Republic of Belarus
2009 Article IV Consultation and Second Review Under the Stand-By Arrangement-Staff Report Informational Annex; Staff Statement; Public Information Notice on the Executive Board Discussion; and Press Release
Author:
International Monetary Fund
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Publication Date:
30 Dec 2009
eISBN:
9781451805321
Language:
English
Keywords:
ISCR; CR; September; reform effort; policy; draft decree; anti-crisis fund; end-December NIR; banking system; financial support; financing constraint; nominal exchange rate; transmission mechanism; Loans; Global
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This 2009 Article IV Consultation highlights that Belarus has so far escaped a significant fall in output, despite a sharp fall in external demand. GDP declined 0.5 percent year over year in the first eight months of 2009, comparing favorably to Belarus’ main trading partners. Economic activity has been bolstered by strong domestic demand, especially for housing construction financed under government programs. Executive Directors have applauded the authorities’ commitment to a tight fiscal policy, with revenue shortfalls being offset by spending restraint while protecting priority social spending.

Abstract

This 2009 Article IV Consultation highlights that Belarus has so far escaped a significant fall in output, despite a sharp fall in external demand. GDP declined 0.5 percent year over year in the first eight months of 2009, comparing favorably to Belarus’ main trading partners. Economic activity has been bolstered by strong domestic demand, especially for housing construction financed under government programs. Executive Directors have applauded the authorities’ commitment to a tight fiscal policy, with revenue shortfalls being offset by spending restraint while protecting priority social spending.

I. Context: The Crisis and The Program

1. At the outset of the global economic crisis, Belarus was in a highly vulnerable position. The domestic economy was overheating, and the real effective exchange rate had appreciated sharply during the second half of 2008. The current account deficit was already high and reserves precariously low. Moreover, Belarus’s exports were highly concentrated—dominated by exports of manufactured goods to Russia (for which demand fell fast) and oil products to the European Union (for which the price was about to fall precipitously). Households were losing confidence in the currency. Faced with rapidly declining reserves, Belarus turned to the Fund for support.

2. The Fund-supported program aimed to balance sufficient adjustment to correct external imbalances with sufficient financing to avoid excessive contraction. The centerpiece of the program was a 20 percent devaluation of the exchange rate and a shift in the peg to a basket of currencies. The exchange rate adjustment was supported by tight income and fiscal policies and increases in interest rates. Fund financing was substantial, and was augmented when it became clear that the fall in Belarus’s exports was even larger than had been projected. Recent economic developments suggest that the program has helped to limit the damage from the crisis, but that external adjustment remains limited. The main focus of the discussions on the second review of the SBA was therefore on policy tightening to improve the external position. The main focus of the Article IV Consultation discussions was on the longer term policies needed to produce sustainable growth in a post-crisis world.

II. Progress So Far: Recent Economic Developments

3. Belarus has so far not experienced a significant fall in output, despite a sharp fall in external demand. GDP declined 0.5 percent year-on-year in the first eight months of 2009, as opposed to the 10.9 percent growth registered in the corresponding period in 2008 but still by less than Belarus’s main trading partners. Economic activity has been bolstered by strong domestic demand, especially fixed investment which expanded by 16.9 percent, due mainly to housing construction financed under government programs.

4. Inflation has fallen. Twelve-month CPI fell to 12.5 percent in August, as the impact of the negative output gap eclipsed the effects of exchange rate depreciation and utility price adjustment early in the year.

uA01fig01

Contributions to GDP Growth

(Percent)

Citation: IMF Staff Country Reports 2009, 333; 10.5089/9781451805321.002.A001

Sources: National Statistical Committee; and IMF staff calculations.
uA01fig02

Inflation

(Percent)

Citation: IMF Staff Country Reports 2009, 333; 10.5089/9781451805321.002.A001

Sources: Belarusian authorities; and IMF staff calculations.

5. The current account deficit has widened, and international reserves remain low. Export value contracted by 46 percent year-on-year during the first seven months of 2009, reflecting a sharp reduction in demand, especially by Russia. Imports fell by 35 percent. The energy balance also worsened, as export prices for oil products fell more than import prices of crude oil. The resulting current account deficit ($3.7 billion in the first half of 2009) was partially offset by net financial inflows, including privatization proceeds, trade credits, and government borrowing. Disbursement of the final $500 million tranche of a $2 billion loan from Russia has been delayed. However the Russian authorities expect to make the disbursement later in the year. There will be a $200 million loan from the World Bank. The European Commission will also propose a 200 million Euro loan under the EU’s macro financial assistance policy. The rollover rate on debt of the banking system has been about 75 percent, and the risks are limited given the moderate size of scheduled repayments by the banking system ($485 million in the second half of 2009). Currency substitution, which accounted for large reserve loss at the beginning of the year, came to a halt in early June and has been partially reversed since. Gross international reserves began to fall in early July, and declined to below $3 billion in late August. Remedial actions were agreed with staff during discussions on the second review and reserves have begun to recover. Gross reserves have also been boosted by the recent SDR allocations amounting to about $570 million.

uA01fig03

International Reserves

(Billions of U.S. dollars)

Citation: IMF Staff Country Reports 2009, 333; 10.5089/9781451805321.002.A001

Source: National Bank of the Republic of Belarus.
uA01fig04

Household Deposits 1/

(Trillions of Belarusian rubels)

Citation: IMF Staff Country Reports 2009, 333; 10.5089/9781451805321.002.A001

Source: National Bank of the Republic of Belarus.1/ Deposits held with the six largest banks operating in Belarus.2/ Forex deposits shown excluding valuation changes (at constant exchange rate as of January 2).

6. The fiscal adjustment remains strong and on track, with further revenue shortfalls being offset by spending restraint. The effects of the crisis continue to be felt, especially through lower profit tax and excise revenue. The authorities have responded with cuts in expenditures for goods and services and “other expenditures”. As agreed at the time of the first review, local government deficits financed from accumulated surpluses and foreign-financed net lending under projects approved before the program, do not need to be offset by additional adjustment by the central government. As a result, the projected consolidated budget deficit could reach 1.7 percent of GDP in 2009.

7. The exchange rate has remained broadly stable since end-June. Following the depreciation of the rubel during May and June, and the widening of the trading band from 5 percent to 10 percent in June, the exchange rate has varied little against the basket of currencies.

uA01fig05
Source: National Bank of the Republic of Belarus.1/ The Belarusian rubel per U.S. dollar rate as set at the Belarusian Currency and Stock Exchange (BCSE). The BCSE rate is set as the official rate for the following day.2/ The basket rate is calculated using BCSE exchange rates.

8. Market interest rates remain high in real terms. The NBRB increased the interest rate on overnight loans by two percentage points in June, while leaving the refinancing rate unchanged, and interbank interest rates are usually over 20 percent. As inflation subsided, market-determined interest rates increased sharply in real terms.

uA01fig06

NBRB Policy Interest Rates and the Interbank Rate

Citation: IMF Staff Country Reports 2009, 333; 10.5089/9781451805321.002.A001

Sources: Belarusian authorities; and IMF staff estimates.
uA01fig07

Real Overnight Interbank Rate

(Percent)

Citation: IMF Staff Country Reports 2009, 333; 10.5089/9781451805321.002.A001

Sources: Belarusian authorities; and IMF staff calculations.

9. However, lending under government programs has continued to increase at a high rate (Box 1). In the first half of 2009, gross disbursements under government programs were some 40 percent higher than in the corresponding period of 2008. The share of such lending in overall credit to economy increased from 33 percent in December 2008 to 38 percent in July 2009. This lending helped propel high rates of investment and domestic demand and therefore contributed to the loss of reserves.

10. Financial soundness indicators remain broadly satisfactory except for insufficient liquidity in some banks. The aggregate capital adequacy ratio has declined slightly, but remains sufficiently high to cope with a variety of potential stress test scenarios (Box 2). Nonperforming loans remain low, though they are expected to increase further. Profitability has slightly decreased. Liquidity indicators are a source of concern, especially for state-owned banks, some of which do not comply with the prudential liquidity ratios. The persistent vulnerability of these banks to liquidity risk stems from their significant involvement in lending under government programs.

III. Riding Out the Storm: Policy Discussions on the Program

A. Macroeconomic Outlook

11. So long as credit growth is contained, the program targets for 2009 remain within reach. Based on tight fiscal and monetary policies in the period ahead, supported by the imposition of a limit on credit under government programs, GDP is projected to decline by about 1 percent in 2009. Significant import contraction in the last few months of the year is expected to contain the current account deficit to around 9½ percent of GDP. This, together with financial support from international donors, will help attain the gross reserve target for 2009. For 2010, the aim should be to bring down the current account deficit further to 7 percent of GDP and increase gross reserves to at least $7 billion (about 2½ months of imports). With the expected recovery of external demand, which will facilitate a modest rebound of output in the order of 2 percent, this can be achieved with a fiscal policy stance similar to that of 2009 and a credit increase in line with nominal GDP. However, an unrestrained credit policy would enlarge further the saving-investment gap, leading to a current account deficit of 13 percent of GDP in 2009 and (if continued on a similar scale) 11 percent in 2010, and a cumulative shortfall of gross reserves by end-2010 of about $4 billion compared with the target of the original program. The authorities broadly agreed with this analysis, though they were more optimistic about export prospects and external financing going forward, and favored a smaller reduction in credit growth.

Lending Under Government Programs

The government is an active player in the financial system, and bank lending under various government programs remains a distinctive feature in Belarus. Government programs are typically implemented via presidential decrees or resolutions of the Council of Ministers which recommend lending to particular projects, sectors, or companies, often at highly subsidized interest rates. Disbursements and repayments are done outside the regular budget process, but a part of the interest payments is subsidized by the budget: borrowers typically pay a subsidized rate to the banks and the government compensates the banks for the difference between the subsidized and the “market” rate which is typically set at a certain margin over the NBRB’s refinancing rate. Many of recommended credits carry state guarantees (Box 1 in the 2009 FSAP Update). There has been a sharp increase in lending under government programs over the period of 2005-09, with the bulk of credits going to agriculture and construction.

State-influenced lending is generally distortive. It interferes with the development of a sound risk culture, precluding the proper pricing and efficient allocation of credit in accordance with inherent risk. Such lending also blocks normal monetary policy transmission mechanism by inducing credit expansion at non-market terms.

The Fund staff has consistently expressed concern about these lending programs. In December the authorities agreed not to initiate new programs financed with government deposits and placed a ban on transferring additional government deposits to commercial banks in order to set the stage for transforming state banks into more market-oriented entities. Nevertheless, while overall monetary limits under the program framework were met, lending under government programs continued in early 2009 using non-government deposit financing, prompting expressions of concern in the staff report in the first review of the SBA that subsidized lending crowds out lending to the private sector. Since then, lending under government programs has increased even more rapidly. The share of such lending in overall credit to economy increased from 33 percent at end-2008 to 38 percent in July 2009.

At the same time, under pressure to meet the lending targets specified in decrees and resolutions, banks turned to the nBRB for refinancing. The NBRB supported this lending using mechanisms outside its standard refinancing facilities (via ad hoc decisions of NBRB Board), increasing the stock of such support by some 1.9 trillion rubels (1.4 percent of GDP) in the first half of 2009 and by a similar amount in July-August 2009 (the average interest rate for refinancing of these programs at the end of August averaged to 9.3 percent, negative on a real basis).

uA01bx01fig01
Sources: National Bank of the Republic of Belarus; and IMF staff calculations.1/ The flows in H1 2009 are shown at program exchange rates.

Banking System Stress Tests

Stress tests based on the end-June 2009 data show that banks have sufficient capital buffers to withstand the assumed shocks (see table) but are significantly vulnerable to liquidity risk.

Despite a small decrease in the aggregate capital adequacy ratio (CAR) since late 2008, banks would remain sufficiently capitalized in the considered stress test scenarios. In the scenario of an increase in the ratio of nonperforming loans to total loans by 15 percentage points, the aggregate CAR would drop from 19.1 percent to 12.4 percent, which is sufficiently above the prudential minimum of 8 percent. The direct effects of exchange rate or interest rate risk remain insignificant. Stress-tests based on macro scenarios, which the NBRB has recently performed in the context of the region-wide stress testing exercise organized by the IMF staff, also suggest that bank capital would stay above the prudential minimum even in the event of a significant macroeconomic slowdown.

State-owned banks are significantly vulnerable to liquidity risk. As of end-June 2009, the actual current liquidity ratio was 95 percent for the banking sector as a whole, but only 76 percent for state-owned banks, which is only marginally above the prudential minimum of 70 percent. Under the considered stress test assumptions (a 10 percent withdrawal of domestic liabilities or a 25 percent withdrawal of liabilities to nonresidents), state-owned banks as well as the largest banks would end up with the current liquidity ratio below the statutory minimum. The vulnerability of state-owned banks to liquidity risk, which had already been emphasized by the results of stress tests in the past, stems from the significant involvement of these banks in lending under government programs.

Sensitivity Stress Test Assumptions and Results

(Based on end-June, 2009 data)

article image
Source: National Bank of the Republic of Belarus.

The current liquidity ratio is the ratio of assets with a remaining maturity of less than one month to liabilities with a remaining maturity of less than one month.

uA01fig08

Adjustment and High-Credit Scenarios

Citation: IMF Staff Country Reports 2009, 333; 10.5089/9781451805321.002.A001

Source: IMF staff estimates.

12. Medium-term prospects depend critically on the implementation of structural reforms to improve the country’s growth potential and reduce external vulnerability. Reforms aimed at fostering a dynamic private sector and increasing the role of market in resource allocation would boost productivity and ease external financing constraints (discussed in Section V), realizing a medium-term potential growth of 7 percent. Under this scenario, which also envisages low fiscal deficits and a prudent monetary policy that contains inflation to moderate single-digits, the current account deficit will gradually fall and stabilize at around 3½ percent of GDP. The capital inflows associated with accelerated privatization will help increase gross reserves to cover about three months of imports, providing a buffer against external shocks. Under a more hesitant approach to reforms, the external financing constraint would bite harder, putting constraints on a growth model reliant on high investment. Medium-term growth would be expected to be 2 percentage points lower, reflecting financing constraints and lower productivity growth. External vulnerability will remain, reflected in high current account deficits and external debt. The authorities broadly agreed but emphasized the strengths in their growth model and their ongoing efforts to improve the business environment.

B. Credit, Monetary, and Exchange Rate Policies

13. A tight credit policy is critical for external sustainability. Sharp expansion of lending under government programs, mainly to agricultural and construction sectors, has resulted in strong aggregate investment and domestic demand and has put substantial pressure on the current account and international reserves. The authorities originally planned to increase this lending even more in the second half of 2009 arguing that agriculture and construction have low import intensity and therefore could be used as the means for pulling the economy out of the recession. Staff disagreed, noting that such an expansion would have direct and indirect effects on domestic demand, and hence on the balance of payments (see paragraph 11). The authorities accepted these arguments and have agreed to limit lending under government programs to 4 trillion rubels for the second half of 2009.1 This is necessary to return NDA and NIR to a path consistent with the program objectives, and is also expected to improve banks’ liquidity ratios. The limit will initially be implemented through NBRB recommendations to commercial banks. The issues of limits for 2010 will be taken up in the context of discussions of the third review.

Basis for a Limit on Credit under Government Programs in 2009

article image
Source: IMF staff calculations.

14. The authorities will also contain domestic demand in the remainder of 2009 by limiting credit and imports by state enterprises with high levels of inventories. State enterprises have been slow to respond to the fall in domestic and external demand, in part because they have tried to adhere to output targets set before the crisis. As a result inventories have increased sharply. The NBRB has now issued recommendations to banks to restrict credit to enterprises with high levels of inventories, to curtail their demand for further imports, and the government has required state enterprises to secure authorization for additional imports from supervising ministries. These short-term measures are already bearing fruit and are expected reduce demand for imports by about $400 million in the remainder of 2009, helping the authorities to meet the reserves targets under the program.2

uA01fig09

Inventories and Production

Citation: IMF Staff Country Reports 2009, 333; 10.5089/9781451805321.002.A001

Sources: Belarusian authorities; and IMF staff calculations.1/ Lagged 12-month moving average of industrial production.

15. The NBRB will continue to use interest rate policy to contain credit and domestic demand. Market interest rates are now well above the expected rate of inflation, and the authorities would like to begin reducing them. However, they accepted staff advice that such a reduction should await clear evidence that they are on track to meet targets for external reserves and that the process of de-dollarization is well established.

16. The level of exchange rate appears to be appropriate based on agreed policies (Box 3).3 Comparing the current account norm with the staffs medium-term projections implies only a marginal overvaluation of 2 to 4 percent. The external sustainability approach also indicates that the net external asset position can be broadly sustained without a major correction in the exchange rate. At present, given the importance of the nominal exchange rate in shaping public expectations, staff agreed with the authorities that the current exchange rate regime would serve the country well in the near term. However, the staff advised the authorities to make use of flexibility available under the ±10 percent band, especially if reserves targets appear to be at risk for reasons other than insufficiently tight credit policy.

C. Fiscal Policies

17. The authorities remained committed to fiscal restraint, an important anchor of the adjustment strategy. They planned to offset the estimated revenue shortfall (0.5 percent of GDP) by savings on unallocated appropriations, goods and services, and investment of the central government. They decided to further defer the wage increase and increase charges for transportation and utilities (which will reduce the need for subsidies) to help rein in spending, making room for a pension increase of up to 10 percent this year. Local budgets’ expenditure will be monitored closely and, when possible, kept in line with revenue performance. The authorities remain committed to shielding social sectors from spending cuts.

18. The deficit limit of 1.7 percent of GDP in the draft 2010 budget is consistent with program objectives. Under the proposed budget, the tax burden will be reduced by 2½ percent of GDP, mostly by eliminating the turnover tax and local sales taxes. Expenditure on goods and services and investment spending will be reduced. Increases in charges for transportation and utilities in early 2010 will rein in transfers, but interest rate subsidies and those for oil refineries will continue to put pressure on the budget. The wage bill will increase in line with nominal GDP. A presidential decree to increase targeted assistance will double subsidies and transfers to the poor. The Ministry of Finance will also propose additional investment spending (1.3 percent of GDP), which would restore investment spending to its 2009 level as a share of GDP, but the inclusion of this spending in the 2010 budget is contingent on securing revenue sufficient to offset the effects on the deficit. To this end, a proposal to increase the VAT rate by 3 percentage points is under discussion.4

Is There a Need for Further Adjustment in the Exchange Rate Regime or Level?

Adopting the currency basket with flexibility around a central parity was well suited for riding out the crisis. The substantial misalignment observed at the end of 2008 has been largely corrected and there is no need for further significant exchange rate adjustment. Sustainability of the current rate, however, is conditional on maintaining tight control of domestic demand.

The switch to the currency basket in January 2009 accompanied by a nominal correction reversed the erosion of competitiveness. The basket preserved the function of a nominal anchor essential for maintaining external stability, but at the same time safeguarded Belarus’ competitiveness in the environment of significant volatility of major trading partners’ currencies. The band around a central parity provided a cushion for responding to shocks. Until the institutional framework required for a credible alternative nominal anchor is in place, the basket peg will serve to preserve stability.

The CPI-based REER suggests that Belarus experienced a substantial loss of competitiveness in the last half of 2008 but regained it in the first half of 2009 on account of a step devaluation in January and further depreciation in May-June 2009. The ULC-based REER suggests broadly the same conclusions. To the extent that pressure on reserves continues, it comes from insufficiently tight credit policies.

uA01bx03fig01

CPI-based Real Exchange Rate Indexes

(2007=100)

Citation: IMF Staff Country Reports 2009, 333; 10.5089/9781451805321.002.A001

The macroeconomic balance approach suggests only a marginal overvaluation, which, given inherent uncertainty in equilibrium exchange rate assessments, does not provide sufficient ground for recommending another substantial adjustment of the nominal exchange rate. The current account norm (based on the CGER model with Belarus’ equilibrium values of regressors), is estimated at -2 to -2.7 percent of GDP. The underlying current account deficit, which is likely to appear in the medium-term if Belarus follows policies agreed under the second review of the program, is 3.5 percent of GDP. This implies a marginal overvaluation of 2-4 percent. If, however, domestic demand policies fail to adjust the underlying current account deficit would be much wider, implying a substantial misalignment of the exchange rate.

The external sustainability approach leads to a similar qualitative conclusion. Policies outlined in the Letter of Intent would be consistent with stabilizing Belarus’ net external asset position (NEAP) at its present level (30 percent of GDP at the end of the first quarter of 2009). Without adjustment in domestic policies, sustaining the present NEAP position would require a REER adjustment of about 15 percent.

D. Financial Sector Policies

19. In addition to limiting lending under government programs, discussions focused on the need to reduce government involvement in other aspects of the financial sector. In particular:

  • Staff emphasized that NBRB liquidity support to banks on non-market terms should be phased out. The growth in lending under government programs (para 13) has been significantly funded by the NBRB liquidity support to (state-owned) banks outside standard refinancing facilities. This NBRB refinancing has been extended to banks at the below market interest rates and on non-transparent terms and conditions. The staff expressed concern that this type of bank refinancing goes against the proclaimed intention to disengage the NBRB from non-core business, and distorts effective competition among banks. The authorities believed that providing liquidity support at below market rates is necessary to prevent commercial banks from incurring losses on their lending under government programs. However, they acknowledged the problem, and by end-December 2009 they will agree with IMF staff a schedule for phasing out this support.

  • There was agreement on the need to enhance NBRB independence. Following the recommendations of the recent Safeguard Assessment and FSAP Update, the authorities are preparing amendments to key financial sector legislation, including the Statute of the NBRB. These institutional changes should help improve the effectiveness of both banking supervision and monetary policy implementation.

  • There was also agreement that the NBRB should disengage from non-core business. To this end, by end-December 2009, the authorities will develop an action plan for sales to private investors of all NBRB non-financial subsidiaries and associated companies.

uA01fig10

NBRB Claims on Banks

(Trillions of Belarusian rubels)

Citation: IMF Staff Country Reports 2009, 333; 10.5089/9781451805321.002.A001

Source: National Bank of the Republic of Belarus.

E. Other Structural Reforms

20. The authorities and staff agreed on the importance of accelerating the privatization program. Tangible progress has been achieved in developing a legal framework for privatization to become competitive, transparent, and professionally executed. A draft Privatization Law and a draft decree on establishing a privatization agency will be submitted to the President by September 30, 2009. A privatization agency is expected to become operational shortly after the relevant decree is enacted, focusing on preparing several large enterprises for privatization through an open, international, transparent, and competitive tender by end-February 2010.

21. Further steps in curtailing the government’s involvement in the economy are planned. The authorities agreed to desist from setting quantitative targets, including for output and employment, in enterprises where the government has only a minority shareholding. The authorities plan to further liberalize prices this year by reducing the number of products subject to price controls and trade margins, consistent with the World Bank recommendations. However, more needs to be done in improving the flexibility in setting wages, as the corporate sector remains subject to the unified pay grading system. The authorities also need to refrain from taking protectionist measures in response to the current crisis.5

IV. Program Modalities and Capacity to Repay

22. The attached Letter of Intent summarizes the progress in implementing the economic program. All quantitative and continuous performance criteria for end-June were met.6 As committed in the letter, the authorities suspended the adoption of new government lending programs. They also eliminated all instructions that are not consistent with their commitment not to impose a general ceiling on monthly price increases. The structural benchmark to engage a consultant to assist in preparing state-owned banks for privatization was partially met, as the authorities selected an international consultant to assist in the privatization of one bank, and plan to engage consultants for other banks once strategic investors for those banks are identified. The authorities are on track to submit to the Head of State a draft Decree on establishing a Privatization Agency, and bring loan classification and provisioning requirements in line with best international practices, two structural benchmarks for end-September.

23. The Letter also sets out policy commitments for the remainder of 2009. With data yet to be released and assessed and no evidence that the performance criteria will not be met, the authorities are requesting a waiver of applicability of the end-September quantitative performance criteria, which is supported by staff. The end-December indicative targets, adjusted upwards (NIR) and downward (NDA) by 100 percent of the equivalent of the amount of the recent SDR allocations, are proposed to be established as the performance criteria.7 The measures envisaged in the Letter, together with financing from international donors, are expected to bring the gross reserves to targeted levels for the program period. A financing gap of about $300 million had emerged in 2009, but this is now expected to be filled by additional financing from the EU. Thus, the program is fully financed. With regard to 2010 beyond the program period, additional adjustment or financing would still be required to bring reserves up to a more comfortable level. To strengthen the program, an additional structural benchmark is proposed to reflect the authorities’ commitment to refrain from imposing quantitative targets on companies that do not benefit from government’s financial support and in which the government has only a minority share.

24. Belarus’s capacity to repay the Fund remains adequate. The level of Fund credit outstanding is expected to reach 49 percent of gross international reserves at its peak in 2010, and Fund repurchases and charges would amount to 37 percent of total debt service in 2013 (Table 9). The risks are manageable given the still moderate level of gross external debt (expected to peak at 43 percent of GDP in 2010 and fall thereafter as the current account deficit declines). Additional comfort stems from the fact that the public debt will remain below 30 percent of GDP even at its peak in 2010, reflecting the government’s commitment to sound fiscal policy (Appendix I).

Table 1.

Belarus: Selected Economic Indicators, 2007–14 1/

article image
Sources: Belarusian authorities; and IMF staff estimates.

In Tables 1-3, program columns refer to what is agreed during the first review of the Stand-By Arrangement.

Contribution to growth.

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

Table 2.

Belarus: Balance of Payments, 2007–14

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Table 2.

Belarus: Balance of Payments, 2007–14 1/ (concluded)

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Sources: Belarus authorities; and IMF staff estimations.

Includes projections of unaccounted flows of $250 million for 2009 onwards. Previously, recorded under errors and omissions.

Disbursements and repayments are based on the schedule agreed at the time of the first review.

In 2009, Russia’s remaining budget support of $500 million is included as government loan in the program column, but as other donors’ financing in the projection column. Other donors’ financing in the projection column also includes $200 million from the World Bank and the equivalent of about $290 million from the EU.

Projected overperformance in 2009 is due to the SDR allocations.

Table 3.

Belarus: Fiscal Indicators and Projections, 2007–10

(Trillions of Belarusian rubels, unless otherwise indicated)

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Table 3.

Belarus: Fiscal Indicators and Projections, 2007–10 1/ (concluded)

(Percent of GDP, unless otherwise indicated)

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Sources: Ministry of Finance; SPF; and IMF staff estimates.

Includes changes in expenditure arrears.

For 2009, net lending excludes project financing committed before the start of the program (US$353 million).

The actual deficits 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 includes January closing expenditure in the year they were actually paid.

Includes statistical discrepancy up to 2008.

Table 4.

Belarus: Monetary Authorities’ Accounts, 2007–10

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

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

Projections are shown at the current exchange rates.

Cumulative flow since end-November 2008.

Performance criterion as discussed in IMF Country Report No. 09/109. 2009Q1 performance criterion was adjusted in accordance with the adjustment mechanism specified in the TMU.

Performance criterion as discussed in IMF Country Report No. 09/99. 2009Q2 performance criterion was adjusted in accordance with the adjustment mechanism specified in the TMU.

Table 5.

Belarus: Monetary Survey, 2007–10

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

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

Projections are shown at current exchange rates.

Table 6.

Belarus: Banking Sector Soundness Indicators, 2005–09

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Source: National Bank of the Republic of Belarus.

Ratio of demand assets to demand liabilities. The prudential minimum is 20 percent.

Assets/liabilities with a remaining maturity of less than 1 month. The prudential minimum is 70 percent.

Table 7.

Belarus: Financing Requirements under the Program, 2009–10

(Millions of U.S. dollars)

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Source: IMF staff calculations.

Total financing from Russia in 2009 amounts to $1 billion, of which $0.5 billion has already been disbursed.

Table 8.

Belarus: Indicators of External Vulnerability, 2005–09

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Sources: Belarus authorities; 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.

Values for 2009 are as of June 2009.

Deflated by the CPI.

Value for 2009 shown at program exchange rates.

Table 9.

Belarus: Capacity to Repay the Fund, 2009–14 1/

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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.

V. Looking Beyond the Crisis: Policies to Support Sustainable Growth

25. Discussions for the 2009 Article IV Consultation were focused on policies that could bring about sustainable growth, and form the basis for a follow-up program. The starting point in this analysis for the staff is that the world after the crisis will be different. Constrained access to capital markets, as well as the phasing out of energy subsidies from Russia, implies that Belarus should shift its growth model from one based on high capital investment to one based on productivity increases, supported by strong macroeconomic policies. The authorities broadly shared this view, but stressed that the social costs of structural reforms should be minimized, and cautioned against overly rapid change. The staffs views are summarized below, and developed in more detail in the Selected Issues Paper “Belarus: Sources of Recent Growth and Prospects for Future Growth”. A rich exchange of views with the authorities also came in a joint NBRB/IMF Seminar held on August 25.8 It was agreed that an agenda for structural reform that could form the basis for a follow-up Fund program beginning in 2010 would be discussed further during subsequent review missions.

A. Reinventing Belarus’s Growth Model

26. Belarus achieved an average 7.5 percent annual growth in the ten years up to 2008, benefiting from its inherent strengths and favorable external conditions. High investment-to-GDP ratios and productivity gains from a well-educated and disciplined labor force were the main contributors to growth. Some aspects of the Belarusian economic model are discussed in Box 4. The favorable external environment—including strong growth in Russia and the rest of the world, easy access to the Russian market, and low-cost energy imports from Russia—also allowed the economy to grow rapidly.

27. However, the global economic crisis has exposed the economy’s vulnerability. The external current account has registered a sizable deficit for most of the past decade as savings fell short of investment, leading to precariously low international reserves. Concentrated exports, destined mainly to the Western European market for oil products and the Russian market for non-energy products, were hard hit when demand in both markets fell drastically as a result of the global financial crisis. The situation was exacerbated by lower world oil prices and reduced subsidies on energy imports.

Belarus’s Economic Model

Almost two decades after independence, Belarus achieved impressive growth while displaying many features of a planned economy. After a 40 percent decline in output during 1992-95, the government sought stability and to protect jobs and wages by wielding wide administrative controls, including on prices, trade margins, and the exchange rate. Thereafter, Belarus achieved the highest growth and lowest poverty rates of the CIS.

The pro-poor economic model provided ample social benefits, but proved difficult to finance and sustain in the long-run. Growth resumed in 1996 and remained high until 2008, permitting large investments in physical and social infrastructure that helped in turn sustain growth. Its distributional pattern is also found to benefit the poor more than the rich. World Bank simulations imply an elasticity of poverty reduction to economic growth of about 2.5, much higher than in Latin America and the Caribbean or Sub-Saharan Africa. An extensive system of social services and social protection contributed to Belarus’s social achievements. However these achievements were supported by expansionary domestic policies that exhausted Belarus’s foreign reserves and increased its vulnerability to economic shocks. Moreover, a high tax burden to finance large untargeted subsidies retarded private sector development.

uA01bx04fig01

Poverty and Growth Developments

(Percent)

Citation: IMF Staff Country Reports 2009, 333; 10.5089/9781451805321.002.A001

Sources: Belstat; and IMF staff estimates.1/ Proportion of population with average per capita available resources below the minimum consumer budget.

Wage policies. The policy of setting large wage increases (with dollar-denominated wage targets) has had a positive impact on poverty reduction in Belarus. However, real wage growth has outstripped productivity growth, undermining competitiveness and economic stability.

Social protection. Poor households (with a smaller share of wage income) receive large social protection transfers (child allowances, housing assistance, etc.) and pensions. Social protection transfers averaged about 14 percent of GDP during 2002-09. Quasi-fiscal transfers are also important, with SOEs financing social assets (housing, utilities, schools). Large transfers to loss-making companies and active labor market programs kept unemployment low.

Education and health policies. The social sectors in Belarus are overwhelmingly state financed and use more than a quarter of budget resources (11 percent of GDP). The share of education outlays relative to GDP hovers around 6½, significantly more than in OECD countries. This helped form a well trained labor force. With a publicly provided health care system and generous benefits, health indicators also rank among the best in Europe and Central Asia. Belarus has one of the lowest infant and under 5 mortality rates, lowest maternal mortality rates, and almost universal immunization rates.

28. In the longer run, several external constraints are likely to hinder a return to the growth path prior to the current crisis. Both the GDP levels and potential growth rates of Belarus’s main trading partners are likely to be lower in the aftermath of the crisis, reducing external demand for Belarus’s products. Belarus would not benefit to the same extent as in the past from preferential prices on oil and gas imports from Russia. Meanwhile, the investment-driven growth model will face pressure as external financing is likely to be less accessible and more costly following the global crisis. There are also indications that the returns from investment have declined, not only because the level of investment is already very high, but because much of recent investment has been in residential construction.

29. Potential growth is likely to be significantly lower than the pace observed in the recent past. A study based on the production function approach shows that capital accumulation explained about 70 percent of the growth during 2001–08, while productivity gains contributed 23 percent 9. However, the growth of both the capital stock and productivity has been declining in recent years. Extrapolation of the recent trends of capital and productivity growth yields a medium-term potential growth rate 2½ percentage points lower than the average for 2001–08. As discussed in the section on the medium-term outlook, external financing constraints following the current crisis would reduce investment growth further, depressing potential growth to around 5 percent. To achieve a medium-term growth of 7 percent, productivity increases averaging 3 percent annually would be required.

Sources of Economic Growth

(Percent)

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Accumulation of labor and capital, using factor shares of 0.45 and 0.55 respectively.

Residual from the growth accounting exercise.

30. The staff argued that Belarus could strengthen its growth factors by carrying out structural reforms. Experience in other countries that have undergone economic transition shows that better allocation of resources, a larger and more dynamic private sector, and increased use of foreign capital can help boost productivity growth. Belarus has much to gain from market-oriented reforms given that Belarus is still in its early stage of transition, and its structural reforms should focus on yielding state control to market forces, and pushing ahead with privatization. A menu for structural reforms is set out in Box 5.

A Menu for Structural Reforms

Reduction in state intervention in the economy will allow market forces to play a major role in the allocation of resources. Specific reforms could include:

  • Minimizing price controls so that price signals can direct the flow of resources and help adjust excesses and shortages in the economy;

  • Abolishing most retail trade margins in line with the government’s agreement with the World Bank;

  • Liberalizing wages to reward high productivity, and developing the labor market so that workers can move to jobs where they are most productive;

  • Abolishing mandatory quantitative targets at the macroeconomic and enterprise levels as it has become more difficult to manage an increasingly sophisticated economy through central planning; and

  • Allowing the banking system to make lending decisions based on the profitability and risks of projects rather than government recommendations.

Productivity growth could also benefit from the emergence of a strong private sector through:

  • Simplifying conditions for setting up new private businesses, as experience in other countries indicates that jobs created by the private sector can provide employment opportunities for workers laid off as a result of state enterprise reforms. New businesses might be created by spinning off parts of existing state enterprises;

  • Further reducing the regulatory burden on the private sector, and allowing greater flexibility in setting prices, wages and margins;

  • Increasing the private sector’s access to credit resources by fostering a more competitive financial sector.

An ambitious and transparent privatization agenda that is open to foreign investors would help bring capital, technology, and management and marketing skills. The following measures would facilitate this process:

  • Reducing conditions attached to new investment, such as requiring retention of current employees and wage scales;

  • Enacting a modern Privatization Law, and establishing a Privatization Agency with powers to prepare enterprises for privatization and hire professionals from the market.

31. Providing social security can help reduce the negative impact of, and sustain popular support for, structural reforms. The authorities were concerned about the social impact of structural reform, in particular the risk of high unemployment. The staff accepted the validity of this concern, agreeing that transition had often been painful, but noted that some countries had been able to minimize the social impact, notably China (through promotion of new private enterprises to absorb laid-off workers and development of a social security system)10 and the Czech Republic (through active labor market policies). The staff also stressed the need to strengthen the social safety net to give subsistence and vocational assistance to the temporary dislocated labor force, until they are re-absorbed by the labor market. Privatization proceeds and fiscal savings from reduced subsidies to inefficient production could help finance the safety net.

32. While agreeing that structural reforms could improve growth potential, the authorities were cautious about the pace of reform. The authorities agreed that structural reforms should be the focus of the economic program to lay a solid foundation for medium-term development. However, they were also worried about potential loss of control over the economy, and concerned that the benefits of their current economic model should not be jeopardized by overly rapid change. They also pointed to progress already made, including their recent achievements in improving business climate.11 They also underlined the need to upgrade technology and raise energy efficiency to increase productivity. The staff noted the authorities’ concerns, but also warned that overly gradual approaches to reform had costs. In particular, it will be important to demonstrate to foreign and domestic investors the authorities’ commitment to reform, and to realize quickly the macroeconomic benefits associated with transition. To this end, macroeconomic policies should be designed with a view to reducing external vulnerabilities as well as improving growth prospects.

B. Supporting Macroeconomic and Financial Sector Policies

33. Continuation of a prudent fiscal policy will be important in supporting structural reforms. The authorities viewed an annual deficit of 1.5 percent of GDP as appropriate, given Belarus’s relatively low public debt. A modest deficit would allow the authorities to improve social and physical infrastructure, which would help to attract private investment. Staff stressed that medium-term fiscal policy should support the transition to a more market-oriented economy. Efforts to reduce the tax burden and provide a level playing field for potential investors should be pursued. On the spending side, resources will be needed to pay for unemployment benefits and to retrain laid-off employees and adapt their skills to new demands. Staff also emphasized the need to cut untargeted subsidies, including to loss-making enterprises.

34. Over the long term, a move toward a more flexible exchange rate regime is warranted. At present, the peg to a basket of currencies with flexibility around a central parity offers the best prospect of maintaining external stability, due to the lack of an alternative anchor and the importance of the nominal exchange rate in shaping expectations. However, over time, a more flexible exchange rate regime could better enable the economy to handle the mostly real sector shocks to which it is subject. Such a move would require developing a supporting institutional framework, most notably central bank independence. The authorities agreed with this analysis, but also stressed that removing the exchange rate anchor in the environment of pressure on the rate could result in a loss of macroeconomic stability. The NBRB also emphasized the need for further financial market development and improvement of models designed to analyze and forecast monetary and macroeconomic indicators as necessary conditions for development of an alternative nominal anchor, such as an inflation targeting framework.

35. Increasing the commercial orientation of banks is essential for more efficient allocation of resources. Currently, loan decisions in the state-dominated banking sector are often subject to explicit or implicit government direction. As a result, banks have limited incentives to innovate or to control costs and risks. Lending under government programs also crowds out other potentially profitable lending. The authorities noted that they were currently considering the modalities of a dedicated agency to address these issues. Initially, such an agency could accumulate existing government program loans that banks would be willing to transfer to it and associated funding in the form of government deposits. Going forward, the modalities of the agency should be discussed with IMF staff. The staff stressed that if such an agency undertook lending, it should be scored as net lending on the budget. The staff also emphasized that lending by such an agency should replace (rather than add to) lending under government programs by commercial banks.

36. There is also scope for stimulating development of nonbank financial institutions. As discussed in the FSSA Update (IMF Country Report 09/30, January 2009), capital market development in Belarus could be stimulated by strengthening the legal and regulatory framework covering the protection of minority investor rights, accelerating the existing program of privatization of state-owned enterprises, thereby increasing the supply of traded shares, and enhancing public debt management, thereby establishing a domestic government bond yield curve. A more diversified financial sector would also contribute to a successful business environment and to economic development.

VI. Staff Appraisal

37. Belarus has so far survived the crisis with very modest output losses, in part because of the strategy of expanding credit for construction and agriculture. Belarus has experienced a lower output fall than most countries hit by the crisis, despite a huge fall in its exports. In part this is because exchange rate adjustment has reduced the impact of the crisis on the external accounts. But it is also because the authorities have aggressively expanded credit under government programs to sectors they believe are not import intensive.

38. However, this has come at a price: the current account deficit remains high and reserves low. The authorities have adhered to a balanced budget and have increased policy interest rates to support the rubel, but credit under government programs is either explicitly subsidized or extended at rates below market interest rates. This credit has increased domestic demand, and hence demand for imports, and resulted in heavy reserves losses in July and August. Consultations on this began in July and continued during the mission for the second review for the SBA.

39. The main modification of the program is to tighten credit policy. The authorities now accept that credit policy has to be tightened, and the objectives of building reserves and supporting the exchange rate regime given priority over that of maintaining output. However, the realization has come late, and the authorities’ delay in reacting means that a sharp adjustment in credit policies is now required to meet program performance criteria. This should be accompanied by the unwinding of distortionary and non-transparent liquidity support measures.

40. Credit tightening should be accompanied by strong fiscal and monetary policies and, if needed, flexibility under the exchange rate peg. The authorities’ continuation of a tight fiscal policy is welcome, as is the NBRB’s intention to keep interest rates high until there is clear evidence of a turnaround in reserves. The authorities should also be prepared to permit more flexibility in the exchange rate within the widened band during the remainder of 2009, especially if reserves targets are at risk for reasons other than insufficiently tight credit policy.

41. The proposed 2010 budget can be the foundation for a prudent macroeconomic framework, which will need to involve continued credit restraint. The authorities plan to limit the consolidated budget deficit for 2009 to the equivalent of 1.7 percent of GDP, which will permit an expansion of credit to the rest of the economy in line with projected nominal GDP growth. To avoid crowding out other lending, the authorities will need to exercise restraint in lending under government programs in 2010.

42. The Article IV Consultation provided an opportunity to look beyond the crisis and also to get past disagreements on the viability of the authorities’ growth model. The authorities understand well that financing high growth through high investment will be much more difficult after the global crisis, and that past differences of view on the sustainability of their growth model have now been overtaken by events. A consensus is emerging on the elements of a reform strategy. There is broad agreement that privatization will play an important part in easing the external financing constraint and promoting technological development. There is also growing acceptance of the need for liberalization of the economy, beginning with reducing the burden of regulation and quantitative targets on the private sector. However, this acceptance will compete with the instinct to maintain or add controls, especially in response to a crisis.

43. The success of reform will ultimately depend on political judgments by the authorities. There is increasing recognition that an increasingly sophisticated economy and growing links with other economies will require new methods of economic management. This opens the door for development of a detailed reform agenda. The authorities are understandably cautious about the social costs of reform, and protective of their achievements in avoiding some of the pitfalls of transition. Nevertheless, the prospects for high and sustainable growth depend critically on the willingness of the authorities to try new approaches, even if it involves loosening administrative controls on the economy.

44. A new Fund arrangement could play a supporting role in program design and in easing the financial burden of adjustment. The improving dialogue between the Fund and Belarus under the program, in collaboration with other international players—especially the World Bank, EBRD and EU—offers an opportunity to shape the reform agenda. International financial support can also ease some of the inevitable costs of transition. Assuming that the current program remains on track, discussions on a successor arrangement could begin during the next review of the SBA and lead to a new agreement in early 2010.

45. On the basis of the policies set out in the Letter of Intent, the staff recommends completion of the second review of the SBA, with a waiver of applicability for the end-September performance criteria.

Appendix I

Appendix I. Table 1.

Belarus: External Debt Sustainability Framework, 2004–14

(Percent of GDP, unless otherwise indicated)

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Derived as [r - g - ρ(1+g) + εα(1+r)]/(1+g+ρ+gρ) times previous period debt stock, with r = nominal effective interest rate on external debt; ρ = change in domestic GDP deflator in U.S. dollar terms, g = real GNP 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 [-ρ(1+g)+εα(1+r)]/(1+g+ρ+gρ) times previous period debt stock. ρ increases with an appreciating domestic currency (ε > 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. Differs slightly from external financing requirement in Staff Report because includes official transfers and IMF repurchases but excludes increase in portfolio and other investment assets.

The key variables include real GNP growth; nominal interest rate; dollar deflator growth; and both non-interest current account and non-debt inflows in percent of GNP.

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 I. Figure 1.
Appendix I. Figure 1.

Belarus: External Debt Sustainability: Bound Tests of the Program Scenario 1/

(External debt in percent of GDP)

Citation: IMF Staff Country Reports 2009, 333; 10.5089/9781451805321.002.A001

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.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 2009.
Appendix I. Table 2.

Belarus: Public Sector Debt Sustainability Framework, 2004–14

(Percent of GDP, unless otherwise indicated)

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Gross debt of general government (including guarantees) and of monetary authorities.

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

The real interest rate contribution is derived from the denominator in footnote 2/ as r - π (1+g) and the real growth contribution as -g.

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

For projections, this line includes exchange rate changes.

Defined as public sector deficit, plus amortization of medium and long-term public sector debt, plus short-term debt at end of previous period.

The key variables include real GDP growth; real interest rate; and primary balance in percent of GDP.

Derived as nominal interest expenditure divided by previous period debt stock.

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 I. Figure 2.
Appendix I. Figure 2.

Belarus: Public Debt Sustainability: Bound Tests of Program Scenario 1/

(Public debt in percent of GDP)

Citation: IMF Staff Country Reports 2009, 333; 10.5089/9781451805321.002.A001

Sources: 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.2/ Permanent 1/4 standard deviation shocks applied to real interest rate, growth rate, and primary balance.3/ One-time real depreciation of 30 percent and 10 percent of GDP shock to contingent liabilities occur in 2009, with real depreciation defined as nominal depreciation (measured by percentage fall in dollar value of local currency) minus domestic inflation (based on GDP deflator).

Appendix II: Belarus: Letter of Intent

Minsk, September 30, 2009

Mr. Dominique Strauss-Kahn

Managing Director

International Monetary Fund

Washington, DC, 20431 U.S.A.

Dear Mr. Strauss-Kahn:

1. This letter describes the economic policies and objectives of the authorities of the Republic of Belarus for the remainder of 2009 and for 2010. The current letter supplements and amends the commitments made during the first review under the Stand-By Arrangement (SBA) with the International Monetary Fund. Based on the policies we have pursued since the initiation of the SBA, we request the completion of the second review under the SBA.

2. Since the completion of the first review we honored our commitments outlined in our Letter of Intent of June 19, 2009, meeting all end-June program targets.

  • We made greater use of the flexibility in our exchange rate policy to facilitate external adjustment. To this end during June 2009 the NBRB allowed the rubel to depreciate by about 5 percent against the central parity and widened the exchange rate band from ±5 percent to ±10 percent. We met the end-June net international reserves (NIR) target.

  • We further tightened monetary policy which helped us achieve the end-June quantitative target on net domestic assets (NDA). To support the exchange rate regime and to keep inflation low we raised the overnight credit rate by 2 percentage points and also recommended commercial banks to increase interest rates on new rubel term deposits of households by 2 percentage points, compared with their March 2009 level.

  • We maintained tight fiscal policy by containing government expenditure, and met the adjusted performance criterion for cash deficit at end June 2009.

  • We are making good progress in meeting structural benchmarks under the program.

  • In the future, we intend to strictly adhere to our commitments under the program.

3. Modifications of the end-September performance criteria are not proposed. However, as the Executive Board will only meet to consider our request for completion of the second review under the SBA in October, we request a waiver of applicability for all end-September performance criteria. The performance criteria for end-December will be set under the second review of the program. The performance criteria, prior action and structural benchmarks are summarized in Tables 2 and 3. The third review will be held after November 15, 2009.

Table 1.

Belarus: Schedule of Purchases Under the Stand-By Arrangement

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Source: IMF staff calculations.
Table 2.

Belarus: Quantitative and Continuous Performance Criteria under SBA approved on January 12, 2009 1/

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

Definitions are specified in the Technical Memorandum of Understanding (TMU).

Cumulative flows from end-December 2008.

The performance criterion on the ceiling of the government deficit was adjusted for projects initiated before the program up to the limit of $353 million and for the cash deficit of local governments up to a limit of 1.4 trillion rubels. Table 2 of the Letter of Intent for the first review erroneously indicated that the end-June PC is not subject to the adjustment mechanism.

Cumulative flows from end-November 2008 at program exchange rates.

Table 3.

Belarus: Prior Actions and Structural Benchmarks Under the Stand-By Arrangement

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4. We believe that the policies set out in this letter are adequate to achieve the objectives of the program, but will take any further measures that may become appropriate for this purpose. As is standard under all IMF arrangements, we will continue to consult with the IMF on adoption of new measures, and in advance of revisions to the policies described in this letter. We will consult with Fund staff about the appropriate policy response if gross reserves fall below $4.8 billion before end-December 2009. We will also continue to provide the Fund with information as required to monitor progress on program implementation. We will consult with the Fund on our economic policies after the expiration of the arrangement, in line with the Fund’s policies on such consultations. Finally, we consent to the publication of this letter and the accompanying Executive Board documents on the IMF’s website.

I. Program Objectives and Macroeconomic Framework

5. Achieving macroeconomic stabilization and economic recovery while minimizing social costs remain our key objectives. To achieve these objectives macroeconomic policies would have to be strengthened by additional structural reforms. Our current exchange rate and fiscal policies are consistent with program objectives. Policy rates were increased in June and deposit rates are now strongly positive in real terms. However, to moderate domestic demand pressures and alleviate external imbalances we are tightening our credit policies. Structural reforms will be aiming at creating new opportunities for the economically active population, while ensuring that adequate social safety net is in place to protect the most vulnerable people.

6. The macroeconomic framework agreed during the first review of the program remains largely valid. We expect output and the current account deficit to be slightly higher than programmed. GDP is projected to decline by 1¼ percent, compared with 3 percent expected at the time of the first review. The current account deficit would widen to 9¾ percent of GDP, against an earlier projection of 7¾ percent of GDP. Inflation has subsided, consistent with economic slowdown and declining international prices, and is now expected to reach 11 percent at end-2009 on a year-on-year basis.

7. The external position remains vulnerable, as the trade deficit has been widening and international reserves declining. With exports still weak, further measures to contain domestic demand will be needed to arrest the decline in reserves. Further economic liberalization and privatization would stimulate foreign direct investment, strengthening the external position in 2010. Barring further deterioration of external conditions, these measures would allow us to narrow the current account deficit to 7 percent of GDP in 2010 and bring international reserves to 2½ months of imports of goods and services.

II. Monetary and Exchange Rate Policies

8. Our monetary and exchange rate policies aim to strengthen the credibility of the exchange rate regime, while limiting the adverse effects of the global economic crisis on the Belarusian economy. Recently NIR and NDA have deviated from the path specified in the program, in part because monetary policy has not been sufficiently tight. While market interest rates have been strongly positive in real terms, following an increase in policy rates in June, credit expansion has continued, mostly due to an increase in lending under government programs which is not interest sensitive.

9. We believe that the increase in interest rates in June will have continuing effects which will facilitate meeting the NIR and NDA targets under the program. We intend to keep interest rates unchanged for the present, and will consider a possibility of reducing policy interest rates only if NIR and NDA trends are consistent with meeting program targets and the process of de-dollarization indicated by an increase in the rubel share of time deposits continues.

10. We will also tighten credit policy by keeping liquidity support provided by the NBRB to banks to levels consistent with the targeted path of NDA (quantitative performance criterion). To this end, no new government lending programs for 2009 will be adopted through end-December 2009 (prior action) and any new lending programs for 2010 will be discussed with IMF staff in the context of the third review of the SBA. We will impose a limit on net lending under government programs at no more than 4 trillion rubels between end-June and end-December 2009. This limit could be raised in consultation with the IMF staff if additional foreign financing is received during 2009. We have also recommended that banks limit credit to state-owned enterprises with high levels of inventories. These measures would allow us to limit credit, while avoiding crowding out of market-based lending and will also mitigate budgetary risks.

11. Tightening credit policy will help us meet targeted levels of reserves, which would continue to be reflected in NIR floors (quantitative performance criterion). In addition, we will continue working with our bilateral and multilateral creditors to ensure timely disbursements of all committed funds, while also exploring prospects for new financing. If it appears that there are risks of missing the NIR targets for reasons other than insufficiently tight monetary policy, we will make further use of exchange rate flexibility within the ±10 percent band.

III. Fiscal Policy

12. We remain committed to the balanced general government budget—including local governments’ budgets and the Social Protection Fund, and excluding bank recapitalization operations (up to minimum regulatory capital adequacy norms)—in 2009. Fiscal policy will remain tight in 2010. The general government budget deficit will be kept within 2.7 trillion rubels (1.7 percent of GDP). Fiscal performance will continue to be monitored by a ceiling on the cash deficit of the general government (quantitative performance criterion).

13. To ensure that we meet the end-September and end-December fiscal targets, we will restrain spending, including on investment, while maintaining spending on health and education and ensuring that arrears are not accumulated. We will also advise local governments to contain their spending in line with the program. Any local spending in excess of programmed levels would be offset by additional spending cuts by the central government. If revenues exceed spending appropriations for line ministries, they will be allocated to the Presidential Reserve Fund, and will be used to restore cuts in the originally approved budget, primarily in public investment.

14. We are also undertaking the following key steps to meet our target of zero-deficit budget in 2009:

  • Maintaining tight wage policies. We decided to postpone a 5 percent increase of budget sector wages from September 1 to November 1, 2009. We will increase pensions in line with pension legislation, with an increase of up to 10 percent in 2009.

  • Reducing subsidies. We will reduce spending on subsidies and transfers—the largest expenditure item in the budget—by cutting untargeted subsidies and transfers to households and, more generally, subsidies to the economy.

    • Beginning from November 1 we will reduce fiscal subsidies by increasing tariffs on household utilities by the equivalent of $5, or 9 percent, compared with their current level.

    • We will also increase transportation tariffs by 18 percent from November 1, 2009.

15. The government will present for consideration of the President of the Republic of Belarus a draft 2010 budget with a deficit of 2.7 trillion rubels (1.7 percent of GDP). The government will also propose additional public investment for infrastructure and priority projects, to be financed by an increase in the VAT rate from 18 to 21 percent.

16. These proposals will allow us to pursue several fiscal priorities for 2010:

  • Keeping debt sustainable. A modest 2010 budget deficit, partly financed by privatization proceeds, would add little to Belarus’s debt. We have begun reducing government guarantees of commercial banks’ credit to alleviate contingent credit risks.

  • Supporting economic recovery. We will revisit our spending priorities to create fiscal space that would ensure adequate financing of our priorities, including investment in human capital and infrastructure. To this end, in the first half of 2010 we will further reduce fiscal subsidies on household utilities by increasing the communal service tariffs by the equivalent of $10. We will enact the recently proposed decree improving the targeting of selected social benefits, raising their level from January 1, 2010. We will continue working with the World Bank on better targeting of the social safety net which would allow us to further reduce untargeted subsidies and transfers.

  • Continuing tax reforms. In the context of the 2010 budget we will eliminate the turnover tax and the local tax on sales of goods in retail trade. We will continue improving the tax system and develop the tax reform strategy based on the recommendations of the FAD Technical Assistance mission on Tax Policy scheduled for October 2009.

17. We are planning to establish an agency that would facilitate leasing of equipment by our exporters. We plan an initial capital injection of 400 billion rubels to set up this agency. In accordance with internationally established practice, the initial capital injection will be treated as a financing operation that will not increase the government deficit. To account for the potential fiscal costs of default, we will appropriate as a contingency line in each year’s budget an amount equivalent to the expected repayment of the agency’s leases in that year, with the contingency line being reduced as payments are received.

IV. Financial Sector Policies

18. We have been implementing measures to strengthen the financial system:

  • We have recently adopted a Memorandum of Understanding between the Ministry of Finance, the Ministry of Economy, the NBRB and the new Agency for Deposit Guarantee which formalized the institutional framework for dealing with a potential financial crisis.

  • We have been working on bringing our loan classification and provisioning requirements in line with best international practices (structural benchmark). We have prepared amendments to the Instruction on the Procedures of Formation and Use by Banks and Nonbank Credit and Financial Institutions of Reserves to Cover Potential Losses for On- and Off-Balance Sheet Transactions which will be passed by end-September 2009. The amendments will be enacted from the moment of their publication, but the NBRB may grant some banks a transitional period to fully implement these amendments until December 31, 2010. We will also address the classification of loans with government guarantees issued before January 2009 by either amending the NBRB instruction on these loans or by transferring these loans to the agency (Para. 20).

19. We have been working on reducing the government’s involvement in the financial system by implementing measures already identified in the program, including the following:

  • Disengaging the NBRB from non-core business. In line with earlier program commitments, NBRB’s direct or equity financing of non-financial organizations will remain within the ceiling of 350 billion rubels in 2009. We will not extend new loans to, or make equity investment in, non-financial organizations in 2010. Furthermore, by end-December 2009 we will develop an action plan for sales to private investors of all NBRB non-financial subsidiaries and associated companies.

  • Curbing directed lending function of the government. In line with our legislation prohibiting the central and local governments from making any additional transfers to their deposit accounts with commercial banks, we will transfer the existing stock of these deposits back to NBRB accounts in line with the schedule for repayment of corresponding loans. An exception will be made for certain central and local government demand deposits held for operational purposes. We will continue to refrain from approving any new directed lending programs financed with budget deposits (structural benchmark).

  • Bank privatization. We identified a strategic investor for one bank, and selected an international consultant to assist in preparing this bank for privatization. We will continue to look for strategic investors to buy the majority shareholding in OJSC Belinvestbank and minority holdings in JSSB Belarusbank and OJSC Belagroprombank as soon as market conditions permit. We will engage qualified, experienced and reputable consultants, on a competitive basis, to assist us in preparing state-owned banks for partial or full privatization after strategic investors have been identified (structural benchmark).

20. We intend to establish an agency which would help clean up banks’ balance sheets. The agency would take over government-directed loans which are classified as problem loans and associated state funding from commercial banks, and eventually could supplement and replace commercial banks as the source of financing government programs, with its new lending included in the budget above the line. A draft decree on establishing the agency will be submitted to the Head of State by end-November 2009. The draft decree envisages that initially its activities will be limited to managing existing loans and the agency would not engage in new lending. To capitalize the agency, we will transfer to agency government deposits used to finance the transferred loans. This transfer and any residual capitalization costs of the agency will be reflected below the line in the budget.

21. We have no plans to further recapitalize state banks in 2009. The limit on credit under government programs specified in paragraph 10 should prevent deterioration of liquidity ratios at state-owned banks. The NBRB will ensure that state banks remain liquid by further curtailing their ability to extend new loans if their liquidity ratios fall below the statutory norms. Decisions on additional recapitalization on these banks shall be taken only in cases if indicators of their safe functioning would fail to meet regulatory requirements and after consultations with IMF staff. Should private banks become undercapitalized, we will use our existing framework, including negotiations with shareholders, liquidation and nationalization (supported by government resources), as appropriate, to rapidly resolve the issues.

22. We have been striving towards maintaining independence of the NBRB. We will ensure that no provisions are included that impair the independence of the NBRB in the draft decree “On Improving Control (Supervisory) Activity in the Republic of Belarus” or in any other legislation. Building on recommendations of the FSAP update and the Safeguards Assessments, we will, by the end of 2009, prepare draft amendments and supplements to the Statute of the NBRB approved by Decree of the President of the Republic of Belarus #320 dated June 13, 2001 with further amendments being introduced into the Banking Code to ensure operational and financial independence of the NBRB (structural benchmark). In this context we intend to seek assistance from the IMF.

23. We recognize that the NBRB liquidity support to banks outside standard refinancing facilities based on ad hoc decisions of the NBRB Board is distortionary and should be provided only in exceptional circumstances. We will not extend new loans to banks at interest rates below rates on standard refinancing facilities (e.g. Lombard auctions) except credits for housing construction in the remainder of 2009 which are issued at the NBRB refinancing rate under existing government programs. The NBRB will agree with the IMF by end-December 2009 a schedule for phasing out refinancing of existing loans. In line with the recommendations of the 2008 FSAP Update, we will adopt a formalized framework for the provision of NBRB emergency liquidity assistance to banks, possibly using technical assistance from the IMF’s Monetary and Capital Markets Department.

24. In line with the recommendations of the safeguards assessment the end-June quantitative PCs relating to NIR and NDA have been audited by international accountants and we will continue this practice until the end of the program.

V. Policies to Improve Business Climate

25. We have developed a legal framework for privatization to become competitive, transparent and professionally executed. A draft Privatization Law incorporating comments from the World Bank staff will be submitted to Parliament by September 30, 2009. A draft decree on establishing a privatization agency has been prepared by the government and taking into account comments from the World Bank and IMF staffs will be submitted to the Head of State by September 30, 2009 (structural benchmark). To accelerate the process of privatization we will identify five large SOEs as candidates for privatization by November 30, 2009. After consultations with the World Bank staff this list will be submitted to the Head of State for approval. We will work towards preparing controlling equity stakes of these enterprises for sale through an open, international, transparent, and competitive tender by February 28, 2010.

26. We will step up our efforts to promote market-based economic growth. The Council of Ministers will issue by end-December 2009, a recommendation to the line ministries and, other government agencies in charge of economic activity, including local governments, not to set any quantitative targets for 2010, such as output and employment targets, for the companies that do not benefit from government’s financial support and in which the government has a minority share (structural benchmark). We will refrain from the application of mandatory wage policy to companies in which the government does not have majority control. The government’s right in such companies will not extend beyond the rights of all minority shareholders. We reaffirm our commitment to reduce the state regulation of wages and prices. We have eliminated all instructions that are not consistent with our commitment not to impose a general ceiling on monthly price increases. We will further reduce the number of products subject to price controls and trade margins, consistent with our understandings with the World Bank, and also refrain from announcing medium-term wage targets.

Sincerely yours,

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1

Given loans already extended in July and August and expected repayments, this will have the effect of limiting gross lending under government programs during September-December 2009 to about three trillion rubels, less than half the original plan.

2

The inventory level dropped in July as enterprises cut production further and stepped up efforts to sell products in response to the introduction of the sales-to-output target set by the government.

3

More details are provided in the accompanying Selected Issues Paper: “Is There a Need for Further Adjustment in the Exchange Rate?”

4

A proposal to increase VAT by 4 percentage points was rejected by the government earlier this year, due to concerns about the effects on enterprises’ liquidity, consumers and inflation. The Ministry of Finance will rely on technical assistance from the Fund to address some of these concerns, and also believes that a VAT increase will be more politically palatable when linked to higher infrastructure spending.

5

In May 2009, Belarus introduced temporary higher import tariffs on two lists of consumer goods that will be effective for six months and nine months, respectively.

6

Table 2 of the Letter of Intent for the first review erroneously indicated that the end-June performance criterion on the ceiling of the government deficit was not subject to the adjustment mechanism.

7

The Technical Memorandum of Understanding accompanying the Letter of Intent updates the definition of NIR by removing a requirement that securities counted towards reserve assets be issued by G-7 countries, thereby bringing the definition closer to practice used in other Fund programs.

8

Presentations made at this seminar can be found at: http://www.imf.org/external/country/BLR/rr/index.htm

9

See Selected Issues Paper “Belarus: Sources of Recent Growth and Prospects for Future Growth”.

10

See China’s Ownership Transformation: Process, Outcomes, Prospects, International Finance Corporation, 2005, page 9.

11

In the Doing Business 2010 report, Belarus was recognized as one of the top regulatory reformers for the second consecutive year, with its ranking on overall ease of doing business going up from 82 last year to 58.

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Cover IMF Staff Country Reports
Republic of Belarus: 2009 Article IV Consultation and Second Review Under the Stand-By Arrangement-Staff Report Informational Annex; Staff Statement; Public Information Notice on the Executive Board Discussion; and Press Release
Author:
International Monetary Fund
Volume/Issue:
Volume 2009: Issue 333
Publisher:
International Monetary Fund
ISBN:
9781451805321
ISSN:
1934-7685
Pages:
81
DOI:
https://doi.org/10.5089/9781451805321.002

Contributions to GDP Growth

(Percent)

Inflation

(Percent)

International Reserves

(Billions of U.S. dollars)

Household Deposits 1/

(Trillions of Belarusian rubels)

NBRB Policy Interest Rates and the Interbank Rate

Real Overnight Interbank Rate

(Percent)

Adjustment and High-Credit Scenarios

Inventories and Production

CPI-based Real Exchange Rate Indexes

(2007=100)

NBRB Claims on Banks

(Trillions of Belarusian rubels)

Poverty and Growth Developments

(Percent)
Appendix I. Figure 1.

Belarus: External Debt Sustainability: Bound Tests of the Program Scenario 1/

(External debt in percent of GDP)
Appendix I. Figure 2.

Belarus: Public Debt Sustainability: Bound Tests of Program Scenario 1/

(Public debt in percent of GDP)