Public Information Notices
Republic of Belarus and the IMF
IMF Concludes Article IV Consultation with the Republic of Belarus
On October 13, 2000 the Executive Board concluded the Article IV consultation with the Republic of Belarus.1
Economic activity slowed down markedly in the wake of the 1998 Russian crisis, but picked up in late 1999/early 2000 on the heels of the Russian recovery and its positive impact on trade. Although agricultural output continued to decline, officially reported GDP grew by almost 3½ percent in 1999 and by 4 percent in the first half of 2000. The inflation rate remained at triple digits at the end of 1999 (251 percent) and reached about 75 percent during January–September, despite a downward trend in monthly rates. Foreign trade picked up during the first half of 2000 on the strength of the economic recovery in Russia, but the current account deteriorated sharply, partly on account of higher oil prices. Gross reserves increased during this period, but still cover less than one month of imports.
Following several steps to liberalize the foreign exchange market since late 1999, a unified exchange rate for the Belarusian rubel at the Belarusian Currency and Stock Exchange (BCSE) was introduced on September 14, when the main and additional trading sessions were merged. Since then the official rate has been set as the final market-clearing rate of the previous day. The liberalization measures taken during the first half of the year led to a significant increase in traded volumes and to convergence of parallel exchange rates. Following the unification, the exchange rate has remained relatively stable.
The overall fiscal deficit, including quasi-fiscal operations of the banking system of 3½ percent of GDP, widened to 5¾ percent of GDP in 1999 from 3¼ percent in 1998. The general government posted a deficit of 2¼ percent of GDP in 1999. Preliminary information suggests that the general government deficit narrowed to about 0.1 percent of GDP for the first eight months of 2000. Faced with difficulties in obtaining domestic and external financing, the authorities constrained expenditures. They expect to limit the general government deficit to 1 percent of GDP in 2000.
After running loose monetary and credit policies in 1999, the National Bank of Belarus (NBB) tightened its stance somewhat in early 2000, keeping the refinance rate positive in real terms since February. These measures contributed to the relative stability in the parallel markets and boosted the demand for rubels. Monetary policy was relaxed from the second quarter of 2000, mainly via increased central bank purchases of foreign exchange, with a view to providing banks with liquidity for lending to priority sectors.
Bank fragility remains a major obstacle to macroeconomic stabilization. In 1999 capital support to state-owned banks amounted to 2½ percent of GDP. Such attempts to recapitalize state banks are unlikely to strengthen the sector as long as banks continue to engage in quasi-fiscal activities imposed by the government. A number of steps have been taken to improve banking supervision, including the introduction of several new prudential requirements, but effective banking supervision is impaired by weaknesses in implementation.
There have been no major strides in advancing structural reforms. Price and wage controls have been intensified, small-scale privatization remains incomplete and the business environment continues to be marred by excessive regulation and state intervention. On the other hand, a targeted social safety net is expected to be introduced in January 2001.
Executive Board Assessment
Executive Directors welcomed the recent signs of improvement in economic policies. These include unifying official exchange rates, liberalizing the foreign exchange market, and maintaining positive real interest rates. Directors stressed, however, that fundamental progress toward macroeconomic stabilization and sustainable growth will require implementation of a comprehensive reform program, including tight macroeconomic policies and a coherent structural reform agenda. In this regard, Directors welcomed the authorities’ indication that they recognize the need for fundamental reforms, and encouraged them to translate this convincingly into action.
Directors noted with concern that financial gaps are likely to emerge this year in the absence of significant policy adjustments. They called on the authorities to adopt tighter fiscal and monetary policies. Directors acknowledged the recent improvements in the fiscal position, but said that expenditure cuts may be necessary to ensure that the fiscal deficit is limited to the available financing. They noted that a part of government spending continues to be off budget, notably through commercial banks’ quasi-fiscal operations. Directors urged the authorities to phase out these quasi-fiscal operations and thus improve the transparency of fiscal accounts.
Directors expressed particular concern about the recent relaxation of monetary targets for 2000. They observed that the higher targets for money growth are inconsistent with the authorities’ inflation target and their objective of greater exchange rate stability. Directors urged the central bank to assert its recently regained independence by resisting pressure for policy reversal to accommodate the financing requirements of sectoral programs.
Directors welcomed the progress in establishing a targeted social safety net. They regretted, however, that the continuing lack of progress on structural reforms, including on price and wage liberalization, was hampering the efforts to stabilize the economy and was dampening the prospects for private investment and economic growth. Directors observed that the frequent state interventions, reliance on extensive administrative controls, the high barriers to new business formation, and an unstable legal and regulatory environment all threatened the development of small and medium-sized enterprises. They also considered that another crucial element in the reform process will be a hardening of budget constraints of public enterprises, including the elimination of cross-subsidies and other implicit subsidization. Directors called on the authorities to accelerate reforms in these areas without delay.
Directors noted that the fragility of the banking sector remains a major obstacle to macroeconomic stabilization. They expressed concern that banks are saddled with nonperforming assets that originate in the quasi-fiscal responsibilities imposed on them by the government. Directors considered that fundamental bank restructuring—including a significant reduction of state intervention and equity in the banking sector—will be essential to avoid frequent bail outs that could undermine stabilization efforts.
Directors welcomed the substantial improvement that has been made in the timely provision of data for surveillance purposes. They recognized, in particular, that notable progress has been made in compiling the national accounts according to the 1993 System of National Accounts. Directors noted, however, the continuing deficiencies in the quality of basic data sources, and urged the authorities to address these shortcomings urgently. They encouraged the authorities to take the necessary steps for Belarus to subscribe to the Special Data Dissemination Standard (SDDS).
Directors took note of the authorities’ request for financial support from the Fund, but most considered that this should be preceded by the successful completion of a Staff-Monitored Program (SMP), as an element of Fund support for Belarus over the medium term. An SMP will require a clear, credible, and public commitment from the authorities to a comprehensive and consistent stabilization and structural reform program. It would provide an opportunity to demonstrate a satisfactory track record, and could lay the foundation for Fund financial assistance to Belarus. In this connection, Directors reiterated that, while the recent unification of official exchange rates was a welcome first step, it will need to be accompanied by supportive financial and structural policies, including the early removal of price and wage controls and other obstacles to private sector activity. They also encouraged the authorities to use the current strong performance of neighboring countries as an impetus for the acceleration of reforms and the development of a virtuous growth circle.
Directors welcomed the authorities’ intention to publish the paper on Recent Economic Developments as an important step toward improved transparency.
|Belarus: Selected Economic Indicators|
|Money and credit|
|Rubel broad money||103||130||195||55|
|NBB rubel net domestic credit||135||194||101||52|
|Refinance rate (end-of-period)||42||48||110||90|
|(In percent of GDP, unless otherwise indicated)|
|Balance||-0.7||-0.3||-2.2 1/||-1.1 2/|
|Adjusted balance 3/||...||-3.3||-5.7||-2.5 2/|
|Balance of payments 4/|
|Gross international reserves|
|In millions of U.S. dollars||394||345||309||367|
|In months of imports||0.5||0.5||0.6||0.6|
|Exchange rates (end-of-period)|
|Exchange rate regime||Managed floating in parallel markets|
|Official exchange rate (rubel per U.S. dollar)||31||107||319||675|
|Parallel exchange rate (rubel per U.S. dollar) 5/||41||425||905||990|
Sources: Data provided by the authorities and IMF staff estimates.
1/ Including banking recapitalization cost of about 2.4 percent of GDP.
2/ Excluding the Social Protection Fund.
3/ Including quasi-fiscal operations.
4/ Preliminary data.
5/ Interbank non-cash exchange rate outside the Belarus Currency and Stock Exchange.
1 Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country’s economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country’s authorities. In this PIN, the main features of the Board’s discussion are described.
IMF EXTERNAL RELATIONS DEPARTMENT