IMF Executive Board Concludes 2011 Article IV Consultation with BelarusPublic Information Notice (PIN) No. 11/34
March 9, 2011
Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case. The staff report (use the free Adobe Acrobat Reader to view this pdf file) for the 2011 Article IV Consultation with Belarus is also available.
On March 4, 2011 the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Belarus.1
For nearly a decade before the crisis, Belarus’s economy grew rapidly but remained vulnerable to external shocks. The crisis exposed the external weaknesses and prompted the authorities to embark on a Fund-supported adjustment program. The program aimed at addressing the vulnerabilities and establishing conditions for sustainable growth: the exchange rate was realigned and supported by a new exchange rate regime, monetary and the fiscal policies were tightened, and several important structural reforms initiated. Belarus avoided output loss during the crisis and completed program in March 2010. However, the current account deficit failed to adjust due to the strength of the external shock but also owing to high credit growth spurred by lending under government programs.
After the end of the program policies have been loosened to the extent of becoming unsustainable: 12-month credit growth rate increased to 38 percent in the end of 2010, 1st grade wage in the budget sector was increased by about 50 percent, and the Republican budget deficit limit was increased to 3 percent of GDP. Moreover, the National Bank of the Republic of Belarus (NBRB) did not make use of the exchange rate flexibility provided by the existing exchange rate system. Loose macroeconomic policies succeeded in increasing the growth rate of GDP to about 7½ percent, but at the cost of estimated further increase in the current account deficit to about 16 percent of GDP and strong pressures on the international reserves. Gross reserves were supported by a sharp increase in foreign currency borrowing by the NBRB from Belarusian commercial banks at the end of 2010: during all of 2010, the stock of such borrowing amounted to some US$3.8 billion, with US$2.3 billion having been accumulated in the final quarter of the year.
Belarus’s prospects are expected to improve due to the recent agreement on the Common Economic Area with Russia and Kazakhstan, but it would not be sufficient to restore current account sustainability without significant adjustment measures. The new agreement with Russia on the regime for oil imports reached in December 2010 will entail the net gain of about 2 percent of GDP in the oil balance, but it does not fundamentally change the outlook. Without prompt adjustment measures, the current account deficit will remain too high. The authorities need to make quickly difficult decisions to restore external sustainability.
Executive Board Assessment
Executive Directors commended the authorities for the progress made under the Fund-supported program that expired in March 2010. Under this program, Belarus avoided loss of output during the global recession, contained inflation, and increased gross reserves. Against this background, Directors regretted the recent relaxation of macroeconomic policies which has boosted domestic demand and has contributed to an unsustainable current account deficit. To restore external sustainability, they stressed the urgent need for policy adjustments and far-reaching structural reforms.
Directors underscored that reducing the current account deficit is critical. They emphasized the need for fiscal and monetary tightening and cuts in lending under government programs. Noting the impact of high credit and wage growth on the external accounts, Directors reiterated the importance of prudent monetary policy and a lower wage bill in the public sector. In general, they considered that exchange rate flexibility would also facilitate the adjustment.
Directors expressed concern about the authorities’ decision to borrow foreign exchange from domestic banks to meet mounting pressures on international reserves. They encouraged the authorities to refrain from such borrowing and reorient macroeconomic policies to support the balance of payments.
Directors welcomed the plans for structural reforms contained in the Program for Social and Economic Development for 2011-15 and the recently adopted President’s Directive aimed at liberalizing the economy. These reforms, if accompanied by macroeconomic adjustment, would help address structural balance of payments problems and improve competitiveness. Directors urged the authorities to pursue an ambitious structural reform agenda centered on economic liberalization, a shift in investment from the housing sector to the tradable sector, a smaller role of the state, and the development of the financial sector. They agreed that establishing a Development Bank to administer lending under government programs would free the central bank and commercial banks from a quasi-fiscal activity.
Directors welcomed the opportunity to review Belarus’ experience with the 2009 exceptional access Stand-By Arrangement. They agreed with the main message from the ex post evaluation that the Fund-supported program was generally successful. Directors stressed the need to ensure ownership, including at the highest levels, of program design and conditionality. They saw merit in continued close engagement with the Fund but stressed that any future financial arrangement should be accompanied by a credible commitment to strong stability-oriented policies and an ambitious structural reform agenda. Directors supported the proposal to initiate post-program monitoring, which would enhance the policy dialogue between the Belarus authorities and the Fund.