Republic of Belarus: Staff Report for the 2014 Article IV Consultation—Informational Annex

KEY ISSUESContext: Attempts to boost activity with policy stimulus, in lieu of much-needed structural reform, have failed to raise growth and contributed to large external imbalances. Adverse developments in the region further cloud the outlook. High financing needs and low buffers leave Belarus highly dependent on external financial support. The risk of disorderly adjustment remains high.Challenges: Mitigating immediate risks and facilitating external adjustment through a sharp change in macroeconomic policies. Advancing the transition to a market-based economy to raise sustainable growth.Policy recommendations:• Halt wage increases and reduce subsidized lending to slow demand growth;• Reduce foreign exchange interventions and tighten monetary policy to facilitate external adjustment;• Enhance market orientation of the economy through a rapid phase-out of price controls and mandatory targets and by privatization of state-owned enterprises.

Abstract

KEY ISSUESContext: Attempts to boost activity with policy stimulus, in lieu of much-needed structural reform, have failed to raise growth and contributed to large external imbalances. Adverse developments in the region further cloud the outlook. High financing needs and low buffers leave Belarus highly dependent on external financial support. The risk of disorderly adjustment remains high.Challenges: Mitigating immediate risks and facilitating external adjustment through a sharp change in macroeconomic policies. Advancing the transition to a market-based economy to raise sustainable growth.Policy recommendations:• Halt wage increases and reduce subsidized lending to slow demand growth;• Reduce foreign exchange interventions and tighten monetary policy to facilitate external adjustment;• Enhance market orientation of the economy through a rapid phase-out of price controls and mandatory targets and by privatization of state-owned enterprises.

Fund Relations

(As of April 30, 2014)

Membership Status: Joined July 10, 1992; Article VIII

General Resources Account

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SDR Department

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Outstanding Purchases and Loans

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Financial Arrangements

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Projected Payments to the Fund 1/

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When a member has overdue financial obligations outstanding for more than three months, the amount of such arrears will be shown in this section.

Safeguards Assessments:

Voluntary (non-program related) assessment of the NBRB was completed in April 2004. The assessment concluded that significant vulnerabilities existed in the safeguards framework, especially in the areas of the legal structure and independence, external and internal audit, and in financial reporting. The assessment made specific recommendations to correct the identified shortcomings.

An updated assessment of the NBRB, which was completed in May 2009 in connection with the Stand-By Arrangement approved on January 12, 2009, found little progress in addressing previously identified vulnerabilities. The assessment determined that risks have increased since the voluntary 2004 assessment and recommended the following measures:

  • Adopting a new law that provides operational and financial independence for the NBRB to ensure the effectiveness of the NBRB’s internal and external audit mechanisms and the control systems,

  • Conducting special audits of NIR and NDA data to reduce the risk of misreporting,

  • Divesting the NBRB’s investment in non-financial subsidiaries, and

  • Publishing the audited IFRS financial statements.

The NBRB implemented only some of the recommendations. Special audits of NIR and NDA data for March, June, September and December 2009 test dates were completed. The NBRB divested most of its non-financial subsidiaries in 2011, but also increased involvement in quasi-fiscal activities, e.g., in the first half of 2011 the NBRB purchased bonds issued by domestic banks at higher than market prices and subsequently sold them to the Development Bank to acquire bonds issued by the latter. While the new Banking Law provides some improvement over its previous version, NBRB autonomy is still undermined, in particular, by powers of the President to amend the NBRB Statute at any time, to direct NBRB operations by his decrees, and to dismiss Board members.

Exchange Arrangements:

The currency of Belarus is the Belarusian rubel, which was introduced in 1994.

The de jure exchange rate regime is managed float. Starting from the last quarter of 2012, the Belarusian rubel has followed a gradually depreciating trend with a 2 percent band. Therefore, the de facto exchange rate arrangement has been retroactively reclassified from other managed to crawl-like arrangement, effective September 19, 2012.

Belarus accepted the obligations of Article VIII, Sections 2, 3, and 4 of the IMF’s Articles of Agreement on November 5, 2001.

An Article VIII mission took place in 2013 and identified exchange restrictions and multiple currency practices (MCPs) subject to the Fund’s jurisdiction. The exchange restrictions arise from the requirement of an NBRB permit for (i) advance payments for imports and (ii) payments for imports with delivery outside of Belarus. The MCPs arise from (i) the potential deviation by more than two percent of the exchange rates in the over-the-counter (OTC) market and the Belarusian Currency and Stock Exchange (BCSE), (ii) the potential deviation by more than two percent of the exchange rates in the OTC market and the BCSE exchange rate or the official exchange rate with respect to the mandatory resale of unused foreign exchange by resident legal entities and foreign exchange amounts subject to mandatory sale requirement and (iii) broken cross rates among the currencies for which the NBRB establishes official exchange rates with monthly frequency with respect to the mandatory resale of unused FX by resident legal entities and FX amounts subject to mandatory sale requirement.

Based on the mission’s recommendations, the NBRB developed and approved a plan to eliminate all of the restrictions in the near future. Legislative amendments to this effect are in process. At this time, the authorities do not request Board approval of the identified exchange restrictions and MCPs. The staff supports the authorities’ plans to eliminate the measures and encourages them to implement these as soon as possible.

UFR/Article IV Consultation:

Belarus is on a 12-month consultation cycle. The last Article IV consultation was concluded on May 25, 2013. The report was published: http://www.imf.org/external/pubs/cat/longres.aspx?sk=40666.0.

Stand-By Arrangement:

A 15–month Stand-By Arrangement (SBA) in the amount of SDR 1.6 billion (US$2.5 billion, 418.8 percent of quota) was approved by the Executive Board (Country Report No. 09/109) on January 12, 2009. An augmentation of the SBA was approved on June 29, 2009 in conjunction with the completion of the first review (Country Report No. 09/260), bringing the Fund’s financial support to SDR 2.3 billion (US$3.5 billion, 587.3 percent of quota). The final review was completed on March 26, 2010. Total disbursements under the program amounted to SDR 2.3 billion (US$3.5 billion).

FSAP Participation, ROSCs, and OFC Assessments:

Two FSAP missions took place in 2004 and an FSSA report was published on http://www.imf.org/external/pubs/cat/longres.cfm?sk=18367.0.

The detailed assessment reports were disseminated in May 2006 for the Basel Core Principles for Effective Banking Supervision on http://www.imf.org/external/pubs/cat/longres.cfm?sk=19246.0, for the Transparency of Monetary Policy and Banking Supervision on http://www.imf.org/external/pubs/cat/longres.cfm?sk=19248.0, and the Technical Note - Deposit Insurance on http://www.imf.org/external/pubs/cat/longres.cfm?sk=19250.0.

The Detailed Assessment Report on Anti-Money Laundering and Combating the Financing of Terrorism was published in June 2007 (IMF Country Report No. 07/190, http://www.imf.org/external/pubs/cat/longres.aspx?sk=21030.0

An FSAP update mission took place in September 2008. An FSSA update report was published in January 2009 (IMF Country Report No 09/30, http://www.imf.org/external/pubs/cat/longres.cfm?sk=22656.0

The fiscal ROSC was published on http://www.imf.org/external/pubs/cat/longres.cfm?sk=17839.0 and the data ROSC on http://www.imf.org/external/pubs/cat/longres.cfm?sk=18013.0.

A World-Bank led FSAP Development Module took place in February 2014.

Technical Assistance, 2007–14

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Relations With the World Bank Group

A. The World Bank Group Strategy

1. The World Bank Group (WBG) Country Partnership Strategy (CPS) for FY 2014–17 was discussed by the WBG Board of Executive Directors in June 2013. The CPS supports Belarus to improve: 1) competitiveness of the economy by supporting structural reforms, including reducing the role of the state, transforming the state-owned enterprise (SOE) sector, promoting private and financial sector development and integration into the global economy; (2) quality and efficiency of public infrastructure services, use of agricultural and forestry resources and global benefits of public goods; and (3) human development outcomes through better education, health and social services. The WBG program includes Analytical and Advisory Activities (AAA), investment lending by the World Bank and investments in the private sector by the IFC.

2. WBG lending is focused on investment lending in sectors with an adequate and improving policy framework, a sufficient knowledge base, a solid implementation track record and demonstrated Government commitment. The CPS envisages new investment lending, totaling up to US$ 570 Million during 2013-2015. Lending operations will support investments in private sector development, public financial management (PFM) systems, forest management, energy efficiency, district heating, water supply/sanitation, education, and transport.

3. The WBG also supports a program of analytical and advisory activities. Core diagnostics around critical developmental issues will continue, including structural reforms, fiscal, PFM, trade, WTO accession, private and financial sector development. These advisory and technical engagements - many of them of a programmatic nature - will underpin the policy dialogue in critical reform areas, supporting the Government in designing and implementing policies to achieve stated objectives of economic modernization and strengthened competitiveness. Analyses in such areas as municipal services, forestry, education and health will underpin future investment operations.

4. The WBG’s program in Belarus will be calibrated according to the depth, breath and speed of structural reforms. Accordingly, the AAA and lending programs have been identified only for the first two years of the CPS. Should structural reforms accelerate, lending scope and instruments could be revisited at mid-term of the CPS period.

5. The IFC will support private sector development and energy efficiency improvements through a combination of investments and advisory work. The IFC program in Belarus will support: (i) trade development in critical sectors such as agriculture, with strategic focus on small and medium-sized exporters and importers, (ii) micro, small, and medium-sized enterprises’ (MSMEs) access to finance, (iii) investments into energy efficiency improvements, and (iv) advisory work on regulatory simplification, including in agriculture and forestry. Agriculture will remain a priority sector, with support directed at improvements in agricultural output and efficiency, access to finance, regulatory environment, and food safety standards.

B. IMF-World Bank Group Collaboration in Specific Areas

6. The WBG and the Fund teams will continue to work closely in delivering their assistance. The IMF plays a key role at the macro level, while the World Bank Group focuses on the structural reform agenda, business regulatory environment and investment climate, energy efficiency, infrastructure and social and environmental issues. Recent examples of close cooperation and coordination between the Bank Group and the Fund include ongoing discussions under the IMF post program monitoring and Article IV Consultations and during the preparation of the WBG CPS, and joint work with the Government working group on structural reforms issues.

Areas in Which the World Bank Group Leads

7. Structural reforms and private business development. Under the CPS, the Bank will continue to support the design and implementation of structural reforms through its programmatic structural reform technical assistance. This programmatic TA which will be implemented through 2016 is focused on providing targeted analytical and advisory support on structural reforms, including further liberalization of factor and product markets to support a more efficient allocation of resources in the economy, transformation of the SOEs and enhancing private sector growth, including the services sector. As part of this TA, the World Bank is also providing focused technical assistance to support Belarus’ WTO accession. In addition, the WBG is implementing a privatization TA (which was initiated during the previous CPS and is largely funded through a donor Trust Fund) to provide advice on legal and institutional instruments and implementation capacity to successfully launch an enterprise privatization program that is on par with international best practice. The WBG has initiated a new private sector development TA which supports the Government in establishing an effective system for the promotion of small and medium-sized enterprises. In addition, the IFC will continue to deliver an active advisory program around challenges facing the private sector and international “best practices” for improving the regulatory environment and investment climate.

8. Public Financial Management. The WBG will continue to provide technical assistance to improve public financial management systems in Belarus. During the previous CPS work has been initiated on strengthening the medium-term perspective in fiscal planning, enhancing debt management and moving towards a more result-oriented budget management system. To assess the current state of PFM performance, the Bank has updated the Public Expenditure and Financial Accountability (PEFA) assessment. The PEFA is a key diagnostic to underpin the preparation of the planned PFM modernization investment loan to improve transparency and efficiency of public financial management and strengthen accountability of the Government for the use of public funds.

9. Energy sector. Currently, two energy efficiency projects are being implemented in Belarus with World Bank’s financial support: Energy Efficiency Project (EEP) (US$215 million), and Biomass District Heating Project (US$90).

10. Road Transport. The Road Upgrading and Modernization Project (US$150 million) is aimed at developing Belarusian transport infrastructure on a strategic route, the Trans-European Transport Corridor IX, connecting the Black Sea with the Baltic countries. A new Transit Corridor Improvement Project (US$250 million) is under preparation.

11. Environment. The Bank supports Belarus’ efforts in strengthening its environment institutions, addressing key public health challenges, and complying with its international commitments. Progress is being made towards achieving improved water, wastewater and solid waste management services under the Water Supply and Sanitation Project (US$60 million) and Solid Waste Management Project (US$42.5 million). Additional Financing Loan (US$90 million) to enhance the impact of the Water Supply and Sanitation Project has been approved.

Areas of Shared Responsibility

12. Macroeconomic development. The two institutions discuss and consult with each other in the preparation of macroeconomic framework and debt sustainability analysis, as well as in the preparation of analytical pieces on macro-growth issues.

13. Public expenditure management. Building on the recently completed PER 1 and 2, the Bank will continue to focus on improving the efficiency of public spending. The first two volumes of the programmatic Public Expenditure Review focused on spending efficiency in agriculture, energy, social assistance, pension sectors, intergovernmental fiscal relations, and the efficiency of public spending in health and education. The Bank will continue to provide targeted analytical and advisory services to support fiscal reforms within a consistent macroeconomic framework, to ensure fiscal and debt sustainability and to provide for growth supporting expenditure and revenue policies. Integrating recommendations of the two volumes, the Bank will deliver a synthesis report on fiscal reforms. The Fund, jointly with the Bank, has been working on supporting the authorities in their fiscal consolidation effort, including technical assistance on expenditure rationalization.

14. Financial sector. The Bank and the Fund will jointly support the authorities in addressing key vulnerabilities in the financial sector and designing needed reforms. The Bank and the IMF are collaborating in financial sector monitoring, including on key developments, such as the newly established Development Bank. The World Bank will maintain an active dialogue with the authorities on financial consumer protection and financial literacy and the overall development of the financial sector, including through a joint FSAP Development Module, completed in May 2014.

Areas in which the IMF Leads

15. The IMF is actively engaged with the authorities in discussing their macroeconomic program and policies, providing technical assistance and related support, including support on economic and financial statistics, tax policy, monetary operations, and fiscal transparency. The IMF is leading the dialogue on monetary and exchange rate policies, and overall fiscal policies.

16. The IMF analysis in these areas serves as an input to the Bank’s policy advice. The Bank and the IMF teams have regular consultations, and Bank staff takes part in IMF Article IV Consultations. This helps to ensure consistency of policy recommendations by the two institutions.

Questions may be referred to Sebastian Eckardt (Senior Economist, World Bank, 202-458-7954), and Kiryl Haiduk (Country Economist, World Bank, 375-17-2265284).

Belarus: Bank and Fund Planned Activities in Macro-Critical Structural Reform Areas in 2012–17

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Statistical Issues

(As of April 1, 2014)

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Belarus: Table of Common Indicators Required for Surveillance

(As of April 1, 2014)

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Any reserve assets that are pledged or otherwise encumbered should be specified separately. Also, data should comprise short-term liabilities linked to a foreign currency but settled by other means as well as the notional values of financial derivatives to pay and to receive foreign currency, including those linked to a foreign currency but settled by other means.

Both market-based and officially-determined, including discount rates, money market rates, rates on treasury bills, notes and bonds.

Foreign, domestic bank, and domestic nonbank financing.

The general government consists of the central government (budgetary funds, extra budgetary funds, and social security funds) and state and local governments.

Including currency and maturity composition.

Including external gross financial asset and liability positions vis-à-vis nonresidents.

Daily (D); Weekly (W); Monthly (M); Quarterly (Q); Annually (A); Irregular (I); Not Available (NA).

These columns should only be included for countries for which Data ROSC (or a Substantive Update) has been published.

Reflects the assessment provided in the data ROSC published February 1, 2005 and based on the findings of the mission that took place during March 23 to April 7, 2004 for the dataset corresponding to the variable in each row. The assessment indicates whether international standards concerning (respectively) concepts and definitions, scope, classification/sectorization, and basis for recording are fully observed (O), largely observed (LO), largely not observed (LNO), or not observed (NO).

Same as footnote 7, except referring to international standards concerning (respectively) source data, statistical techniques, assessment and validation of source data, assessment and valid