An IMF mission, led by Mr. Thomas Richardson, Deputy Division Chief in the European II Department, visited Minsk during September 1 - 8, 2003. Mr. John Odling-Smee, Director of the European II Department, joined the mission for discussions with the authorities during September 1 - 3. The main goals of the mission were: (i) to review recent economic developments, and discuss the 2004 budget and macroeconomic framework, (ii) to assess preparation for the intended formation of a monetary union with Russia, and (iii) to discuss the authorities' ongoing interest in negotiations on a stand-by arrangement with the IMF.

The mission commended the authorities on the intention to adopt a balanced budget and to reduce inflation significantly in 2004. However, the mission expressed concern about plans to raise nominal wages to $150 per month in 2004 and $250 per month in 2005. Wage increases that are not matched by productivity growth will only lead to further loss of competitiveness and enterprise profitability. Moreover, they are fundamentally inconsistent with the announced plans to create a monetary union with Russia.

The mission considered the status of preparations for the monetary union. The IMF views a monetary union question as being more political than economic issue. Either the currency union with Russia or retaining the Belarusian rubel could work very well in Belarus, as long as appropriately tight macroeconomic policies and deep structural reforms are in place. However, an exchange rate peg increases the urgency of structural reforms and a conservative budgetary policy.

The mission discussed the authorities' request for negotiations on a stand-by arrangement. The IMF continues to believe that a considerable record of implementation of macroeconomic policies consistent with the IMF advice would be needed before such negotiations could begin. The mission and the authorities clarified some of their differences on projections for 2004, and discussions will continue through our office in Minsk, as well as during the IMF-World Bank Annual Meetings in Dubai at the end of the month.