June 29, 2009
1. This statement reports on key economic and policy developments since the staff report was finalized. The new information does not alter the thrust of the staff appraisal.
2 In recent weeks, the authorities took several important actions in the area of exchange rate and monetary policies:
Monetary policy has been tightened. As indicated in the staff report, the prior actions—raising the NBRB overnight rate by 2 percentage points and issuing a recommendation to banks to increase the rates on new household term deposits by 2 percentage points—have been observed (Appendix II, Table 3). In addition, the authorities are reducing liquidity support to banks to bring Net Domestic Assets (NDA) in line with the proposed revised target.
Exchange rate flexibility has been enhanced. The exchange rate of the rubel against the basket has been gradually lowered to 5 percent below the central parity. On June 22, 2009 the NBRB announced widening of the exchange rate band from ±5 percent to ±10 percent relative to the central parity.
3. Households and businesses appear to have reacted favorably to the policy changes. The gradual depreciation of the rubel during June did not trigger a new wave of currency switching: indeed a spike in demand for foreign exchange observed in late May-early June has waned. The upward trend in the stock of household term rubel deposits has resumed, indicating increased public confidence in stability of banks and the rubel. The media response to the widening of the exchange rate band has been generally positive, and there appears to have been no significant increase in foreign exchange purchases by households.
4. Prospects for external financing during 2009-10 are broadly consistent with the projections in the staff report. The final $500 million tranche of a $2 billion loan from Russia, originally projected to be disbursed in the second quarter, is now expected to be disbursed in the second half of the year. The authorities have applied for Macro-Financial Assistance from the EU, with a view to bolstering reserves further in late 2009 or 2010.
5. The corrective actions taken by the authorities offer a good prospect that they will be able to meet the proposed revised performance criteria for end-June. As of June 24, the level of Net International Reserves (NIR) was about $75 million below the proposed end-June floor, and the level of NDA about 300 billion rubels above the proposed end-June ceiling, after adjusting the targets for the delayed disbursement of the final tranche of the loan from Russia. However, the NBRB has been purchasing foreign exchange, and NDA is expected to fall as liquidity support extended to finance end-quarter tax payments by businesses is unwound. The authorities appear to be on track to meet the end-June fiscal performance criterion, as the central government has kept up efforts to control spending.
6. Recently released macroeconomic data illustrate the severity of the external shock and the authorities’ attempts to support domestic demand during April-May. During January-April, exports were 49 percent lower than in 2008 whereas imports fell by only 33 percent, leading to a sharp increase in the trade deficit. However, January-May investment in fixed capital was 18.9 percent higher than in the corresponding period of 2008, in part because of subsidized lending for residential construction. The expansion in investment offset the fall in net exports and contributed to a modest increase in GDP, which grew 1.4 percent year-on-year in January-May. This suggests that the composition of growth during 2009 may differ from that in the staff projections, and that there are some upside risks to the staff’s projection of a fall in output for 2009 of about 3 percent. However, since most of the growth in 2008 took place in the second half of the year, it remains likely that output for the full year 2009 will fall. CPI inflation in May amounted to 0.3 percent, reducing 12-month inflation to 13.6 percent.
7. Some further progress has been achieved in structural reforms. The authorities liberalized prices on some 40 percent of Belarusian exports. A number of items were excluded from the list of socially important goods and their domestic prices were liberalized. The authorities have also begun working on developing a privatization agency.