Republic of Belarus: Staff Report for the 2018 Article IV Consultation
Author: International Monetary Fund. European Dept.
Publication Date:
17 Jan 2019
eISBN:
9781484389003
Language:
English
Keywords:
ISCR; CR; government; deficit; GDP; Belarusian authorities; budget deficit; private sector; U.S. dollar; central bank; capital market; Budget planning and preparation; Monetary base
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2018 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for Republic of Belarus

Abstract

2018 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for Republic of Belarus

Context

1. Belarus remains one of the most state-controlled economies in Europe. Enterprises either fully or partially owned but controlled by the State account for about half of total employment and value-added in the economy. This is a significantly higher share than in regional peers.

A01ufig1

Share of SOE’s in the Economy, 2012-2014

(Percent of total, average)

Citation: IMF Staff Country Reports 2019, 009; 10.5089/9781484389003.002.A001

Sources: Böwer, Uwe (2017) State-Owned Enterprises in Emerging Europe: The Good, The Bad, and The Ugly”, IMF Working Paper.1/ Data for 2016 (2017 for UKR) are sourced from the national authorities. Output refers to value added. Data only covers SOE’s with 50 percent or more state share.

2. There have been some efforts at developing the private sector. In particular, a highly preferential tax and regulatory regime coupled with strong human capital have allowed the IT sector to flourish. Other sectors such as restaurants and hotels and tourism more broadly have also seen a significant injection of private capital. But, on the whole, the share of the private sector in total economic activity has increased slowly over the last fifteen years, by 5–10 percentage points depending on the measure.

3. Increasing inefficiencies in the state-owned sector have led to a marked decline in trend growth (Figure 1). Distorted economic incentives coupled with soft budget constraints (see below) keep many unviable SOEs alive. As a result, growth since the global financial crisis has been one of the weakest in the region, and income convergence vis-à-vis Western Europe and Russia has stopped or gone into reverse.

Figure 1.
Figure 1.

Belarus: Growing Inefficiencies and Low Potential Growth

Citation: IMF Staff Country Reports 2019, 009; 10.5089/9781484389003.002.A001

4. These inefficiencies, historically coupled with enabling macro policies, have led to deep-seated macro vulnerabilities that leave the country exposed to shocks:

(i) Limited trade and financing diversification (Annex I). Low export diversification in both goods and markets leaves Belarus vulnerable to shocks to a narrow set of commodities and countries. In addition, external financing is largely concentrated, including in the form of large energy discounts and transfers from Russia.

A01ufig2

Belarus and Selected Countries: Gross Reserves

(August 2018; in months of imports)

Citation: IMF Staff Country Reports 2019, 009; 10.5089/9781484389003.002.A001

Sources: IMF International Reserves and Foreign Currency Liquidity database; and World Economic Outlook database.

(ii) High dollarization.1 Financial dollarization remains one of the highest in Europe despite some declines in recent years, carrying both a liquidity risk on the banks’ liability side (particularly given low reserves) and a credit risk on the asset side.

(iii) Rising debt (Annexes II and III). While public debt including guarantees is about average for the region at some 52 percent of GDP, it has risen fast over the last 10 years. This is mostly because of costly extra-budgetary activities and the very high share of FX debt in total public debt (90 percent), which exacerbates the impact of currency depreciations on the debt/GDP ratio. External (private and public) debt is also average for the region at some 70 percent of GDP, but gross external refinancing needs are relatively large at 26 percent of GDP—and they remain substantial even if one excludes trade credits which tend to have more stable rollovers and in which account for about half of the total.

A01ufig3

Public Debt mcl. Guarantees

(Percent of GDP)

Citation: IMF Staff Country Reports 2019, 009; 10.5089/9781484389003.002.A001

Sources: Belarusian Authorities and IMF staff calculations.

5. Macro policy frameworks and policies have improved since the last crisis though. Historically, monetary policy in Belarus had been subordinated to policy objectives other than price/monetary stability, such as stimulating subsidized lending. A revised monetary policy framework targeting money aggregates, adopted in 2015, has allowed a shift to a more rules-based policy. The framework has been gradually refined since then, and it has been instrumental in delivering greater exchange rate stability–despite the shift to a managed float—as well as a rapid decline in inflation. Financial sector regulation and supervision frameworks are also improved. Fiscal policy was also measurably tightened after 2014. Implementation of past staff advice on structural reform has been more limited however (Annex IV).

6. A new government was appointed in August, led by Prime Minister Rumas. Its key economic objectives include creating a favorable business environment, enhancing the efficiency of the state sector of the economy and with it of labor productivity, and establishing a world-class IT sector.

Recent Developments, Outlook, and Risks

7. The economy is in the midst of a cyclical recovery, following a recession in 2015–16 (Figure 2). The 2017 outturn and growth in the first half of 2018 (4.6 percent) were stronger than expected at the time of the 2017 Article IV. Higher oil prices and robust external demand have supported exports, while domestic demand got an impulse from double-digit wage growth following ambitious wage targets set by the President. In turn, stronger imports have led to some deterioration in the current account balance despite the positive terms of trade. Growth momentum has weakened somewhat in the recent months in line with developments in the region, and growth is expected to come at 3.7 percent for the year as a whole.

Figure 2.
Figure 2.

Belarus: Real Sector Developments

Citation: IMF Staff Country Reports 2019, 009; 10.5089/9781484389003.002.A001

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

8. Inflation remains low and the rubel relatively stable. Prudent monetary policy coupled with increasing central bank credibility (see below) are keeping inflation at historically low levels (4.9 percent y/y in October 2018), notwithstanding rapid wage growth. Importantly, the rubel has remained relatively stable on a nominal effective basis, depreciating against the U.S. dollar by 8 percent in the year to date.

9. The budget deficit is expected to widen this year as a rapid increase in expenditures has outweighed robust revenue outturns. Robust external demand, better terms of trade, and a higher-than-expected redistribution of import duties within the Eurasian Economic Union (EAU) could increase revenue by some ¾ percentage points of GDP this year. Expenditures, however, are rising faster, particularly capital spending but also wages and salaries. All in all, the overall budget deficit (IMF definition, including quasi-fiscal spending on SOEs) could reach 1.3 percent of GDP this year, versus 0.3 percent in 2017.

10. The outlook for next year and the medium-term is conditional on the outcome of negotiations on a new energy agreement with Russia (see Box 1). The 2019 budget assumes no compensation for tax maneuver losses, while the authorities’ medium-term forecasts assume full compensation post 2019. These assumptions are built into staff’s baseline projections (Tables 1–5). Under this assumption, growth is expected to slow down notably next year to about 2½ percent. Although the resumption of compensation could provide a rebound in 2020, the medium-term outlook is subdued absent vigorous structural reforms, weighed down by unfavorable demographics and weak productivity. At this juncture, medium-term growth is projected at 2 percent. Consistent with these structural inefficiencies, the external assessment finds that the current account is 2–3 percent of GDP weaker than warranted by fundamentals and desirable policies, and that the real effective exchange rate is overvalued by about 10 percent (Annex V).

Table 1.

Belarus: Selected Economic Indicators (Baseline), 2016-2023

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

Contribution to growth.

Includes general government and off balance sheet operations.

Table 2a.

Belarus: Balance of Payments (Baseline), 2016–2023 1/

(Percent of GDP)

article image
Sources: Belarusian authorities and Fund staff estimates and projections.

According to BPM6 methodology.

Annual percentage change. ‘+’ denotes appreciation.

Table 2b.

Belarus: Balance of Payments (Baseline), 2016–2023 1/

(Millions of USD)

article image
Sources: Belarusian authorities and Fund staff estimates and projections.

According to BPM6 methodology.

Annual percentage change. ‘+’ denotes appreciation.

Table 3a.

Belarus: Fiscal Indicators and Projections (Baseline), 2016–2023

(Percent of GDP, unless otherwise indicated)

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

For 2018, includes capital injections to SOEs previously classified as an off-balance sheet item (following a change in the national budget classification).

Includes guarantee payments, bank and SOE recapitalizations as well as SOE debt restructuring.

Includes general government and off balance sheet operations.

Table 3b.

Belarus: Fiscal Indicators and Projections (Baseline), 2016–2023

(Billions of BYN, unless otherwise indicated)

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

For 2018, includes capital injections to SOEs previously classified as an off-balance sheet item (following a change in the national budget classification).

Includes guarantee payments, bank and SOE recapitalizations as well as SOE debt restructuring.

Includes general government and off balance sheet operations.