of GDP. Government deposits at end-April 2005 reached five percent of GDP split evenly between the NBRB and selected commercial banks, propping up the liquidity of the latter.

6. However, quasi-fiscal operations expanded in 2004, leaving overall government intervention in the economy very high. Extensive quasi-fiscal operations—notably centrally-mandated US$ wage targets, “recommended” credits, concessional housing loans, and off-budget spending—boosted the state’s effective role. Directed bank lending for government programs (essentially a net addition to banks’ market-based lending) surged to 3.4 percent of GDP, while the wage increases imposed on the enterprise sector in excess of GDP growth are estimated at almost 2½ percent of GDP.3

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Fiscal and Government-Mandated Operations

(In percent of GDP)

Citation: IMF Staff Country Reports 2005, 214; 10.5089/9781451805161.002.A001

Source: Belarusian authorities and staff estimates1/ Wage growth in non-budget enterprises in excess of nominal GDP growth to meet government-mandated wage targets.

7. Budget consolidation has progressed further. In line with the authorities’ strategy of enhancing the coverage of the budget, the Social Protection Fund (SPF) has been consolidated into the central treasury from April 2004, and Innovation Funds from 2005. On the revenue side, tax administration continued to focus on large taxpayers, with stronger enforcement efforts succeeding in alleviating the revenue impact of lower turnover tax and VAT rates. The VAT was unified for all Belarusian trade, increasing revenue and widening the tax base by including small traders. In an overhaul of budgetary financing, inflationary NBRB financing of the budget was discontinued, and privatization receipts were recorded below the line from 2004.

8. Monetary policy achieved its inflation objective despite rapid credit expansion, benefiting from the exchange rate anchor and strengthened confidence in the rubel. Disinflation in 2004 stemmed from more restrained base money growth helped by an improved net government position, a crawling band to the Russian ruble (which resulted in some real appreciation), and rising demand for rubels reflecting dedollarization and growing trust in banks.4 Two-fifths of the 36 percent increase in real credit to the economy was due to directed lending for agriculture, industry, and housing construction—the latter with maturities of up to 40 years. Accelerating credit growth led to a liquidity crunch in the banking system in late 2004 (Figure 1).5 Bank liquidity improved in the first quarter of 2005 (in part owing to increasing government deposit placements), allowing interbank interest rates to decline.

Figure 1.
Figure 1.

Belarus: Monetary Developments, December 2003-March 2005

Citation: IMF Staff Country Reports 2005, 214; 10.5089/9781451805161.002.A001

Source: National Bank of Belarus.

Contribution to Reserve Money and Broad Money Growth, 2003–04

(In percent)

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Sources: Belarusian authorities; and staff calculations.

9. The liquidity crunch in late 2004 exposed structural weaknesses in the state-dominated banking system. In recent years, the system benefited from growing deposits and rising rubel demand, and was bolstered by repeated government recapitalizations of key banks, increasing government deposits in selected banks, as well as some loan evergreening and supervisory forbearance. The share of nonperforming loans fell by half since end-2002 to 4.6 percent at end-2004 partly as a result of rapid credit expansion driven in part by directed lending, which, however, occurred with limited regard to creditworthiness considerations.6 State banks’ profitability remained low, with the single large private bank accounting for well over half of bank profit in 2004 with a return on equity of 22.3 percent, and the two largest state-owned banks posting returns on equity below 3.5 percent. The banking system remains vulnerable to shocks, including to a possible reversal in the recently gained confidence in the banking system that underpinned the increase in deposits.

Bank Recapitalizations, 2000–04

(In billions of rubels, unless otherwise indicated)

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Source: Belarusian authorities.

10. The accompanying FSSA reports significant improvements in financial regulation and supervision, but notes the risk that systemic banks could become insolvent in the absence of recurrent large government recapitalizations. Belarus has made significant progress in upgrading the financial regulatory and supervisory framework toward international standards. However, state ownership of banks remains predominant and “recommended” credits drive credit growth despite debtors’ low profitability and creditworthiness. As a result, the largest state banks’ balance sheets remain weak, posing significant systemic risk.

11. The 2004 surge in the current account deficit was partially reversed in early 2005. Last year’s current account deficit was much larger than expected despite favorable terms-of-trade developments. It was boosted in December by an estimated US$½ billion in one-off imports owing to temporary tariff exemptions and purchases advanced in anticipation of switching the VAT on trade with Russia to the destination principle from 2005. Exports and imports grew by about 40 percent on the back of strong external and domestic demand coupled with growing margins on energy trade. FDI fell further to minimal levels with privatization stalled and the golden share rule expanded.7 The current account surplus in the first quarter of 2005 allowed the NBRB to increase its reserves. While Belarus’s external indebtedness at end-2004 was low at 18½ percent of GDP, over two-thirds of it—equivalent to almost four times gross official reserves—were short term.

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The trade deficit with CIS countries…

Citation: IMF Staff Country Reports 2005, 214; 10.5089/9781451805161.002.A001

Source: Ministry of Statistics of Belarus.
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…is in part offset by the surplus vis-à-vis non-CIS countries.

Citation: IMF Staff Country Reports 2005, 214; 10.5089/9781451805161.002.A001

Source: Ministry of Statistics of Belarus.

12. The real effective exchange rate remained broadly unchanged while unit labor costs rose in 2004. Domestic inflation was largely offset by the 6.6 percent nominal effective depreciation during the year. The rubel’s real exchange rate vis-á-vis the Russian ruble depreciated by 3.7 percent (this currency dominates the REER given its ⅔ weight). However, the real exchange rate against the dollar appreciated markedly, bolstering dollar wages. Unit labor costs picked up on the back of rapid wage growth, but with limited consequences on measured competitiveness so far, since key trading partners experienced similar increases. Overall, Belarusian exports have marginally increased their market share in both CIS and non-CIS countries.

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The real effective exchange rate remained broadly stable…

Citation: IMF Staff Country Reports 2005, 214; 10.5089/9781451805161.002.A001

Source: National Bank of Belarus and IMF.
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…while unit labor costs are on the rise.

Citation: IMF Staff Country Reports 2005, 214; 10.5089/9781451805161.002.A001

Source: National Bank of Belarus and IMF.

13. Market-oriented structural reforms have stalled. The cost recovery of utility services for households declined by 12 percentage points in 2004 to 54 percent. Privatization, limited to small municipal property, yielded 0.1 percent of GDP, while debt conversions and share buybacks resulted in increased state ownership in several large enterprises and banks. As a result, the share of the private sector remained under 25 percent. The concentrated industrial structure is highly amenable to centralized economic management, as highlighted by the government’s close monitoring of 178 state-owned enterprises that account for 13½ percent of GDP.

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Belarus remains well behind other countries in structural reform progress.

Citation: IMF Staff Country Reports 2005, 214; 10.5089/9781451805161.002.A001

Source: EBRD Transition Report 2004.Note: Minimum score (little progress) is 1 and maximum score is 4.33 (“4+”). The share of private sector in GDP has been re-normalized to fit the scale. The privatization indicator is an average of the small-scale and large-scale.

14. The planned currency union with Russia will be delayed. In the absence of final agreement in several key areas—including fiscal interaction between Russia and Belarus, the modalities of monetary policy decision making, the conversion exchange rate, and rules for fiscal prudence—implementing the currency union from January 2006 is no longer feasible.

II. Policy Discussions

15. Discussions produced a constructive dialogue, focusing on the sustainability of Belarus’s recent macroeconomic performance. The authorities and staff have argued their case in the framework of distinctly different economic paradigms. The authorities emphasized the social aspects of their policies, which, they argued, were a better fit for Belarus’s economy and would continue delivering the good results seen in recent years. Staff, on the other hand, argued that Belarus was on an unsustainable path characterized by centralized demand stimulation but lacking the prerequisites of long-term supply growth. Discussions covered the macroeconomic framework and the medium-term outlook; the monetary and fiscal policy framework as well as the need for policy adjustment and for structural and institutional reform.

16. The authorities argued that their socially-oriented policies were a success. They continued to project rapid growth and considered administrative controls and centrally-managed resource transfers more effective in dealing with macroeconomic shocks and imbalances than market forces (Box 1). Therefore, they did not see immediate reasons for foregoing further rapid wage increases, phasing out directed credit or speeding up structural reforms.

17. Staff pointed to the risks of Belarus’s centrally-managed demand-boosting policies. The recent rapid economic expansion with declining inflation was due to favorable external developments and an ultimately unsustainable macroeconomic policy mix. While the economy’s momentum is expected to lead to considerable growth in 2005, this strategy risks running out of steam in subsequent years. The productivity increases to underpin sustainable growth are unlikely to be forthcoming given the government’s excessive footprint in the economy and growing tensions resulting from current policies. As discussed in the SI paper, real wage growth has significantly outpaced productivity increases since 1995.8 Looking forward, ambitious centrally-mandated economy-wide wage targets threaten to decapitalize enterprises by squeezing their profit margins, and—together with the slow exchange rate crawl—undermine productivity growth and external competitiveness. Finally, inflation pressures would mount with further monetary expansion driven by recommended credits and the consequent need to recapitalize banks.

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High wage growth undermines profitability, placing the economy on an unsustainable path.

Citation: IMF Staff Country Reports 2005, 214; 10.5089/9781451805161.002.A001

Sources: Belarusian authorities; and staff calculations.

IMF Advice and Belarusian Policy Implementation

The authorities have responded to several Board recommendations and have a good track record of implementing technical assistance recommendations. Recent policy decisions in line with earlier recommendations include the elimination of direct NBRB financing of the budget from 2004, and the incorporation of the Social Protection Fund and, from January 2005, the Innovation Funds into the central government budget. Cooperation in demand-driven technical assistance has led to the publication of fiscal transparency and data ROSCs, and Belarus’s subscription to the SDDS.

However, the effectiveness of surveillance appears limited in areas where fundamental disagreements remain over the conduct of macroeconomic policies. These areas include key forms of government intervention in the economy, notably (i) rapid centrally-mandated wage growth targets; (ii) recommended lending aimed at priority areas determined by the government; (iii) administrative intervention in price setting; and (iv) the newly expanded golden share rule. The authorities also do not consider IMF-recommended structural reforms as a priority. In particular, they do not view privatization as contributing to greater economic efficiency.

In the past two years, differences persisted between the authorities’ and IMF’s projections in the monetary and fiscal area. The fiscal outcomes bridged the gap between the two in 2003, and were closer to the IMF’s projections last year. As for the monetary projections, both the authorities and the IMF have significantly underestimated the massive increase in demand for rubels (the authorities by a smaller margin). This underestimation explains why inflation was lower than projected in both years despite much higher reserve and broad rubel money growth.

Monetary and fiscal targets and actual performance

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Source: Belarusian authorities and IMF Country Reports 03/117 and 04/144

18. Belarus’s open, unreformed economy is also vulnerable to looming exogenous shocks. The magnitude of the net resource transfer from Russia cannot grow indefinitely—in fact, it is likely to shrink as world market energy prices stabilize or retreat, while Belarus’s gains from preferential access to Russia’s market are likely to diminish as Russia joins the WTO and reforms its economy.9 Belarus’s long-term supply growth is undermined by weakened market signals, delays in structural reforms—the basis for economic take-off in other transition economies—and the lack of the knowledge and resource transfer associated with FDI. This, together with precariously low international reserves, persistent arrears, excessive inventory levels and a high, albeit declining, share of loss-making enterprises, leave the economy vulnerable to shocks. Finally, the rapidly aging population would place increasing long-term pressure on an unreformed pension and health system.

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After decades of demographic stability…

Citation: IMF Staff Country Reports 2005, 214; 10.5089/9781451805161.002.A001

Source: Statistical Yearbook.1/ Working age population covers males aged 16–59 and females aged 16–54.
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…trends are projected to worsen sharply, leading to a doubling of the dependency ratio, calling for urgent reforms.

Citation: IMF Staff Country Reports 2005, 214; 10.5089/9781451805161.002.A001

Source: Population Division of the Department of Economic and Social Affairs of the United Nations Secretariat.

19. In sum, disagreement remained on the medium-term growth path. The authorities projected continued rapid growth around 8 percent over the medium term, accompanied by falling inflation and limited current account deficits. In contrast, on current policies, staff projected growth at 7.1 percent in 2005, followed by a slowdown to near-stagnation in a few years. Under the staff’s reform scenario, growth would dip in 2005–06 given tighter macroeconomic policies and structural reforms, but would remain strong over the medium term.10 Inflation would remain in low double digits under unchanged policies, but decline relatively fast in the reform scenario. The current account deficit would continue to be constrained by the paucity of external financing if policies were retained, while greater availability of financing—in particular, FDI—would allow higher growth-enhancing technology imports, and hence, rising current account deficits.

A. Fiscal Policy

20. The authorities saw more room for fiscal maneuver and viewed a less restrictive fiscal policy in 2005 both desirable and financeable. The 2005 budget—as amended—would represent a marked fiscal expansion. Better-than-expected revenues in January-April provide a basis for expecting overperformance relative to the budget’s unrealistically conservative revenue projection, which assumes a two percentage points of GDP drop compared with 2004.11 While the authorities did not rule out a markedly smaller deficit outcome, they were unwilling to commit to it, since they envisaged higher expenditures in response to any revenue overperformance. This year’s budget, as previous ones, focuses on social spending—including substantial support for enterprises, which may need to rise given the ambitious wage targets—but the authorities also envisage further increasing public investment, as resource constraints allow. In contrast with earlier years, they considered the financing situation more favorable, given large government deposits in the banking system and expected, albeit yet unidentified, foreign financing. They also noted that government debt was very low, and that the high tax burden was not a source of concern given rapid growth and continued export competitiveness.

21. Staff argued for retaining budget balance in 2005 by containing and rationalizing expenditures to lower the size of government and support further disinflation. With the size of government—even as conventionally measured—very large, and against the background of rapid credit expansion and very low international reserves, the budgeted 1.8 percent of GDP increase in the deficit relative to 2004 could have serious adverse consequences on fragile inflation and exchange rate expectations. Instead, expenditure should be restrained, coupled with a policy of saving revenue overperformance, which would suffice to keep general government operations in balance this year. This could be followed by a deficit of ¾ percent of GDP in 2006, as quasi-fiscal activities are brought on budget and if fiscal room remains, the tax burden is reduced by cutting the distorting turnover tax levied concurrently with the VAT, combined with a simplification of tax rate structures and a rapid phase-out of discretionary tax preferences. Revenue reform would be important given the difficulty of sustaining the current high revenue ratio as growth moderates. Expenditures could be contained by limiting the growth of budgetary funds, streamlining subsidies, net lending and the wage bill, and improving the targeting of social spending (e.g., house maintenance subsidies).

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The size of government remains larger than in most comparator countries.

Citation: IMF Staff Country Reports 2005, 214; 10.5089/9781451805161.002.A001

Source: WEO, International Monetary Fund.

General Government Operations, 2004–06

(In percent of GDP)

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Sources: MoF and staff estimates.

22. Further budgetary reforms were also discussed. The authorities agreed that while a stable fiscal environment was preferable, frequent amendments to the central budget were necessary to react to changing macroeconomic conditions. They also agreed to continue bringing remaining off-budget operations into the budget over time. With regard to recommended credits, they were of the view that the state legitimately instructed majority state-owned banks to lend under priority programs, such as housing construction and investment projects, and its role as main shareholder included ensuring that these banks remained adequately capitalized. Staff argued for minimizing the number of budgetary amendments to enhance transparency and the predictability of the business environment, and for the inclusion of all quasi-fiscal operations into the budget. Existing quasi-fiscal activities could be substantially reduced, providing explicit budgetary subsidies for those that remain. This would help avoid the resulting recurrent claims on budgetary resources, notably, annual large bank recapitalizations. Finally, to enhance the efficiency of budget resource management, central government deposits should be gradually shifted from state banks to the Single Treasury Account (STA) with the NBRB.

23. It is critical to avoid the large scale long-term commitment of future budget resources through directed and subsidized lending, and to address the fiscal implications of aging. The cumulative costs of directed credits and subsidized housing loans can escalate into a significant fiscal burden over the medium term, which would coincide with that stemming from adverse demographic trends that are well advanced in Belarus. On present trends and in the absence of unexpected large net immigration, the labor force is projected to enter a long-term phase of decline from 2007, plummeting by 14½ percent in the 15 years through 2020, while the share of the elderly will increase dramatically. These developments will place great pressures on pension and health system finances, and raise social assistance needs. The authorities argued that lending activities were controlled to ensure that their cumulative costs do not become unbearable. They also pointed to increasing support to families with children as a measure taken to limit population aging, and reiterated that other social policy targets—wage and pension increases and housing construction—were more important at present. However, there was agreement that quantification of the fiscal impact of demographic changes would be a useful first step.

B. Monetary and Exchange Rate Policy

24. There was agreement on the policy objective of lowering inflation, but the monetary policy framework needs strengthening. The 2005 monetary policy framework rightly assigns further reducing inflation to 8–10 percent by year-end as the priority objective. Lowering inflation was seen as monetary policy’s most effective contribution toward stronger external competitiveness, noting that improvements in productivity and competitiveness depended primarily on developments in the enterprise sector. However, the NBRB should be accorded with operational independence to achieve the inflation objective. Clearly, the NBRB’s ability to meet its policy objectives will depend to an important degree on continued household confidence in the rubel and the banking system, as well as support from fiscal, quasi-fiscal, and—over the medium term—structural policies. In this regard, the NBRB’s room for maneuver is severely constrained by an overly ambitious credit policy, low foreign exchange reserves, and structural weaknesses in the banking system.

25. There was also agreement that while the crawling band could help achieve the inflation objective, a measure of exchange rate flexibility should be retained. This was warranted by low official reserves, as well as uncertainty about future developments in the terms of trade, external competitiveness and short-term capital flows. Greater exchange rate flexibility would also help support attainment of the authorities’ inflation goals in the event that inflation in Russia exceeds the authorities’ projections. Policy transparency would be greatly enhanced by confirming the policy focus on the Russian ruble as the peg currency. While external competitiveness appeared adequate for now, it required close monitoring in light of emerging risks stemming from continued rapid wage growth and the likely intensification of competition in Russia’s markets as third-country exporters gain improved access.

26. Staff argued for restraining domestic credit growth—including directed lending—in 2005 to avoid jeopardizing the achievement of the inflation objective. In particular, real credit growth to the economy should not exceed the NBRB’s indicative target of 14–18 percent, allowing the NBRB to stay its anti-inflationary course. The NBRB should inject liquidity strictly on market terms, eschewing bilateral transactions (notably, refrain from purchasing at face value the low-yielding government securities used in the end-2004 bank recapitalization). In this regard, the NBRB reiterated its insistence that future bank recapitalizations be financed through the budget, avoiding additional money creation.

27. Close monetary-fiscal coordination is critical for achieving low inflation. Changes in the large stock of government deposits currently held in the banking system could significantly impact banks’ liquidity, and should, therefore, be carefully coordinated with the NBRB. Similarly, enhanced coordination would be important regarding government securities operations.

C. Banking System

28. There was agreement that the weak position of several systematically important state banks was a concern. Despite rapid growth in household deposits, these banks remained dependent on periodic government recapitalizations, fresh government deposits, central bank liquidity injections and ready access to interbank excess liquidity. It was agreed that safeguards would be desirable to limit the NBRB’s role in any rescue operations of these banks by defining the role of the NBRB as the lender of last resort, and setting out guidelines for distinguishing bank illiquidity from insolvency and for the modalities of NBRB and government engagement in each case.

29. However, the strategy of safeguarding financial stability through regular top-ups of fragile banks’ capital while assuming continued remonetization should be reassessed. Using systemically important state banks as conduits for directing resources to selected sectors and activities chosen without due regard to profitability or creditworthiness implies that the banking system cannot effectively channel financial resources toward their best use. This strategy also results in a government-mandated redistribution of household savings to areas designated by policymakers as high priority. The recurring recapitalizations that become necessary as a result perpetuate state banks’ loss-making activity, could undermine the public’s trust in them, and delay adjustment in the economy in response to changes in the economic environment. This in turn would undermine the basis for continued remonetization, as well as for increases in productivity, and hence growth sustainability.

D. External Sector

30. The significant end-2004 deterioration in the current account is likely to be largely reversed in 2005, but concerns remain about the rise in short-term liabilities. While the external debt ratios remain relatively moderate, the share of short-term debt is on rise. Such debt is generally on relatively favorable terms but still raises roll-over risk. In addition, the current stipulations under the golden share rule are excessive, sharply reducing the availability of FDI as well as undermining the quality of the remaining trickle owing to the resulting adverse selection of investors. Dismantling the golden share rule would facilitate larger net FDI inflows, which would bring much-needed technology and knowledge transfer, access to international supply channels and markets, and provide non debt-creating external financing.

31. The Belarusian economy faces the risk of policy-induced losses in competitiveness. The envisaged wage and exchange rate policies are likely to undermine competitiveness in coming years. Belarus’s free economic zones also cause distortions in the tax regime, and hence lower economic efficiency. A further problem is that while Belarus is making technical progress in WTO talks, its accession date is likely to be later than Russia’s. To ease adjustment under these constraints, the authorities noted that they had begun to explore alternative sources of external financing, including a possible syndicated loan. However, medium-term sources of financing for 2005 and beyond remained largely unidentified.

32. Two scenarios quantify possible balance of payment outcomes, while the debt sustainability exercise suggests limited risks. In the baseline medium-term scenario, the current account deficit would hover around 3 percent of GDP with external financing remaining limited and foreign reserves stuck at around half a month’s imports (Table 6). As a result, the economy would remain highly vulnerable to shocks. In the reform scenario (Table 7), the authorities would introduce reforms boosting competitiveness and FDI inflows. Following an initial current account deterioration reflecting higher technology imports, external financing would shift toward non debt-creating inflows. The current account would subsequently improve with rising export competitiveness, and foreign reserves would gradually climb toward three month’s of imports. The staff’s debt sustainability projections (Table 9) generally indicate a modest build-up of external debt through 2008.1 Although the public debt dynamics generally do not give rise to concerns, under some stress test scenarios the debt could approach uncomfortable levels.

Table 1.

Belarus: Selected Economic Indicators, 2001–06

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Sources: Belarusian authorities; and Fund staff estimates.

The Belarusian national accounts have overstated real growth by about 1–2 percent. A new industrial production index, which would improve the estimates is calculated but not published yet.

Consolidates the state government and Social Protection Fund budget; and, from 2002, the activities of the innovation funds, formally incorporated into the state government budget from 2005.

Table 2.

Belarus: Monetary Accounts, 2002–06 (Current Policies)

(In billions of Belarusian rubels, unless otherwise indicated; end-of-period)

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

For the authorities projection for 2004, increases in rubel claims.

Defined as annual GDP divided by average broad (rubel broad) money for the year.

Table 3.

Belarus: Monetary Accounts, 2002–06 (Reform Scenario)

(In billions of Belarusian rubels, unless otherwise indicated; end-of-period)

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

For the authorities projection for 2004, increases in rubel claims.

Defined as annual GDP divided by average broad (rubel broad) money for the year.

Table 4.

Belarus: Fiscal Indicators and Projections, 2001–06

(In billions of rubels, unless otherwise indicated)

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Source: Ministry of Finance, SPF, and IMF staff estimates.

Includes innovation funds from 2002, formally incorporated into the state government budget from 2005.

Includes changes in expenditure arrears.

The actual deficits from above the line include all the closing expenditure for the year carried out in January of the following year and correspond to the authorities fiscal year reports. The deficit values from the financing side include January closing expenditure in the year they were actually paid.