Republic of Belarus
Third Review Under the Stand-By Arrangement: Staff Report; Staff Statement; Press Release on the Executive Board Discussion; Statement by the Executive Director

The staff report on Belarus’ Third Review under the Stand-By Arrangement is examined. Belarus is beginning to emerge from the crisis. Output loss has been limited relative to neighbors, inflation has fallen, the foreign exchange market has stabilized, and de-dollarization is under way, which is likely a sign of returning confidence. However, the economy remains vulnerable to external shocks. The current account deficit remains high and reserves low, despite substantial support, including from the IMF. The authorities have taken measures to close a financing gap during the program period created by a shortfall in external financing.

Abstract

The staff report on Belarus’ Third Review under the Stand-By Arrangement is examined. Belarus is beginning to emerge from the crisis. Output loss has been limited relative to neighbors, inflation has fallen, the foreign exchange market has stabilized, and de-dollarization is under way, which is likely a sign of returning confidence. However, the economy remains vulnerable to external shocks. The current account deficit remains high and reserves low, despite substantial support, including from the IMF. The authorities have taken measures to close a financing gap during the program period created by a shortfall in external financing.

I. Context: Program Achievements and Economic Prospects

1. Almost a year after adoption of a Fund-supported program, Belarus’s economy is stabilizing and growth is set to resume, but the economy remains vulnerable to external shocks. Belarus has avoided the worst consequences of the global economic crisis. Growth prospects are improving, and inflation has fallen, notwithstanding a devaluation at the beginning of 2009 which corrected an exchange rate overvaluation. However, the current account deficit remains stubbornly high, and reserves low, despite substantial support, including from the Fund.

2. Discussions on the third review of the SBA focused on policies that would consolidate the progress made so far and address the remaining weaknesses. The authorities have taken measures to close a financing gap during the program period created by a shortfall in external financing. They have also agreed with the staff on a macroeconomic framework for 2010 that emphasizes macroeconomic stability and a return to modest growth. The authorities see scope for growth to be higher—and have prepared an ambitious “target scenario” embodying this goal. But they were responsive to warnings from the staff that achieving high and sustainable growth will depend on policies supportive of macroeconomic stability, on structural reforms that are not yet fully specified, and on external developments beyond their control. They therefore accept they need to give priority in monetary and fiscal policy to stabilization and increasing international reserves. Policies to achieve these objectives are set out in the attached Letter of Intent (LOI). The authorities are continuing to consider a successor Fund arrangement, but will defer a decision on whether to request Fund financial support until the external financing position for 2010 is clearer.

II. Recent Developments and Program Implementation

3. Economic developments during the past two months have largely followed the course described at the time of the second review of the SBA in October. Belarus continues to avoid the sharp fall in output that has hit most of its neighbors. The current account deficit has increased further, though the third quarter saw some improvement in both the current and financial accounts, and an increase in reserves. Fiscal policy remains supportive of the needed macroeconomic adjustment. Commercial banks remain sound, though there is a growing liquidity problem in the largest state-owned banks. These developments are described in more detail below (Tables 15 and 8).

  • GDP declined by 1.0 percent year-on-year through October 2009, as strong growth in fixed investment—owing mainly to housing construction financed under government programs—offset the weakness in consumption and external demand. The economy is projected to contract slightly for the year. Reflecting slack in the economy and weak international prices, twelve-month CPI inflation eased from 15 percent early in the year to about 11 percent in October, and is expected to fall further to just above 10 percent by year-end.

  • Annual credit growth decelerated to 30 percent in October, due to the authorities’ efforts to rein in loans under government programs. However, it is too early to tell whether these efforts will be sufficient to keep the increase in credit under government programs below the level agreed at the time of the second review.1

  • Recent data point to improved export volumes, but due to a deterioration in the terms of trade the current account deficit is now projected to reach $5.4 billion (11 percent of GDP) during 2009.

  • The financial account has improved. Reflecting improved confidence, since July households have sold some $35 million per month of the foreign currency they purchased in the first half of 2009 and the share of ruble deposits in total deposits has increased, and the share of foreign currency deposits in total deposits declined from nearly 56 percent in June to 51.7 percent in October.2 Corporations have been more successful in rolling over short-term debt.

  • External financing of the program remains largely as expected at the time of the second review. The World Bank Board approved a $200 million Development Policy Loan on December 1. The European Commission is still planning to support Belarus through its macrofinancial assistance policy. However, there have been delays in processing the loan, and due to changes in procedure following the ratification of the Lisbon Treaty, it is increasingly likely that the disbursement (about $290 million) will only take place during the first quarter of 2010. Russia is no longer committed to providing the final $500 million tranche of a bilateral loan, creating a financing gap. The authorities are continuing to pursue financial support through the Eurasian Economic Community Anti-Crisis-Fund and are also discussing with commercial banks a possible loan of $300 million. However, given the uncertainty about these sources of finance the authorities will implement contingency measures and request a modification of the end-December performance criteria. Gross reserves increased to $4.6 billion at end-November, reflecting Fund disbursements and policy adjustment, and are projected to reach the revised program target of $5.6 billion by end-December, 20093.

  • Local governments’ fiscal position deteriorated significantly from a large surplus in 2008 to a deficit of 0.9 percent of GDP as of end-September. However, the general government budget was kept on track by cuts in central government spending on non-priority goods and services and investment. The government also continued to pursue a tight wage policy, deciding not to increase wages in 2009.

  • Financial soundness indicators as of end-September 2009 remained broadly satisfactory and similar to their level as of end-June 2009, though liquidity indicators continued to deteriorate (Table 6). Stress test results (Box 1) show that banks have sufficient capital buffers to withstand a variety of risks but the liquidity condition of the large state-owned banks is weak, reflecting the significant involvement of these banks in lending under government programs.

uF1
Sources: Belarusian authorities; and IMF staff calculations.
uF2
Source: National Bank of the Republic of Belarus.

Banking System Stress Tests

Stress test results based on end-September 2009 data are very similar to those based on the end-June 2009 data: the relatively high capitalization allows banks to withstand a variety of shocks but vulnerability to liquidity risk remains a concern.

The aggregate capital adequacy ratio as of end-September 2009 stood at19.0 percent (as compared to 19.1 percent at end-June 2009), which is over two times higher than the prudential minimum of 8 percent, allowing banks to remain adequately capitalized in the event of assumed stress test scenarios. As in the past, state-owned banks are relatively more vulnerable to various risks, given their relatively low capitalization level, compared to that of foreign or private banks.

The results of liquidity stress tests are cause for concern. In the event of a hypothetical 20 percent withdrawal of client liabilities, state-owned banks as well as the largest banks would end up with the current liquidity ratio below the statutory minimum of 70 percent. The vulnerability of state-owned banks to liquidity risk has been evident in stress tests in the past, and stems from the significant involvement of these banks in lending under government programs, and the imposition of limits on credit under government programs will help to reduce this vulnerability.

Sensitivity Stress Test Assumptions and Results

(Based on end-September, 2009 data)

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Sources: 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.

4. Program performance has been good.

  • All quantitative and continuous performance criteria for end-September were met. NIR exceeded the target by $150 million, and NDA was nearly 0.5 trillion rubels below the ceiling. Given the shortfall in external budget support, the authorities delivered a smaller fiscal deficit to meet the adjusted fiscal target.

  • The authorities have refrained from introducing new government lending programs and the NBRB is limiting credit under government programs. Structural benchmarks relating to loan classification and provisioning and to privatization were met.

  • The authorities postponed an increase in tariffs on households' utilities and transportation until 2010 after making the decision not to increase wages in the budgetary sector in 2009. The NBRB stopped new lending to banks at below the market rate except for housing construction, as agreed in the previous LOI, and under commitments made before signing the previous LOI.

III. Policy Discussions on the Program for 2009

5. Policy discussions focused on measures to close the financing gap during the remainder of the program period. In response to the shortfall in external budget financing ($500 million), the authorities are following through on the package of contingency measures agreed at the time of the second review. The government will maintain the fiscal savings achieved through difficult spending cuts in the third quarter and will backload spending in 2010. Despite its concerns about the effects of a further rapid depreciation of the rubel on confidence, the NBRB has allowed the value of the rubel to move close to the bottom of the current band. The NBRB has also converted some national assets not considered sufficiently liquid to be part of reserves under the program definition to more liquid assets. These measures are expected to increase gross reserves by about $350 million during 2009 ($150 million short of the target for end-December) and by the full $500 million during the program period, and will also reduce the full– year 2010 financing gap.

uF3
Source: IMF staff estimates.1/ Depreciating the rubel against the basket during Nov. to Dec., 2009.2/ Reducing the fiscal deficit by the equivalent of $250 million in 2009, and delaying spending in 2010.3/ Selling assets excluded from IMF-defined international reserves to increase official reserves.

6. Tight fiscal policy will play an important part in helping the government to meet its end-December adjusted target. The government will carry over savings in spending on goods and services and investment made during the third quarter. Further postponement of wage increases to next year will more than offset the impact of the delay in raising fees for utilities and transportation. In 2009, local budgets’ deficits will be contained by reducing transfers from the central government, and a new duty on potassium exports will increase revenue.

7. The recent exchange rate depreciation will improve competitiveness and help close the financing gap, and the forthcoming shift in the central parity of the basket provides scope for further flexibility if needed. The authorities made good use of the flexibility embedded in the exchange rate band in November and early December, depreciating the currency to 81/8 percent below the central parity of the basket, thus bringing it to a level close to the bottom of the band. They also announced their intention to re-center the band at the exchange rate level of end-December 2009, and reaffirmed their intention to maintain the ±10 percent band (Box 2). The incremental move, together with beneficial effects from the recent appreciation of the Russian ruble within the basket, will contribute to closing the financing gap during the remainder of the program period and improve Belarus’s external competitiveness in both 2009 and 2010. Assuming implementation of the policies agreed in the LOI, the current exchange rate appears to be in line with the medium-term equilibrium. The recentering of the band will give the authorities more flexibility in responding to any external shocks.

uF4
Sources: Belarusian authorities; and IMF staff calculations.

The Exchange Rate Regime in Belarus

Throughout the program period the authorities have worked to achieve a balance between the exchange rate flexibility needed to reduce external vulnerabilities and the stability needed to maintain confidence in the regime. At the beginning of 2009, the exchange rate was devalued by 20 percent against the US dollar and the peg to the US dollar was replaced with the peg to a basket of currencies consisting of the Russian ruble, the US dollar, and the Euro, with a possibility of fluctuation within a ±5 percent band around the central parity calculated as a geometric average of the respective exchange rates. The new exchange rate regime reflected Belarus’ structure of trade and financial flows. The shift to the basket and the adoption of a band around the central parity provided some degree of flexibility and stability, much needed in face of uncertainties posed by the global economic crisis.

At intervals during the year, the authorities have been prepared to take advantage of the flexibility provided by the band and fine-tune the regime to respond to the turbulent external environment, although the speed and the extent of adjustments have been influenced by their strong preference for minimizing variability of the rubel against the US dollar. In order to calm the markets in January, the authorities limited the depreciation against the US dollar, pushing the rubel to the upper end of the band. However, continued exchange rate pressures felt in the first half of 2009 called for a gradual slide of the rubel against the parity, reaching the lower end of the ±5 percent band by mid-June. In order to preserve a buffer for further adjustments, the authorities widened the band to ±10 percent.

The need to close the financing gap as well as the need to contain the current account deficit called for yet another movement of the rubel within a widened band in November-December. To maintain scope for flexibility in 2010 the authorities have also decided to recenter the band at its end-December 2009 level, which is expected to be about 8 percent below the originally set parity.

uF5
Source: National Bank of the Republic of Belarus.1/ The basket rate is calculated using BSCE exchange rates.

8. The authorities have taken steps to slow down growth of lending under government programs, but the outcomes of their policies are not yet clear. The authorities scaled back their original lending plan for 2009, but by less than was envisaged at the time of the second review. However, new lending under government programs fell in October, suggesting that banks’ lending is still likely to be kept under the limit.

IV. Policy Discussions for 2010

A. Macroeconomic Outlook and Risks

9. Based on the policies described in the LOI, the economy will resume growth in 2010, and the external current account will improve significantly. The authorities have committed to maintain prudent fiscal and monetary policies and a flexible exchange rate policy. With the fiscal deficit similar to that of 2009 (1.7 percent of GDP), credit increase in line with nominal GDP (13–15 percent), a gradual recovery of external demand (especially faster growth of demand in Russia than was expected at the time of the second review), and expected improvement in the terms of trade, GDP is expected to grow by 3¾ percent, inflation to fall to around 8 percent, and the current account deficit to narrow to around 7 percent of GDP. Gross reserves will reach $7.2 billion, or over 2½ months of imports, but will still be lower than the end-2010 level targeted in the original program by about $1.5 billion (Table 7).4 The financing gap for 2010 beyond the program period could be filled by additional financial support from the Fund if a successor arrangement is agreed, financing from other multilateral donors, and possibly issuance of a Eurobond5. Over the medium term, renewed momentum to liberalize the economy—supported by efforts to maintain macroeconomic stability—will allow the authorities to resume high economic growth (around 7 percent), while reducing further the current account deficit and accumulating a comfortable level of reserves (3.3 months of imports).

10. The main risk to the outlook is that there could be a premature loosening of policies, especially once the program expires. Some policymakers would prefer to target a much higher rate of growth, seeking to fulfill the goals of the five-year plan adopted in 2006 and to increase living standards. Upcoming elections for local governments (in spring 2010) and for the presidency (in early 2011) are likely to add to pressures on the authorities. The staff cautioned that an expansionary policy stance based on overly optimistic assumptions that involves large wage increases, stepped up investment, and higher credit could push up growth in the short run, but would lead to a much worse balance of payments and reverse the gains in reducing external vulnerability. The authorities accepted that policies need to remain disciplined through the program period, and main counterparts recognized that priority needs to be given to maintaining external stability throughout 2010.

11. Substantial uncertainty remains about external sector prospects. The pace of Belarus’s recovery would suffer from lower than projected growth in other countries, especially Russia (the main destination for Belarus’s non-oil exports). Additional downside risks are that energy import prices could be higher than projected and that trade relations with Russia may become strained as the countries negotiate on establishing a customs union and related economic issues. However, the environment for external financing could be better than is currently assumed, especially if Belarus continues with strong implementation of the program.

B. Credit and Monetary Policies

12. Slowing down credit growth will be a key element of the adjustment effort in 2010. The staff cautioned against too rapid expansion of credit in order to lower risks to the current account, and emphasized the need to free up credit for the private sector, which will be the main engine of job creation during the anticipated process of transition. The staff proposed a reduction in the share of lending under government programs to 46 percent of total claims on the economy by end-2010, implying an increase in lending under government programs of no more than 3¼ trillion rubels.6 The authorities accepted this logic, while noting a preference for a more rapid expansion of credit to the economy, including under government programs, if foreign financing (especially foreign direct investment) is available to support it.

13. Success in containing credit under government programs should make it possible to gradually ease interest rates in the credit markets. The authorities have been concerned for some time that the high level of real market interest rates imposes a burden on the real sector. (The real average interbank interest rate was 9 percent in October.) They recognized, however, that reducing interest rates can only be done if it would not compromise the objectives of the program. Given the high level of real rubel interest rates as well as the signs of stabilization (e.g. continued sales of foreign exchange by households and rising share of ruble deposits in total deposits), the staff agreed with the authorities that there was scope for a 50 basis points reduction in the policy rates, while recommending a delay in the reduction until exchange rate depreciation is complete. The NBRB nevertheless decided to make this change from December 1. The NBRB agreed that further reductions in interest rates should depend on progress in meeting reserve targets, continued dedollarization, and the success of the authorities’ efforts to limit credit under government programs.

uF6
Sources: Belarusian authorities; and IMF staff calculations and estimates.

C. Fiscal Policy

14. The 2010 budget, submitted to Parliament by the President and expected to be signed into law by end-December 2009, is consistent with macroeconomic stability. Its deficit of 1.7 percent of GDP will add little to public debt and will free up resources for the private sector. Domestically-financed local budget deficits will be contained by a new provision that limits them to 1 percent of local governments’ revenue (about 0.1 percent of GDP). Tax revenue will be reduced by 1.2 percent of GDP. The impact of the elimination of several taxes (2½ percent of GDP) will be partly offset by an increase of 2 percentage points of the VAT to 20 percent (1 percent of GDP). Expenditures will be reduced by 1.4 percent of GDP, through a reduction of untargeted subsidies, and efforts to streamline the public investment program and contain net lending. Increases in fees for utilities (13 percent)) and transportation (18 percent) will be implemented to mitigate the impact of energy price increases on cost recovery levels. With the approval of the decree to reform targeted social assistance, this spending will double in 2010 and help mitigate the effects of the crisis on the needy.

15. The authorities remain committed to prudent income policies to safeguard Belarus’ competitiveness. In 2009, to contain domestic demand and reduce risks of macroeconomic instability, civil servants and workers of companies receiving public resources were not granted any salary increase. For 2010, the increase in the wage bill of the budgetary sector will be limited to 11 percent, and wages will be increased by no more than 5 percent in the first quarter of 2010. Further increases—within the budget envelope—will be considered if macroeconomic conditions permit. As in 2009, wage setting in state enterprises receiving support from the government will also continue to be governed by wage policy for civil servants.

16. Medium-term fiscal policy will be geared toward further reducing the tax burden and the size of government, and will be supported by IMF Technical Assistance. Over the medium term, the authorities plan to further reduce taxes and to cut spending, especially on subsidies and transfers, which remains the largest item in the budget. The authorities have requested technical assistance from the IMF to help deliver these outcomes.

D. Financial Sector Issues

17. The mission agreed with the authorities on the remit of a special agency that will assume the role currently played by banks in financing government programs. A draft Decree on establishing the agency will be submitted to the President by end-December 2009, and the agency will start functioning in 2010. Initially, the functions of the agency will be limited to management of all already disbursed loans under government programs, with all assets and liabilities relating to lending under government programs being transferred to the new agency except for those relating to commercially viable loans that banks wish to retain. The volume of loans to be taken over will be substantial (the current stock of lending under government programs is 30.2 trillion rubels, equivalent to about 22 percent of GDP), and is expected to improve the liquidity position of state-owned banks. In light of the upcoming establishment of the agency, the authorities agreed to defer any recapitalization of state-owned banks. During 2011 the agency is expected to take over distribution of all new government program loans, with all new lending included in the budget above the line.

18. The establishment of the agency will also allow the NBRB to terminate bank refinancing on non-market terms. There was agreement that such refinancing is distortive and should be phased out. The weighted average interest rate charged on this type of refinancing was 9.4 percent in October 2009, compared to the rate on standard refinancing facilities (mainly Lombard and repos) of 21.3 percent. The NBRB agreed not to extend any new refinancing to banks on non-market terms. However, until the agency is established, the NBRB will roll-over maturing loans which were issued to back specific government program loans with longer maturities. (These account for most outstanding NBRB credit.) The outstanding stock of non-market-based lending will not exceed 8 trillion rubels, which corresponds to 7 trillion rubels of disbursed loans and 1 trillion rubels of already committed disbursements. The staff also emphasized the need for the NBRB to adopt a formalized framework for provision of emergency liquidity assistance to banks, in line with the 2009 FSSA recommendations.7

uF7
Source: National Bank of the Republic of Belarus.

19. Staff endorsed the intention of the authorities to continue implementing structural measures in the financial sector.

  • Loan classification and provisioning. Following the September 2009 amendments to the regulation on loan classification and provisioning, in line with the MCM TA recommendations, the NBRB and banks are conducting an assessment of the quantitative impact of the new regulations on bank soundness indicators.

  • NBRB independence. As part of the program conditionality, the NBRB has recently prepared a draft Presidential Decree which envisages significant changes to its governance structure, including by removing representatives of both the government and the banking sector from its governing body. A joint LEG/MCM TA mission is expected to take place in February 2010 to assist the authorities in addressing remaining issues in drafting this legislation before submitting it to the President.

  • Disengaging NBRB from non-core business. The NBRB’s expects the increase in equity holdings and financing of non-core business entities to be kept within the limit of 350 billion rubels for 2009, which was set under the original program to allow completion of restructuring of the non-core business entities owned by the NBRB. Such financing will be discontinued from 2010. The authorities are preparing a plan to sell all NBRB non-financial subsidiaries and associated companies.

  • Bank privatization. Some progress has been achieved with respect to bank privatization. An independent evaluation of Belpromstroibank, the third largest state-owned bank in the country, has been completed in September. Following this evaluation, an agreement was reached to sell this bank to the Russian Sberbank for about US$300 million.

E. Other Structural Reforms

20. The authorities have made tangible progress in developing legal and institutional frameworks for privatization and reaffirmed their commitment to privatizing selected companies in 2010. The draft Privatization Law and the draft decree on establishing a privatization agency incorporating comments from the World Bank were submitted to Parliament and the President, respectively, on September 30, 2009. A list of five enterprises selected as candidates for privatization has been submitted to the President for approval. The controlling equity stakes of these companies will be offered for sale through an open, international, transparent, and competitive tender by end-February, 2010. Furthermore, by the same date, the authorities will compile a further list of companies slated for privatization and charge the privatization agency, after it becomes operational, with preparing these enterprises for privatization through an open, international, transparent and competitive bidding process.

21. The government is gradually easing administrative controls. The authorities have refrained from the imposition of a general ceiling on monthly price increases. In consultation with the World Bank the authorities further alleviated administrative price controls by removing the restrictions on retail trade margins, except for a limited number of goods, and eliminating requirements for price registration. However, the economy remains heavily regulated, and use of mandatory targets is widespread. Beginning from 2010 the mandatory quantitative economic targets including those for output and employment will be abolished for the companies that do not benefit from government financial support and in which the government has a minority share.

22. The authorities and staff discussed structural reforms that could support growth in the medium-term. At present, the authorities plan to focus on structural reforms which would help them in (i) removing factors systemically undermining macroeconomic stability, (ii) allowing market forces to play a bigger role in resource allocation, and (iii) reducing barriers for private business. Such reforms will be important if the increase in sustainable growth projected over the medium term is to materialize. The authorities agreed that quasi-fiscal activities and mandatory economic targets, including those on wages, have to be phased out to support macroeconomic stability, since they boosted domestic demand by distorting market signals and stretching capacity utilization. In this context, the authorities requested assistance from the IMF and the World Bank to prepare a strategy for developing a market-based incentive system. The authorities also recognize that improving economic efficiency will require market forces to play a more important role in resource allocation and the work towards further price liberalization and market–based lending by banks will be stepped up. Finally, the authorities will foster private sector development by further simplifying requirements for setting up new businesses, reducing conditions attached to new investment, and proceeding with small–scale privatization.

V. Program Issues and Capacity to Repay

23. Understandings were reached on performance criteria and structural benchmarks for the remainder of the program period (Table 2 and 3 of the LOI). The authorities requested and the staff agreed to support a modification of the performance criteria on NIR and NDA for end-December 2009, given that the exchange rate movement allowed by the authorities will have effects mostly in 2010. As prior actions, the authorities have brought the basket value of the exchange rate to the level of 1,038 rubels and published their decision to recenter the exchange rate parity at its December 31, 2009 level to ensure continued exchange rate flexibility. In addition, to comply with a prior action the 2010 budget has been submitted to Parliament by the President. Indicative targets for end-March 2010 have been set in the context of the macroeconomic framework for the whole year. One additional structural benchmark (creating a further list of enterprises to be privatized) is added to further strengthen the reform agenda.

24. Belarus’s capacity to repay the Fund remains adequate. The level of Fund credit outstanding is expected to reach close to 51 percent of gross international reserves at its peak in 2009 and Fund repurchases and charges to amount to 31 percent of total debt service in 2013 (Table 9). While external debt is increasing it remains at a moderate level. Gross external debt is expected to peak at about 44 percent of GDP in 2010 and to fall thereafter as the current account deficit declines, suggesting that risks are manageable. Additional comfort stems from the fact that public debt is likely to remain below 30 percent of GDP even at its peak in 2010 (Appendix I).

25. The prospects for a successor arrangement will be an issue for discussion in the context of the final review of the SBA. At present, there is a financing gap for 2010 beyond the program period. With sound macroeconomic policies and ambitious structural reforms, this can be closed by resources from the Fund and other international donors. The financing gap for 2010 and beyond will be reassessed at the time of the fourth and final review of the SBA. The staff emphasized that continued good performance under the current program will also be important for Fund financial support under a potential follow-up program.

VI. Staff Appraisal

26. Belarus is beginning to emerge from the crisis. Output remains subdued, and Belarus remains highly vulnerable to external shocks, given its high current account deficit and still low level of reserves. However, there are several encouraging signs. Export volumes have stabilized and are projected to recover. The exchange rate depreciation during the year has improved competitiveness, while confidence appears to be growing among households, as evidenced by the partial reversal of currency substitution. Fiscal policy has been consistent and strong, and the inconsistencies in the authorities’ credit policies are being addressed.

27. However, macroeconomic stability remains fragile and needs to be reinforced by strong and consistent policies. The January 2, 2009 devaluation sharpened households’ perceptions that radical changes in policy are likely to occur at end-year, and it is essential that the authorities present a clear and reassuring picture of their policy plans as the end of the year approaches. Pressures on the budget from local governments and line ministries will need to be resisted firmly. The edifice of credit under government programs channeled through commercial banks and financed by below–market rate refinancing from the NBRB needs to be dismantled, and the new agency designed to achieve this needs to be established quickly.

28. The authorities’ willingness to agree measures to compensate for a shortfall in external financing demonstrates their commitment to the program. Both the Ministry of Finance and the NBRB are meeting commitments made to the Fund before the second review of the SBA to adjust policies to close a $500 million financing gap. On the part of the Ministry of Finance, this involves maintaining painful expenditure cuts during the remainder of this year. The NBRB has agreed to important exchange rate measures which will help to reduce external pressures while increasing flexibility to handle unexpected shocks.

29. The authorities have stressed their determination to continue with sound macroeconomic policies in 2010. Faced with a choice between the “target scenario” which would not have been consistent with program commitments (or with economic reality) and a continuation into 2010 of strong but difficult policies agreed under the SBA, the authorities have chosen the latter. They have not abandoned the target scenario, but they intend to treat it as “motivational” and base policies on realistic assumptions and agreed program objectives.

30. However, the risk that authorities might lean towards the “target” scenario remains and the economy remains vulnerable to shocks. As the program draws to a close, and if external constraints ease, there are risks that the authorities will loosen policies too far or too quickly. Approaching elections will add to this risk. Moreover, the past year has shown the economy’s vulnerability to falls in demand for exports, disruption in the foreign exchange market, and shortfalls in official financing. The gradual ending of subsidies on oil and gas imports will add to the difficulties the authorities face.

31. Over the medium term both continued macroeconomic stabilization and structural reform will be needed. Belarus is set to emerge from the crisis in good shape, but the authorities will not only need to maintain tight macroeconomic policies for some time, but also make further progress in structural reform. Belarus is only beginning a process of structural transformation of the economy, and progress in liberalizing the economy and increasing productivity will be essential for rapid and sustainable growth.

32. The authorities are continuing to consider a follow-up program centered around structural reform, though they would like to defer a decision on this until next year. The authorities would like to explore the possibility of Fund support, though they also see a possibility that they could find sufficient external finance through foreign direct investment to avoid recourse to substantial new borrowing. With or without a new program, the authorities have emphasized their desire for a continued close relationship with the Fund. The staff believes that Belarus can benefit from the Fund’s continued advice and support on macroeconomic and structural issues, and from a closer relationship with the World Bank and other international financial institutions.

33. On the basis of the authorities’ good performance since the second review and the policies set out in the LOI, the staff recommends completion of the third review of the SBA, with a modification of the end-December NIR and NDA performance criteria.

Table 1.

Belarus: Selected Economic Indicators, 2007–14

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Sources: Belarusian authorities; and IMF staff estimates.

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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Sources: Belarus authorities; and IMF staff estimations.

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

The original targets for gross reserves were $5,204 million for 2009 and $8,085 million for 2010. These were adjusted upward by the SDR allocations totaling about $568 million. The projected shortfall in 2010, which is cumulative, includes the shortfall for 2009.

Based on latest projection available.

Table 3.

Belarus: Fiscal Indicators and Projections, 2007–10

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

Includes changes in expenditure arrears.

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.