Republic of Belarus
Fourth Review Under the Stand: By Arrangement

This paper discusses key findings of the Fourth Review Under the Stand–By Arrangement for Belarus. All end-December quantitative and continuous performance criteria and structural benchmarks were met. Discussions focused on confirming the authorities’ commitment to program objectives, including with regard to lending under government programs, and on measures to reduce or offset the effects of higher prices on oil imports. The authorities also proposed to increase domestic prices of oil products and restructure the oil refining industry to reduce the need for subsidies.

Abstract

This paper discusses key findings of the Fourth Review Under the Stand–By Arrangement for Belarus. All end-December quantitative and continuous performance criteria and structural benchmarks were met. Discussions focused on confirming the authorities’ commitment to program objectives, including with regard to lending under government programs, and on measures to reduce or offset the effects of higher prices on oil imports. The authorities also proposed to increase domestic prices of oil products and restructure the oil refining industry to reduce the need for subsidies.

I. Introduction and Summary

1. Belarus is on track to meet most program objectives. All end-December quantitative and continuous performance criteria and structural benchmarks were met. Other commitments under the program were largely implemented. With regard to program objectives, output has stabilized, inflation has fallen, and reserves have increased. However, the current account deficit increased in 2009 and public and external debt levels rose sharply. Progress on structural reforms was mixed. Financial sector reform has been accelerated. However, in the area of privatization, while structural benchmarks were met, there have been delays in completing follow-up measures.

2. A deterioration of oil import terms since completion of the last review poses additional economic challenges for Belarus. A new oil supply agreement between Russia and Belarus cuts the subsidy on oil imports from Russia by half. Without offsetting measures the 2010 balance of payments and the fiscal deficits would worsen by up to $2 billion, almost 4 percent of GDP (Box 1). To reduce and offset these effects, the authorities propose and the staff support a package of measures including structural changes to the oil refining industry and fiscal, credit and exchange rate measures.

3. The authorities expressed interest in a multi-year follow-up arrangement with the Fund after completion of the current SBA. In doing so, they cited the need for assistance from the Fund in helping Belarus to further reduce vulnerability to external shocks and transform from an investment-driven growth model to one that relies more on improvement of productivity, by carrying out fundamental structural reforms.

Implications of the New Oil Supply Agreement with Russia

Belarus’s oil refining industry has benefited for many years from preferentially priced crude oil imports from Russia. While the subsidy element has been gradually falling, Belarus’s average oil import price would have been about 30 percent lower than the international price in 2010 if the export duty discount offered by Russia in 2009 remained in place.

On January 27, 2010, Belarus and Russia agreed on changes to the 2007 oil supply agreement following intense negotiations.1 Based on the new agreement, Russia will impose the full export duty on crude oil exported to Belarus, except for the portion identified for domestic consumption which will be provided duty-free. For 2010, it is agreed that the volume for domestic consumption will be 6.3 million tons, subject to a review by October 1. As a result, while subsidies from Russia will continue, they will be at a lower level: the average oil import price would be less than 15 percent below the international price in 2010 if Belarus continues to import the same amount of crude oil as it did in 2009. The Belarusian authorities continue to negotiate on trade under the new agreement. In particular, the authorities are negotiating on terms of a tolling arrangement that has the potential to improve profitability of the Belarusian oil refineries.2

As part of the response to the oil price shock, the authorities plan to rationalize the oil sector. They plan to cut production to a level that can produce the optimal package of oil products for both domestic consumption and exports,3 eliminate export duties on oil products, and increase domestic prices for oil products. These measures will allow the government to stop subsidizing the oil refineries, which will help minimize the impact of the oil price shock on the budget (see ¶12).

II. Recent Developments

4. The recovery from the crisis has been gradual, broadly in line with projections at the time of the third review (Tables 1-5).

Table 1.

Belarus: Selected Economic Indicators, 2007–15

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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, 2007–15

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Table 2.

Belarus: Balance of Payments, 2007–15 1/ (concluded)

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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 number for the 3rd review column is the shortfall relative to the target of $8,653 million. These amounts are assumed to be filled by government borrowing from abroad.

The original targets for gross reserves is $8,085 million for 2010. This is adjusted upward by the SDR allocations totaling about $568 million.

Based on latest projection available.

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 annual GDP, unless otherwise indicated)

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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 unidentified financing that is assumed to be filled by government borrowing from abroad.

Includes statistical discrepancy up to 2008.