Statement by the IMF Staff Representative on the Republic of Belarus, July 16, 2014

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.

1. This statement reports on key developments since the staff report was finalized. While some of the new information implies slightly reduced risks, the need for substantial external adjustment remains and therefore the information does not alter the thrust of the staff appraisal.

2. On June 26, Belarus received US$2 billion in bridge financing from Russia. The short-term loan, issued by VTB bank, refinances the earlier US$450 million VTB bridge loan that was disbursed in December 2013 and provides US$1.55 billion in net new financing. This allowed reserves to rise to US$6.4 billion (1.7 months of imports) at end June. The VTB bridge loan is expected to be replaced by a long-term loan from the Russian government in the same amount. The disbursement of the Russian money was anticipated and is included in the macroeconomic projections in the staff report. Therefore, the new financing—while mitigating risks in the very short term—does not alter the staff’s overall assessment of Belarus’ external vulnerabilities this year, which remain high.

3. Separately, Russia also agreed to lower oil duties payable by Belarus from 2015. In the context of the treaty on the Eurasian Economic Union (EEA) that was signed end May, Russia agreed to lower, starting next year, the duties that Belarus pays to the Russian budget on oil products that are produced with oil imported from Russia but exported outside of the customs union. The duty savings associated with the new agreement amount to US$1.5 billion (2 percent of GDP) per year, provided the agreement is renewed. While this will support the external position, reserves will remain far below comfortable levels. Beyond the oil-duty reduction, the short-term impact of the EEA is expected to be modest given the already high degree of trade integration between Belarus and Russia.

4. First-quarter growth was revised slightly upwards while the trade balance has recently started to deteriorate. Q1-GDP growth was revised up to ¾ percent, from ½ percent in earlier preliminary estimates. Newly available component data suggest that Q1 growth was entirely driven by net exports, in line with the seasonal improvement in the trade balance in the first months of the year. Incidentally, the trade balance deteriorated in April, turning into a small deficit—a trend that is expected to continue as the year progresses. Meanwhile, the current account deficit in the first quarter amounted to US$1.7 billion (10.4 percent of quarterly GDP) as the improvement in trade was offset by a seasonal increase in repatriated earnings. The overall balance of payments recorded a US$1.1 billion deficit in Q1, resulting in a corresponding reserve loss.

5. Inflation has accelerated, amid continued loose monetary policy. Monthly inflation increased from 1.3 percent in March to 2.5 percent in May, causing inflation to reach 19 percent in year-on-year terms—the highest rate since May 2013. While the NBRB, in view of the uptick in inflation, refrained from further reducing its key “refinancing rate” in June, it reduced its overnight deposit rate by one percentage point to 19 percent in early July.

6. A large bank’s exemption from reserve requirements will not be removed until March 2015. In the context of its ongoing liquidity problems, the NBRB has agreed with this large bank on a recovery plan that requires the bank to fully comply with normal reserve requirements only by end-March 2015. Until then the bank is held to an individual, gradually increasing, reserve requirement schedule—with which the NBRB indicates it is currently fully complying. The liquidity problems notwithstanding, in recent months the bank substantially reduced its deposit interest rates.