Abstract
This 2007 Article IV Consultation highlights that Belarus’s centralized economy grew rapidly over the past few years, enhancing social development. The state redistributed large and growing terms-of-trade gains stemming from favorable Russian energy pricing across the economy, boosting domestic demand. A new energy agreement, however, has abruptly reversed terms-of-trade gains. Belarus now pays Russia twice as much for gas supplies as in 2006 and a fifth more as a share of world market prices for crude oil. This resulted in an estimated loss of 5½ percent of GDP in 2007.
1. This supplement provides updated information that has become available since the staff report was finalized. Since Belarus is a 3(b) country under the Decision on Implementation of the 2007 Decision on Bilateral Surveillance, this supplement also provides a summary of the authorities’ reaction to staffs assessment of real exchange rate misalignment. The new information does not change the thrust of the staff appraisal.
2. Recent data confirm continued strong growth, inflation pressures, and a worsening trend in the current account balance. Real GDP grew by 8.8 percent in January–July 2007 compared with the same period last year. Twelve-month CPI inflation remained low at 7.2 percent in June, but the PPI surged to 14.1 percent, reflecting energy price pass-through. Preliminary estimates for the current account deficit in the first half of 2007, at 2.7 percent of annual GDP, point to a marked deterioration from the 0.7 percent of GDP deficit recorded in the same period of 2006. This is broadly in line with the staff report’s baseline projection.
3. General government operations remained in surplus in January–June 2007. The surplus of 1.9 percent of annual GDP is about double the average recorded in the first halves of the previous three years. It primarily reflects continued strong revenue performance.
General Government Operations in January-June in percent of annual GDP
General Government Operations in January-June in percent of annual GDP
| Revenue | Expenditure | Balance | |
|---|---|---|---|
| 2004 | 20.0 | 19.4 | 0.6 |
| 2005 | 22.1 | 20.6 | 1.5 |
| 2006 | 22.0 | 21.0 | 1.0 |
| 2007 | 23.1 | 21.2 | 1.9 |
General Government Operations in January-June in percent of annual GDP
| Revenue | Expenditure | Balance | |
|---|---|---|---|
| 2004 | 20.0 | 19.4 | 0.6 |
| 2005 | 22.1 | 20.6 | 1.5 |
| 2006 | 22.0 | 21.0 | 1.0 |
| 2007 | 23.1 | 21.2 | 1.9 |
4. The NBRB has continued to lower the refinance rate toward its end-2007 target. On August 1, the NBRB cut the refinance rate again by 25 basis points to 10.5 percent, consistent with reaching its end-year target level of 9 percent. Credit growth continues to be high at a 12-month rate of 56.5 percent in June.
5. The forthcoming 2008 Monetary Policy Guidelines envisage a streamlining of monetary policy targets. The NBRB will no longer peg the Belarusian rubel de jure to the Russian ruble from January 1, 2008. Formalizing the de facto peg maintained in the past several years, the NBRB intends to peg the rubel to the U.S. dollar within a corridor of ±2.5 percent around central parity. In addition, it will drop M1 as an intermediate monetary policy target, citing its weak correlation with inflation. Staff supports these moves as enhancing monetary policy transparency.
6. On Aug. 21, 2007, Standard & Poor’s Ratings Services assigned a ‘B+’ long-term foreign currency and a ‘BB’ long-term local currency sovereign credit rating to Belarus. Short-term sovereign credits were rated ‘B’. The outlook is stable. This first sovereign rating compares favorably to initial ratings for other CIS countries, being similar to those initially granted to Kazakhstan and Georgia.
7. The authorities stressed uncertainties associated with staff’s calculations regarding real exchange rate misalignment. The authorities argued that owing to their planned offsetting policy measures, terms-of-trade losses from energy price increases would be smaller than the cumulative 10–15 percent of GDP estimated by staff for the period to 2012. They also project smaller current account deficits than those in staffs baseline scenario; and with higher expected FDI inflows, they project lower debt accumulation in the coming years. The authorities also point to their plans to ease the tax burden and reduce the energy and material intensity of production—factors they expect will improve Belarus’s competitiveness.