## cr1909 - 1.3 percent of GDP in 2018, from 0.3 percent in 2017. The deficit is projected to fall modestly ## Source details **Canonical URL:** [cr1909 - 1.3 percent of GDP in 2018, from 0.3 percent in 2017. The deficit is projected to fall modestly](https://www.imf.org/-/media/files/publications/cr/2019/cr1909.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2019/cr1909.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2019/cr1909.pdf.json) --- ### Fiscal outlook and near-term projections - General government overall balance: -0.3 percent of GDP in 2018; projected -1.3 percent of GDP in 2019 and -3.9 percent of GDP in 2020 (baseline). - General government primary balance: 1.7 percent of GDP in 2018; projected 0.2 percent of GDP in 2019 and 3.2 percent of GDP in 2020. - Overall balance (including off-balance sheet operations): -0.3 percent of GDP in 2018; projected -1.3 percent of GDP in 2019 and -3.9 percent of GDP in 2020. - Gross public and publicly guaranteed debt: 53.4 percent of GDP in 2017; 51.7 percent of GDP in 2018; projected 54.1 percent of GDP in 2019 and 55.4 percent of GDP in 2020. - Gross public guarantees (percent of GDP): 9.5 (2017), 9.0 (2018), 9.0 (2019), 8.5 (2020), 8.2 (2021), 7.8 (2022), 7.7 (2023). - Memorandum: Nominal GDP (billions of U.S. dollars): 54.4 (2017), 59.6 (2018), projected 62.4 (2019), 65.2 (2020). ### Medium-term outlook, growth and risks - Medium-term growth projection: 2 percent. - Real GDP growth: -2.5 (2016), 2.4 (2017), 3.7 (2018); projected 2.4 (2019), 2.8 (2020), 2.3 (2021), 2.0 (2022), 2.0 (2023). - Consumer prices (end of period): 4.6 percent (2017), 5.5 percent (2018); projected 5.0 percent (2019 and 2020), 4.0 percent (2021–2023). - Current account balance (percent of GDP): -1.6 (2017), -2.6 (2018); projected -4.0 (2019), -2.3 (2020), -2.4 (2021), -2.3 (2022), -2.2 (2023). - Key downside risk: less-than-full compensation from Russia for losses caused by Russia’s new energy taxation system (tax maneuver) could materially lower medium-term growth below 2 percent and raise budget and current account deficits. ### Executive Board assessment and priorities - Directors welcomed continued economic recovery and improved policy frameworks. - Principal concerns: - Rapidly rising public debt. - High dollarization. - Uncertainty about negative spillovers from Russia’s new energy taxation system. - Recommended priorities: - Use cyclical recovery to implement comprehensive macroeconomic policies and ambitious reforms, including SOE reform, to strengthen resilience and increase potential growth. - Undertake additional fiscal consolidation spread over the next three years to achieve a credible medium-term debt target balancing development needs and fiscal sustainability. - Monitor fiscal risks from SOEs and gradually switch funding toward rubel-denominated debt to reduce exchange rate vulnerability. - Ensure central bank independence, progress toward inflation targeting, and eliminate interest rate caps. - Strengthen financial sector stability, implement remaining FSAP recommendations, reduce dollarization, and develop local capital markets. - Advance structural reforms: risk-based assessment of SOEs’ viability with actionable restructuring plans; enhance social safety nets; improve the business climate and level the playing field between private and state-owned enterprises. ### Staff diagnosis and policy recommendations (key points) - Context: cyclical recovery, historically low inflation, broadly stable exchange rate; vulnerabilities include rapidly rising public debt, high dollarization, limited trade and financing diversification, large SOE sector. - Fiscal policy: - A total permanent adjustment of 1½ percent of GDP is required to reverse the upward trajectory of public debt (higher adjustment may be needed if projected reductions in quasi-fiscal transfers to weak SOEs do not materialize). - The adjustment could be spaced over a three-year period. - Monetary policy: - Monetary policy should remain tight in light of fast rising wages and uncertain external environment. - Continue gradual transition towards inflation targeting, remove interest rate caps, and strengthen central bank independence. - Financial sector: - Strengthen regulatory and supervisory frameworks. - De-dollarization is a priority: requires credible macro-policies and development of the rubel capital market. - Structural reforms: - Systematic, risk-based assessment of SOEs’ viability and strengthened corporate governance. - Enhance social safety nets to cushion restructuring impacts. - Facilitate private sector activity, level the playing field between private and SOEs, raise energy tariffs to reduce cross-subsidies, and liberalize prices more broadly. ### Selected macro-financial indicators (high-level highlights) - Real GDP: 3.7 percent (2018). - Total domestic demand: 4.8 percent (2018). - Consumption: 5.1 percent (2018); nongovernment consumption 5.4 percent (2018). - Investment (fixed): 4.1 percent (2018). - Exports of goods (percent of GDP): 52.7 (2017), 53.3 (2018); projected 52.5 (2019). - Imports of goods (percent of GDP): 58.0 (2017), 59.2 (2018); projected 58.0 (2019). - Gross external debt (percent of GDP): 73.3 (2017), 68.3 (2018); projected 69.0 (2019), 67.5 (2020). - Official reserves (billions of U.S. dollars): 7.3 (2017), 6.6 (2018); projected 7.0 (2019), 7.1 (2020). ### Inflation, exchange rate and near-term outlook - Inflation: "4.9 percent y/y in October 2018". - Rubel nominal effective stability: "depreciating against the U.S. dollar by 8 percent in the year to date." - Rapid wage growth ongoing but not yet translated into elevated inflation. - Budget: revenue could increase by "some ¾ percentage points of GDP this year"; 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." - Growth: expected to slow to "about 2½ percent" next year; medium-term growth projected at "2 percent" absent vigorous structural reforms. - External assessments: current account "2–3 percent of GDP weaker than warranted by fundamentals"; REER overvalued by "about 10 percent". ### Impact of Russia’s tax maneuver (Box 1) - Russia’s tax maneuver replaces oil export duty over five years and introduces a mineral extraction tax. - Under existing bilateral terms, Belarus imports eighteen million tons of crude oil duty-free, refines and re-exports products, and receives equivalent export duty on six million tons as a budget transfer. - Absent a new agreement, at current oil prices the annual direct impact once transition is complete is estimated at "some 3.9 and 1.3 percent of GDP, respectively" on the current account and fiscal balance. - Authorities are negotiating a new arrangement and are confident of full compensation. ### Estimated impact of Russian tax maneuver on BoP and fiscal sector in Belarus, absent compensation (Percent of GDP) - Direct impact on BoP: 2019 "1.0", 2020 "1.9", 2021 "2.7", 2022 "3.4", 2023 "3.9" - Higher crude oil import costs: 2019 "0.8", 2020 "1.5", 2021 "2.4", 2022 "3.4", 2023 "3.9" - Reduction in budget transfer from Russia (BoP component): 2019 "0.2", 2020 "0.4", 2021 "0.3", 2022 "0.0", 2023 "0.0" - Direct fiscal impact: 2019 "0.5", 2020 "0.9", 2021 "1.1", 2022 "1.1", 2023 "1.3" - Reduction in custom duties on refined oil exports: 2019 "0.3", 2020 "0.5", 2021 "0.8", 2022 "1.1", 2023 "1.3" - Reduction in budget transfer from Russia (fiscal component): 2019 "0.2", 2020 "0.4", 2021 "0.3", 2022 "0.0", 2023 "0.0" ### Fiscal policy — findings and staff recommendations - 2019 budget projections (under current assumptions): - Revenues expected to decline by "2 percent of GDP" due to loss of customs duties and other factors. - Deficit excluding quasi-fiscal transfers to SOEs could increase to "2.3 percent" in 2019. - Assuming quasi-fiscal transfers remain historical, overall budget deficit (including these transfers) could reach close to "4 percent of GDP." - Post-2019 (subject to compensation and NPP completion assumptions): - Primary surplus (including quasi-fiscal debt creating flows) could reach "2 percent of GDP" in the medium-term, implying an overall deficit of about "½ percent of GDP." - Public debt (IMF definition, including public guarantees) expected to stabilize at around "56 percent of GDP," provided exchange rate depreciation is small. - Staff view: - Medium-term target of "50 percent of GDP" for public debt is appropriate. - Reaching this anchor requires a permanent adjustment of "1½ percent of GDP" spread over two-three years. - Policy measures: - Durably reduce transfers to weak SOEs with broad SOE reform. - Tackle tax expenditures estimated to cost "about 4 percent of GDP per year" and gradually raise reduced VAT rates. - Continue parametric pension reform and harmonize special pension provisions to ensure Social Protection Fund sustainability. - Fiscal risk management: - Strengthen monitoring of contingent fiscal risks from SOEs, expand reporting to SOEs owned by sub-national governments, and ensure data integrity via risk-based audits. - Enhance operational capacity of the fiscal risk unit. ### Monetary and financial sector — monetary policy and framework - Revised monetary framework since early 2015 stabilized inflation at "around 5 percent." - NBRB shifted from money aggregate targeting to interbank rate targeting starting January 2018. - With inflation stabilizing at "around 5 percent (next year’s inflation target)," current stance implying real policy rates of "about 5 percent" is considered appropriate. - NBRB should preserve exchange rate flexibility as a shock absorber within limits imposed by high dollarization. - Transition to full inflation targeting challenged by weak transmission (price controls), high dollarization, and legacy fiscal dominance. - IMF TA assisting to strengthen forecasting, operational framework, and communications. - Gradual elimination of outstanding interest rate caps recommended. - Strengthen NBRB operational independence, legal framework per FSAP recommendations, and recapitalize the NBRB’s large negative equity position; divest remaining shares in two banks to avoid conflicts of interest. ### Financial stability and de-dollarization - Financial sector appears reasonably sound: reported capital adequacy ratio "18 percent" for the sector; NPLs improved after AQRs. - Mandatory Basel III LCR and NSFR from "January 1, 2018." - Asset classification tightened to limit loan ever-greening; new NPL regulation issued and being assessed. - Macroprudential reforms planned over the next two-three years, including legalising a macroprudential mandate for the NBRB and coordinated assessments of five banks. - De-dollarization: - Dollarization remains high despite gradual decline; most FX exposures are to the U.S. dollar. - Prudential measures: required reserve rate on foreign currency deposits raised to 17 percent in January 2018 (versus 4 percent for rubel deposits). - Since May 2018 NBRB collects monthly information on debt to unhedged borrowers. - EBRD supporting rubel market development and issuing longer-dated rubel paper; authorities planning some rubel-denominated issuance for 2019. - Recommended de-dollarization actions: - Develop an overarching de-dollarization strategy with clear timelines. - Develop legal infrastructure for derivatives to support rubel market. - Central bank could set internal targets for share of time/saving deposits in domestic currency. - Conduct external communications campaign on de-dollarization to educate borrowers on FX borrowing risks. ### BoP vulnerabilities and external financing - Financial account less susceptible to portfolio flows; vulnerabilities stem from concentrated financing and trade. - Gross external financing needs projected at 26 percent in 2018 (high relative to peers and above 15 percent threshold). - Trade credits account for half of gross financing needs and 70 percent of short-term amortization on average. - Financing sources undiversified: heavy reliance on Russia and the Eurasian Fund for Stability and Development. - Trade concentration: Russia accounted for 45 percent of exports in 2017 and about three-fourths of non-commodity exports; potash and refined oil account for one third of goods export proceeds. - Reliance on Russia for energy discounts and transfers remains substantial and subject to renegotiation. ### Public Debt Sustainability Analysis (DSA) — baseline and stress tests - Key risks: majority of general government debt in foreign currency (~90 percent); contingent SOE liabilities. - Baseline: public debt projected to peak at 56 percent of GDP in 2023; gross financing needs around 6–8 percent of GDP annually in medium term. - Background: end-2017 PPG debt 53.4 percent of GDP; realized off-balance sheet debt from contingent liabilities totaled 8 percent of GDP over 2015–17. - Baseline macro assumptions: medium-term growth converging to 2 percent; additional contingent liabilities realization about 7 percent of GDP over 2018–2023; primary balance excluding NPP deteriorating from 4.4 percent of GDP in 2018 to 3.1 percent in 2023. - Stress tests: - Real GDP growth shock (1 st. dev. for two years) pushes gross debt above 70 percent of GDP in 2023; gross financing needs reach 11.3 percent of GDP in 2023. - Real exchange rate shock (56 percent loss vs. US$) pushes gross debt close to 111 percent of GDP in 2023; gross financing needs 17 percent of GDP in 2023. - Primary balance shock (2 percent of GDP deterioration) drives debt ratio to 59.7 percent in 2023. - Interest rate shock (rate hikes from 2019 by 200 bps) drives debt close to 57 percent of GDP in 2023. - Combined macro-fiscal shock pushes debt-to-GDP to slightly above 215 percent in 2023 (largest contribution from exchange rate depreciation). - Public debt composition highlights: - Share of FX-denominated debt about 90 percent (over 44 percent in US$ and over 40 percent in EUR). - Realized off-balance sheet debt from contingent liabilities 8 percent of GDP over 2015–17. ### Adverse scenario — zero compensation for oil subsidy loss (no policy response) - Assumptions: zero compensation in 2020 and beyond; nominal exchange rate as in baseline; no policy adjustment. - Projected impacts: - Growth could fall to zero or negative, with much of the effect likely permanent. - Current account deficit worsen by ~3 percentage points vs baseline to close to 5½ percent of GDP. - Additional financing requirement: about U$6.5 billion in unidentified financing to preserve reserves. - Public debt would rise to 70 percent of GDP by 2023 versus 56 percent in baseline. - Banks likely to be stressed via exposure to oil refineries, lower GDP growth, and pressures on unhedged debtors. - Policy implication: absent full compensation, additional adjustment relative to baseline is required; negotiations with Russia are a priority. ### FSAP update and financial sector reforms — status highlights - AQRs and capital actions completed for major banks; AQR of remaining banks completed mid-2017 with remedial plans. - Basel III LCR and NSFR introduced from "January 1, 2018"; LCR for operating banks 93.2 percent in BYN and 104.7 percent in foreign currency as of October 1, 2018. - Provisioning and asset classification reforms implemented; provisioning on foreign currency loans to unhedged borrowers phased to 5 percent by 2020 and provisions on such loans at 10.9 percent as of October 1, 2018. - ELA framework and contingency planning implemented; work in progress on resolution frameworks and strengthening NBRB independence. - Financial Stability Council established; coordination and regularization of meetings ongoing. ### SOE restructuring, utility pricing and structural reforms - Authorities prioritize SOE restructuring and commercialization; focus on governance, budget constraints, and attracting international investors. - Household utility tariffs increased to move toward cost recovery: electricity up 21.8 percent and gas up 25.6 percent on January 1, 2019; heating tariff increases announced for June 1, 2019. - Cost recovery of household utility tariffs increased by up to 80 percent since 2014. - Recommendations: raise household utility prices faster to cost recovery levels, gradually liberalize prices, and continue efforts to join the WTO to diversify exports. ### Key medium-term numerical projections and indicators (selected series, 2016–2023) - Real GDP (percent change): -2.5, 2.4, 3.7, 2.4, 2.8, 2.3, 2.0, 2.0 - End of period consumer prices (percent): 10.6, 4.6, 5.5, 5.0, 5.0, 4.0, 4.0, 4.0 - Current account balance (percent of GDP): -3.4, -1.6, -2.6, -4.0, -2.3, -2.4, -2.3, -2.2 - Gross external debt (percent of GDP): 78.6, 73.3, 68.3, 69.0, 67.5, 66.8, 66.1, 64.3 - Gross public and publicly guaranteed debt (percent of GDP): 53.5, 53.4, 53.7, 54.1, 55.4, 55.4, 55.7, 56.0 - Nominal GDP (billions of U.S. dollars): 47.7, 54.4, 59.6, 62.4, 65.2, 67.7, 70.1, 73.8 - Official reserves (billions of U.S. dollars): 4.9, 7.3, 6.6, 7.0, 7.1, 7.5, 7.8, 8.2 ### Key messages for policy sequencing - Secure compensation/clarity on Russia tax maneuver to avoid large negative fiscal and external shocks. - Use cyclical recovery to commence fiscal consolidation of "1½ percent of GDP" (or more if SOE quasi-fiscal transfers persist) spread over two-three years to target "50 percent of GDP" public debt anchor. - Accelerate SOE reforms with risk-based viability assessments and credible restructuring; couple with social safety net enhancements. - Preserve tight monetary stance, progress toward inflation targeting, phase out interest rate caps, and strengthen NBRB independence and capitalization. - Reduce dollarization through sustained macro policies, development of rubel capital markets, prudential measures, and public de-dollarization communication. *International Monetary Fund — Republic of Belarus (excerpt).* ### 1.3 percent of GDP in 2018, from 0.3 percent in 2017. The deficit is projected to fall modestly ### cr1909 - 1.3 percent of GDP in 2018, from 0.3 percent in 2017. The deficit is projected to fall modestly ### Fiscal outlook and near-term projections - General government overall balance: -0.3 percent of GDP in 2018, projected -1.3 percent of GDP in 2019 and -3.9 percent of GDP in 2020 under the baseline. - General government primary balance: 1.7 percent of GDP in 2018; projected 0.2 percent of GDP in 2019 and 3.2 percent of GDP in 2020. - Overall balance (including off-balance sheet operations): -0.3 percent of GDP in 2018; projected -1.3 percent of GDP in 2019 and -3.9 percent of GDP in 2020. - Gross public and publicly guaranteed debt: 53.4 percent of GDP in 2017, 51.7 percent of GDP in 2018, projected 54.1 percent of GDP in 2019 and 55.4 percent of GDP in 2020. - Gross public guarantees (percent of GDP): 9.5 in 2017, 9.0 in 2018, 9.0 in 2019, 8.5 in 2020, 8.2 in 2021, 7.8 in 2022, 7.7 in 2023. - Memorandum: Nominal GDP (billions of U.S. dollars) 54.4 in 2017, 59.6 in 2018, projected 62.4 in 2019 and 65.2 in 2020. ### Medium-term outlook, growth and risks - Medium-term growth is projected at 2 percent. - Real GDP growth: -2.5 (2016), 2.4 (2017), 3.7 (2018), projected 2.4 (2019), 2.8 (2020), 2.3 (2021), 2.0 (2022), 2.0 (2023). - Consumer prices (end of period): 4.6 percent (2017), 5.5 percent (2018), projected 5.0 percent (2019 and 2020), 4.0 percent (2021–2023). - Current account balance (percent of GDP): -1.6 (2017), -2.6 (2018), projected -4.0 (2019), -2.3 (2020), -2.4 (2021), -2.3 (2022), -2.2 (2023). - Key downside risk: compensation from Russia for losses triggered by Russia’s new energy taxation system (the so-called tax maneuver). If compensation is significantly less than full, medium-term growth could be materially lower than 2 percent, and the budget and current account deficits could be higher than projected. ### Executive Board assessment and priorities - Directors welcomed continued economic recovery and improved policy frameworks. - Principal concerns highlighted: - Rapidly rising public debt. - High dollarization. - Uncertainty about negative spillovers from Russia’s new energy taxation system. - Recommended policy priorities: - Use the cyclical recovery to implement comprehensive macroeconomic policies and ambitious reforms, including SOE reform, to strengthen resilience and increase potential growth. - Undertake additional fiscal consolidation spread over the next three years to achieve a credible medium-term debt target balancing development needs and fiscal sustainability. - Monitor fiscal risks from state-owned enterprises and gradually switch funding toward rubel-denominated debt to reduce exchange rate vulnerability. - Continue to ensure central bank independence and progress toward inflation targeting; eliminate interest rate caps. - Strengthen financial sector stability, implement remaining FSAP recommendations, reduce dollarization, and develop local capital markets to support de-dollarization. - Advance structural reforms: comprehensive, risk-based assessment of SOEs’ viability followed by actionable restructuring plans; enhance social safety nets; improve the business climate and level the playing field between private and state-owned enterprises. ### Staff diagnosis and policy recommendations (key points) - Context: cyclical recovery, historically low inflation, broadly stable exchange rate; deep-seated vulnerabilities remain—rapidly rising public debt, high dollarization, limited trade and financing diversification, large SOE sector. - Fiscal policy recommendation: - A total permanent adjustment of 1½ percent of GDP is required to reverse the upward trajectory of public debt (higher adjustment may be needed if projected reductions in quasi-fiscal transfers to weak SOEs do not materialize). - The adjustment could be spaced over a three-year period. - Monetary policy recommendation: - Monetary policy should remain tight in light of fast rising wages and uncertain external environment. - Continue gradual transition towards inflation targeting, remove remaining market distortions such as interest rate caps, and strengthen central bank independence. - Financial sector recommendation: - Strengthen regulatory and supervisory frameworks. - De-dollarization is an important priority: requires credible macro-policies and development of the rubel capital market. - Structural reform recommendation: - Deep reforms in the SOE sector: start with systematic, risk-based assessment of viability and strengthen corporate governance. - Enhance social safety nets to cushion restructuring impacts. - Facilitate private sector activity, level the playing field between private and SOEs, raise energy tariffs to reduce cross-subsidies, and liberalize prices more broadly. ### Selected macro-financial indicators (high-level table highlights) - Real GDP: 3.7 percent (2018). - Total domestic demand: 4.8 percent (2018). - Consumption: 5.1 percent (2018); nongovernment consumption 5.4 percent (2018). - Investment (fixed): 4.1 percent (2018). - Exports of goods (percent of GDP): 52.7 (2017), 53.3 (2018), projected 52.5 (2019). - Imports of goods (percent of GDP): 58.0 (2017), 59.2 (2018), projected 58.0 (2019). - Gross external debt (percent of GDP): 73.3 (2017), 68.3 (2018), projected 69.0 (2019) and 67.5 (2020). - Official reserves (billions of U.S. dollars): 7.3 (2017), 6.6 (2018), projected 7.0 (2019), 7.1 (2020). *Source: IMF staff report for the 2018 Article IV Consultation (Republic of Belarus).* ### 8. Inflation remains low and the rubel relatively stable. Prudent monetary policy ### 8. Inflation remains low and the rubel relatively stable. Prudent monetary policy ### Inflation and exchange rate - Inflation is at historically low levels: "4.9 percent y/y in October 2018". - 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." - Rapid wage growth is ongoing but has not (yet) translated into elevated inflation. ### Near-term macroeconomic outlook and energy agreement implications - The budget deficit is expected to widen in the year as rapid expenditure growth outpaces robust revenue outturns. - Revenue could increase by "some ¾ percentage points of GDP this year" due to robust external demand, better terms of trade, and a higher-than-expected redistribution of import duties within the Eurasian Economic Union (EAU). - Expenditures are rising faster, particularly capital spending and wages and salaries. - 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." - The outlook for next year and the medium-term is conditional on the outcome of negotiations on a new energy agreement with Russia. - The 2019 budget assumes no compensation for tax maneuver losses; authorities’ medium-term forecasts assume full compensation post 2019. These assumptions are built into staff’s baseline projections. - Growth expectations: - Growth is expected to slow down notably next year to "about 2½ percent." - Medium-term growth is projected at "2 percent" absent vigorous structural reforms. - External assessments: - The current account is "2–3 percent of GDP weaker than warranted by fundamentals and desirable policies." - The real effective exchange rate is overvalued by "about 10 percent" (Annex V). ### Box 1 — The Impact of Russia’s Tax Maneuver on Belarus (summary) - Russia’s new hydrocarbon tax system (tax maneuver) replaces the export duty on oil and oil products over a five-year period and introduces a mineral extraction tax. - Under existing bilateral terms, Belarus imports eighteen million tons of crude oil from Russia free of export duty, refines it, and re-exports much of the oil products; it also receives the equivalent of the export duty on six million tons of crude oil as a budget transfer. - Absent a new agreement, at current oil prices, the annual direct impact once the transition in Russia is complete is estimated at "some 3.9 and 1.3 percent of GDP, respectively" on the current account and fiscal balance. - Authorities are negotiating a new arrangement and are confident the new terms will fully compensate for these losses. ### Box 1 — Estimated impact of Russian tax maneuver on BoP and fiscal sector in Belarus, absent compensation (Percent of GDP) - Direct impact on BoP: 2019 "1.0", 2020 "1.9", 2021 "2.7", 2022 "3.4", 2023 "3.9" - Higher crude oil import costs: 2019 "0.8", 2020 "1.5", 2021 "2.4", 2022 "3.4", 2023 "3.9" - Reduction in budget transfer from Russia (BoP component): 2019 "0.2", 2020 "0.4", 2021 "0.3", 2022 "0.0", 2023 "0.0" - Direct fiscal impact: 2019 "0.5", 2020 "0.9", 2021 "1.1", 2022 "1.1", 2023 "1.3" - Reduction in custom duties on refined oil exports: 2019 "0.3", 2020 "0.5", 2021 "0.8", 2022 "1.1", 2023 "1.3" - Reduction in budget transfer from Russia (fiscal component): 2019 "0.2", 2020 "0.4", 2021 "0.3", 2022 "0.0", 2023 "0.0" ### Risks to the baseline - Downside risks: - Escalation of geopolitical tensions affecting Russia could have significant spillovers on Belarus via trade and financial linkages. - A tightening of global financing conditions would affect Belarus’ external financing efforts. - Less than full compensation for tax maneuver losses would reduce medium-term growth and increase the current account and fiscal deficits; any exchange rate depreciation resulting from it would exacerbate risks via higher public and external debt ratios and weaker NFA (Annex VII). - Upside risk: - If a new agreement provides compensation for tax maneuver losses already next year, it would provide upside risk to the 2019 forecasts. ### Authorities’ views (macroeconomic outlook and risks) - Authorities’ projections for 2018 and 2019 are very close to staff’s; they believe medium-term growth is closer to "3 percent" due to ongoing reforms to stimulate private sector activity and reform underperforming SOEs. - They estimate tax maneuver losses broadly comparable to staff’s estimates and expect a new agreement—anticipated to be signed sometime in the first quarter of 2019—will fully compensate for any losses. - Authorities are wary of intensification of geopolitical tensions given potential collateral effects. ### A. Fiscal policy — Findings and staff recommendations - 2019 budget projections under current assumptions: - Revenues are expected to decline by "2 percent of GDP" due to loss of customs duties (no compensation for tax maneuver losses), a projected decline in important export prices (e.g., potash), and lower redistribution of import duties within the EAU. - Expenditure changes are expected to be relatively minor relative to the 2018 budget; a ramp up in nuclear power plant spending will be offset by savings in other capital spending. - The deficit excluding quasi-fiscal transfers to SOEs could increase to "2.3 percent" next year. - Assuming quasi-fiscal transfers remain in line with historical levels, the overall budget deficit (including these transfers) could reach close to "4 percent of GDP." - Post-2019 projections (subject to assumptions including compensation for tax maneuver losses and nuclear plant completion in 2020): - The primary surplus (including quasi-fiscal debt creating flows) could reach "2 percent of GDP" in the medium-term, implying an overall deficit of about "½ percent of GDP." - Public debt (IMF definition, including public guarantees) is expected to stabilize at around "56 percent of GDP," provided any exchange rate depreciation is small as assumed in the baseline. - Staff view and recommended adjustment: - Additional fiscal adjustment is advised to reduce public debt to more sustainable levels; a medium-term target of "50 percent of GDP" is appropriate. - Reaching this anchor would require a permanent adjustment of "1½ percent of GDP" — higher if projected declines in quasi-fiscal spending do not materialize. The adjustment could be spread over the next two-three years. - The ongoing recovery, with the output gap closed, is the right time to initiate adjustment. - Policy measures to achieve consolidation: - Durably reduce transfers to weak SOEs, coupled with broad SOE reform to ensure credibility of savings. - Priority action to tackle widespread tax expenditures estimated to cost "about 4 percent of GDP per year," and gradually raise reduced VAT rates. - Continue parametric pension reform and harmonize special pension provisions with other government pensions to ensure sustainability of the Social Protection Fund (SPF). - Fiscal risk management: - Strengthen monitoring of contingent fiscal risks from SOEs: expand reporting to fully cover SOEs owned by sub-national governments and ensure data integrity via systematic, risk-based audits. - Enhance operational capacity of the fiscal risk unit. ### Authorities’ views (fiscal) - Authorities noted 2018 outturns are better than expected and the 2019 deficit could be significantly lower if compensation is in place next year. - Their fiscal projections for 2018 and 2019 are close to staff’s except for below-the-line transfers to SOEs, which they do not project separately. - They view fiscal policy as tight given projected medium-term primary surpluses and see limited reason for further consolidation. - Government aims to reduce quasi-fiscal transfers to SOEs and is expanding data reporting to companies owned by sub-national authorities. - Plans to issue rubel-denominated debt of higher-than-one-year maturity in 2019 were noted. ### B. Monetary and Financial Sector — Monetary policy - Monetary framework and outcomes: - Adoption in early 2015 of a revised monetary framework helped stabilize inflation at low levels of "around 5 percent." - Rapid decline in inflation allowed nominal and real interest rates to decline, producing a historically small spread between rubel and FX lending and deposit rates. - Current monetary stance and operational changes: - The current stance is appropriate and should be maintained. - Starting in January 2018, the NBRB shifted from targeting money aggregates towards targeting the interbank rate as part of monetary policy modernization. - With inflation stabilizing at "around 5 percent (next year’s inflation target)," the current stance implying real policy rates of "about 5 percent" is appropriate despite slowing momentum, given potential inflationary pressures from rapid wage growth. - The NBRB should preserve exchange rate flexibility as a shock absorber, within limits imposed by high dollarization. - Transition to full inflation targeting (IT): - The NBRB should be supported in its goal of gradually transitioning to full IT. - Challenges to transition include: (i) weak monetary transmission channels due to government price controls; (ii) high dollarization; and (iii) legacy of fiscal dominance. - IMF Technical Assistance is assisting to strengthen forecasting capacity, operational framework, and public communications. - Authorities have taken steps to liberalize FX market measures (e.g., elimination of FX surrender requirement for exporters and elimination of requirement to explain reasons for FX purchases). - Gradual elimination of outstanding interest rate caps is important, as they are inconsistent with an interest rate-based policy and distort lending and saving decisions. - Central bank independence and governance: - Operational independence of the NBRB should continue to be respected and strengthened. - Strengthening entails improving the NBRB’s legal framework per FSAP recommendations and recapitalizing the large negative equity position of the NBRB due to past quasi-fiscal losses. - The NBRB should divest remaining shares in two banks to avoid conflicts of interest. ### Authorities’ views (monetary) - Authorities agreed with staff’s view on monetary policy and intend to keep real policy rates at current levels despite pressures to relax the stance. - They support IT as a goal and are increasing operational capacity to implement it. - They are drafting a new list of FX liberalization measures and agree on the need to gradually eliminate interest rate caps, proceeding gradually to avoid jolting markets or borrowers. - The NBRB is working with the EBRD on sale of remaining stakes in banks. ### Financial stability and de-dollarization - Financial sector soundness and trends: - The financial sector appears reasonably sound in capital, asset quality and profitability; credit growth has been picking up. - Asset quality reviews in 2016 and 2017 led to remedial actions; reported capital adequacy ratio is now "18 percent" for the sector as a whole. - Bank profitability has improved in the last two years but remains below pre-recession levels. - Credit recovery started in late 2017, led by consumer credit; corporate credit growth has also turned positive, with stronger growth to private enterprises than to SOEs. - Regulatory improvements: - Mandatory Basel III LCR and NSFR were introduced from "January 1, 2018." - Significant progress in implementing FSAP recommendations, though some 'immediate' recommendations remain in progress or partially implemented (e.g., phasing out exemptions, delegating NPL resolution to a single entity with restructuring powers). - Asset quality measurement and oversight: - Recent changes to asset classification rules tightened margins for loan ever-greening by automatically reclassifying any loan whose terms have been changed twice as restructured. - A new NPL regulation has been issued; the decline in reported NPLs following the new regulation warrants assessment. Market participants report NPLs and provisioning under IFRS9 are not meaningfully different to those under the new regulation. - Staff are assessing the new regulation to validate conformity with best international practice. - Macroprudential framework and supervision: - Authorities plan to beef up supervision of systemic risks and update the macro-prudential toolkit over the next two-three years, in cooperation with the EU. - Planned reforms include incorporating a de jure macroprudential policy mandate for the NBRB into law and entrusting the NBRB with tasks of identifying, monitoring and assessing systemic risks and implementing mitigating policies. - A coordinated assessment of five banks with different business models will be undertaken as a start. - A Financial Stability Council has been set up to coordinate between government and the central bank; regularizing meetings of the Council is an important objective. *cr1909 - 8. Inflation remains low and the rubel relatively stable. Prudent monetary policy* ### 29. The high level of financial dollarization remains a major vulnerability. Dollarization ### 29. The high level of financial dollarization remains a major vulnerability. Dollarization ### Vulnerability and risks - Dollarization has gradually been coming down in recent years thanks to more sustainable macro policies; nevertheless, it remains higher than a decade ago and is above the estimated optimal level for the country. - It is also one of the highest among countries in the region. - High dollarization poses liquidity risks, as the lender of last resort function for FX deposits is constrained by existing reserves. - Dollarization increases credit risk through possible currency mismatches in either the banks’ or the debtors’ balance sheets. - Most FX exposures in Belarus are to the U.S. dollar. ### Measures taken and evidence of progress - Relative exchange rate stability and low inflation have led to a gradual shift towards rubel savings, while lower interest rate spreads are boosting rubel borrowing. - Prudential measures: - Differentiated reserve requirements introduced: required reserve rate on foreign currency deposits raised to 17 percent in January 2018 (versus 4 percent for rubel deposits). - Stricter standards when assessing the hedging ability of borrowers. - Provisioning requirements on FX loans tightened. - Since May 2018 the NBRB has started collecting regular monthly information on debt to unhedged borrowers. - Market development support: - The EBRD is working jointly with the authorities in developing the local capital market and has started to issue longer-dated paper in rubels and lending in rubels. - The authorities are planning some rubel-denominated issuance for 2019 as well. ### Remaining challenges and recommended policy actions - De-dollarization is a multi-year process; macro-policies will need to remain sustainable to continue strengthening confidence in the rubel. - Domestic financial market weaknesses act as a brake on de-dollarization; efforts need to be stepped up to develop a proper benchmark yield curve and a proper market at longer maturities. - Recommended actions: - Develop an overarching strategy to de-dollarize the economy that ties various elements together, takes stock of progress, and imposes clear timelines. - Develop the legal infrastructure for derivatives needed to develop the rubel market. - The central bank could consider setting internal targets on, say, the share of time/saving deposits in domestic currency, with the understanding that these targets are not to be achieved at any cost. - Conduct an external communications campaign on de-dollarization to serve as a commitment device and to educate borrowers about the risks (private and social) of FX borrowing. ### Authorities’ views on dollarization and financial stability - Authorities reiterated their commitment to continue implementing FSAP recommendations. - They are determined to ensure that asset classification and published data reflect the true state of asset quality and pointed to new regulations that close the door to loan evergreening. - Going forward, they are committed to gradually boosting their capacity to identify and tackle systemic risks as part of supervisory efforts. - De-dollarization remains a key objective, and they will consider the possibility of launching a public de-dollarization campaign. ### Related macro-financial context and implications for policy - The cyclical recovery provides a favorable backdrop for strengthening economic resilience, but structural weaknesses persist. - Projections and assessments: - Medium term growth is projected to be at around 2 percent absent comprehensive reform. - The current account is assessed to be 2–3 percent of GDP weaker than warranted by fundamentals and desirable policies. - The real effective exchange rate is overvalued by about 10 percent. - Fiscal and debt implications: - Achieving a 50 percent debt target in the medium term would require a permanent adjustment of 1½ percent of GDP, which could be spread over the next 2–3 years. - Efforts should continue to gradually switch funding towards rubel-denominated debt. - Monetary policy guidance: - The current monetary policy stance is appropriate; the central bank should continue efforts toward a more predictable, rules-based monetary policy and maintain positive real rates. - Phase out interest rate caps that are incompatible with interest-rate based monetary policy. - Financial sector stability: - Continue implementing outstanding FSAP recommendations and strengthen oversight of systemic risks. - High dollarization remains a key vulnerability and needs further reduction via prudent macro policies, development of the local capital market, and public education on FX borrowing risks. *International Monetary Fund — Republic of Belarus (excerpt).* ### 48. Other market-based measures could complement these efforts. Household utility ### cr1909 - 48. Other market-based measures could complement these efforts. Household utility ### Market-based measures and utility pricing - Recommendation: Household utility prices need to be raised faster to cost recovery levels to limit costly cross subsidization by firms. - Recommendation: Prices should be gradually liberalized, to avoid distorting market signals and pressuring firm margins, including SOEs. - Recommendation: Authorities are encouraged to continue efforts to join the WTO, which would help diversify exports to the benefit of the country. ### IMF surveillance timing - Proposal: The next Article IV consultation be held on the standard 12-month cycle. ### Key macroeconomic projections and indicators (selected from tables and figures) - Real GDP (percent change), 2016–2023: -2.5, 2.4, 3.7, 2.4, 2.8, 2.3, 2.0, 2.0 - Total domestic demand (percent change), 2016–2023: -5.4, 4.0, 4.8, 3.1, 2.0, 1.5, 1.8, 2.1 - Consumption (percent change), 2016–2023: -2.5, 3.3, 5.1, 2.7, 1.9, 1.4, 1.9, 2.4 - Nongovernment consumption, 2016–2023: -3.2, 4.5, 5.4, 2.7, 1.7, 1.2, 2.1, 2.6 - Government consumption, 2016–2023: 0.3, -1.3, 4.0, 2.6, 2.4, 2.0, 1.4, 1.5 - Investment (percent change), 2016–2023: -12.2, 5.8, 3.9, 4.1, 2.4, 1.9, 1.4, 1.4 - Fixed investment, 2016–2023: -14.5, 5.0, 4.1, 4.3, 2.5, 2.0, 1.5, 1.5 - Net exports (contribution to growth) 1/ (percent): 2.2, -1.7, -0.9, -0.6, 0.8, 0.8, 0.3, 0.0 - End of period consumer prices (percent), 2016–2023: 10.6, 4.6, 5.5, 5.0, 5.0, 4.0, 4.0, 4.0 - Average consumer prices (percent), 2016–2023: 11.8, 6.0, 5.4, 5.0, 5.0, 4.0, 4.0, 4.0 - GDP deflator (percent), 2016–2023: 8.3, 8.2, 11.1, 5.1, 5.3, 3.9, 3.9, 3.6 - Broad money (percent change), 2016–2023: 3.8, 17.4, 12.9, 9.4, 9.4, 8.5, 8.0, 6.1 - Net credit to the economy (percent of GDP), 2016–2023: 41.5, 40.2, 40.1, 41.0, 41.4, 42.6, 43.1, 44.7 - Net credit to private sector (percent of GDP), 2016–2023: 21.7, 22.4, 22.9, 23.5, 24.3, 25.7, 26.6, 27.9 - Current account balance (percent of GDP), 2016–2023: -3.4, -1.6, -2.6, -4.0, -2.3, -2.4, -2.3, -2.2 - Trade balance, goods (percent of GDP), 2016–2023: -5.3, -5.3, -5.9, -5.6, -4.3, -4.0, -4.1, -4.3 - Gross external debt (percent of GDP), 2016–2023: 78.6, 73.3, 68.3, 69.0, 67.5, 66.8, 66.1, 64.3 - Public external debt (percent of GDP), 2016–2023: 36.9, 37.7, 36.2, 38.9, 37.5, 36.7, 36.1, 34.9 - Private (incl. SOEs) external debt (percent of GDP), 2016–2023: 41.7, 35.7, 32.1, 30.1, 30.0, 30.1, 30.0, 29.5 - Net international investment position (percent of GDP), 2016–2023: -85.6, -75.9, -72.0, -72.8, -72.1, -71.7, -71.1, -69.5 - Gross domestic investment (percent of GDP), 2016–2023: 26.5, 26.2, 27.0, 27.7, 26.7, 26.7, 26.8, 27.0 - National saving (percent of GDP), 2016–2023: 23.1, 24.7, 24.5, 23.7, 24.4, 24.3, 24.5, 24.8 - General government primary balance (percent of GDP), 2016–2023: 2.5, 3.7, 1.7, 0.2, 3.2, 3.3, 3.2, 3.1 - General government overall balance (percent of GDP), 2016–2023: 0.5, 1.8, -0.3, -2.3, 0.2, 0.3, 0.3, 0.4 - Overall balance 2/ (percent of GDP), 2016–2023: -1.7, -0.3, -1.3, -3.9, -1.2, -0.9, -0.8, -0.6 - Gross public and publicly guaranteed debt (percent of GDP), 2016–2023: 53.5, 53.4, 53.7, 54.1, 55.4, 55.4, 55.7, 56.0 - Public guarantees (percent of GDP), 2016–2023: 11.2, 9.5, 9.0, 9.0, 8.5, 8.2, 7.8, 7.7 - Nominal GDP (billions of U.S. dollars), 2016–2023: 47.7, 54.4, 59.6, 62.4, 65.2, 67.7, 70.1, 73.8 - Official reserves (billions of U.S. dollars), 2016–2023: 4.9, 7.3, 6.6, 7.0, 7.1, 7.5, 7.8, 8.2 - Months of imports of goods and services (2016–2023): 1.6, 2.1, 1.8, 1.9, 1.8, 1.9, 1.9, 1.9 - Quota (2016): SDR 681.5 million (923.5 million U.S. dollars) ### External sector projections (selected, percent of GDP) - Current account (2016–2023): -3.4, -1.6, -2.6, -4.0, -2.3, -2.4, -2.3, -2.2 - Financial account (2016–2023): -0.9, -1.7, -1.1, -3.3, -2.5, -2.9, -2.8, -2.7 - Gross international reserves (billions of U.S. dollars), 2016–2023: 10.3, 13.4, 11.2, 11.2, 10.9, 11.0, 11.2, 11.1 - Net international investment position (millions of U.S. dollars), 2016–2023: -40,823; -41,303; -42,926; -45,464; -46,984; -48,480; -49,822; -51,264 *Source: REPUBLIC OF BELARUS — INTERNATIONAL MONETARY FUND (excerpts and tables as provided).* ### 1. State (republican and local) budget ### 1. State (republican and local) budget ### Revenue (as reported) - Total revenue (percent of GDP series as presented): 30.0, 30.1, 30.9, 28.8, 29.0, 28.4, 28.3, 28.1 - Personal income tax (percent of GDP series): 4.1 4.1, 4.3, 4.2, 4.2, 4.2 4.2, 4.3 - Profit tax (percent of GDP series): 2.4, 2.8 2.9, 3.0 3.0 3.0 3.0, 3.0 - VAT (percent of GDP series): 8.7, 8.8 8.7, 8.8 8.8 8.8 8.8, 8.7 - Excises (percent of GDP series): 2.3 2.2, 2.1, 1.8 1.8 1.8 1.8, 1.8 - Property tax (percent of GDP series): 1.7, 1.5, 1.4 1.3, 1.3, 1.3 1.3, 1.3 - Customs duties (percent of GDP series): 3.6, 3.4 4.5, 3.1, 3.8 3.7 3.5 3.4 - Of which: export duties on oil products (percent of GDP series): 2.2, 1.3 1.6, 1.1, 1.6 1.4 1.3 1.2 - Other tax revenues (percent of GDP series): 2.3 2.2, 2.1 2.3, 2.3 2.3 2.3, 2.3 - Non tax revenues (percent of GDP series): 4.9 5.0, 4.9 4.3, 3.8 3.4 3.4, 3.4 - Of which: from SoEs (percent of GDP series): 1.6 2.1, 1.5, 1.5 1.5 1.5 1.5, 1.5 - Of which: oil revenues (percent of GDP series): 0.0, 1.0, 1.4 0.9, 0.4 0.0 0.0, 0.0 ### Expenditure (economic classification, as reported) - Total expenditure (percent of GDP series): 29.8 28.5, 31.4, 31.1 28.8, 28.2 28.0, 27.7 - Wages and salaries (percent of GDP series): 6.9 6.7, 7.2 7.4, 7.3 7.3 7.3, 7.4 - Social protection fund contributions (percent of GDP series): 1.9, 1.9 2.0, 2.0 2.0 2.0 2.0, 2.0 - Goods and services (percent of GDP series): 6.0 5.9, 5.8, 5.6 5.6 5.6 5.6, 5.6 - Interest (percent of GDP series): 2.0, 2.0 2.0, 2.5 3.0 3.0 2.8, 2.6 - Subsidies and transfers (percent of GDP series): 8.2 6.8, 6.1 6.2, 6.2 6.1 6.0 5.9 - Of which: transfers to SPF (percent of GDP series): 1.5 1.2, 0.8 1.0, 1.2 1.1 1.1, 1.0 - Capital expenditures (percent of GDP series): 4.8 5.3, 7.7 7.2, 4.5 3.9 3.9 3.9 - Of which: capital transfers to SOEs 1/ (percent of GDP series): 0.0 0.0, 0.2 0.0, 0.0 0.0 0.0 0.0 - excl. Nuclear Power Plant (percent of GDP series): 3.7, 4.1 5.0, 3.9 3.9 3.9 3.9, 3.9 - Nuclear Power Plant (percent of GDP series): 1.1, 1.1, 2.7 3.2, 0.6 0.0 0.0, 0.0 - Other (percent of GDP series): 0.0 0.0, 0.0 0.7, 0.3 0.3 0.3 0.3 ### State budget balance (as reported) - State budget balance (percent of GDP series): 0.3 1.6 -0.4, -2.3 0.2 0.3, 0.3 0.4 - State budget balance (excl. nuclear power plant, or "NPP") (percent of GDP series): 1.4, 2.7, 2.3 1.0, 0.7 0.3 0.3, 0.4 ### Social Protection Fund (SPF) (percent of GDP series) - Revenue: 12.4 11.8, 11.6 11.7, 11.7 11.6 11.6, 11.6 - Expenditure: 12.2 11.7, 11.4 11.7, 11.7 11.6 11.6, 11.6 - Unemployment Benefits: 0.0 series shown - Pension: 9.4 9.1, 8.9 9.1, 9.1 9.1 9.1, 9.1 - Balance (cash) (percent of GDP series): 0.2, 0.2, 0.2 0.0, 0.0 0.0 0.0, 0.0 ### General government (percent of GDP series) - Revenue: 39.0 38.9, 39.7 37.5, 37.5 37.0 36.8, 36.8 - Expenditure: 38.5, 37.2 40.0, 39.7 37.3 36.7 36.5, 36.4 - Balance (percent of GDP series): 0.5 1.8, -0.3 -2.3, 0.2 0.3 0.3, 0.4 - Balance (excl. nuclear power plant or NPP) (percent of GDP series): 1.7, 2.9, 2.5 1.0, 0.7 0.3 0.3, 0.4 - Primary balance (percent of GDP series): 2.5 3.7, 1.7 0.2, 3.2 3.3 3.2, 3.1 - Primary balance (excl. nuclear power plant or NPP) (percent of GDP series): 3.6 4.9, 4.4 3.4, 3.8 3.3 3.3, 3.2 - Off-balance sheet operations 2/ (percent of GDP series): 2.2 2.1, 1.0 1.6, 1.4 1.2 1.1, 1.0 - Overall balance 3/ (percent of GDP series): -1.7, -0.3 -1.3 -3.9 -1.2 -0.9 -0.8 -0.6 ### Financing and memorandum items - Financing (cash) (percent of GDP series): 1.7, 0.3 1.3, 3.9 1.2 0.9 0.8, 0.6 - Foreign financing, net (percent of GDP series): 2.2, 5.6 1.9, 4.3 0.6 0.8 0.7, 0.6 - Gross public and publicly guaranteed debt (percent of GDP series): 53.5 53.4, 51.7 54.1, 55.4 55.4 55.7, 56.0 - Public debt (percent of GDP series): 42.3, 43.9 42.7, 45.1 46.9 47.2 47.8, 48.3 - Nominal GDP (billions of BYN series): 94.9 105.2, 121.2 130.3, 141.1 150.1 159.1, 168.2 *Sources: Ministry of Finance; SPF; and IMF staff estimates.* --- ### Projections (Baseline, selected aggregates and fiscal projections) ### State (republican and local) budget projections (Billions of BYN) - Total revenue (2016–2023 series): 28.5, 31.7, 37.5, 37.6, 40.9, 42.7, 45.0, 47.3 - Selected tax lines (2016–2023 series, Billions of BYN): - Personal income tax: 3.9, 4.3, 5.2, 5.5, 5.9, 6.3, 6.7, 7.2 - Profit tax: 2.3, 2.9, 3.5, 3.9, 4.2, 4.5, 4.7, 5.0 - VAT: 8.2, 9.2, 10.6, 11.5, 12.4, 13.2, 13.9, 14.6 - Excises: 2.2, 2.3, 2.6, 2.4, 2.6, 2.8, 2.9, 3.1 - Customs duties: 3.4, 3.5, 5.4, 4.0, 5.4, 5.5, 5.6, 5.7 - Non tax revenues: 4.7, 5.3, 6.0, 5.6, 5.3, 5.1, 5.4, 5.7 - Of which: from SoEs: 1.5, 2.2, 1.8, 1.9, 2.1, 2.2, 2.4, 2.5 - Of which: oil revenues: 0.0, 1.1, 1.7, 1.2, 0.5, 0.0, 0.0, 0.0 - Expenditure (economic classification, 2016–2023 series, Billions of BYN): 28.3, 30.0, 38.0, 40.5, 40.6, 42.3, 44.5, 46.6 - Wages and salaries: 6.5, 7.1, 8.7, 9.6, 10.3, 10.9, 11.6, 12.4 - Interest: 1.9, 2.1, 2.4, 3.2, 4.3, 4.5, 4.5, 4.5 - Subsidies and transfers: 7.8, 7.2, 7.4, 8.1, 8.7, 9.2, 9.6, 9.9 - Capital expenditures: 4.6, 5.5, 9.3, 9.3, 6.3, 5.9, 6.2, 6.6 - excl. Nuclear Power Plant (2016–2023 series): 3.5, 4.4, 6.0, 5.1, 5.5, 5.9, 6.2, 6.6 - Nuclear Power Plant (2016–2023 series): 1.1, 1.2, 3.3, 4.2, 0.8, 0.0, 0.0, 0.0 - State budget balance (2016–2023 series, Billions of BYN): 0.3, 1.6, -0.5, -2.9, 0.2, 0.4, 0.5, 0.7 - State budget balance (excl. NPP, Billions of BYN): 1.4, 2.8, 2.8, 1.3, 1.0, 0.4, 0.5, 0.7 ### Social Protection Fund projections (Billions of BYN) - Revenue (2016–2023 series): 11.7, 12.5, 14.0, 15.2, 16.4, 17.5, 18.5, 19.6 - Expenditure (2016–2023 series): 11.5, 12.3, 13.8, 15.2, 16.4, 17.5, 18.5, 19.6 - Pension (2016–2023 series): 8.9, 9.6, 10.8, 11.9, 12.9, 13.7, 14.5, 15.3 - Balance (cash) (2016–2023 series): 0.2, 0.2, 0.2, 0.0, 0.0, 0.0, 0.0, 0.0 ### General government projections (Billions of BYN) - Revenue (2016–2023 series): 37.1, 40.9, 48.2, 48.8, 52.9, 55.5, 58.6, 61.9 - Expenditure (2016–2023 series): 36.6, 39.1, 48.5, 51.8, 52.6, 55.1, 58.1, 61.2 - Balance (2016–2023 series, Billions of BYN): 0.5, 1.8, -0.3, -2.9, 0.2, 0.4, 0.5, 0.7 - Primary balance (2016–2023 series, Billions of BYN): 2.3, 3.9, 2.1, 0.3, 4.5, 4.9, 5.0, 5.2 - Off-balance sheet operations 2/ (2016–2023 series, Billions of BYN): 2.1, 2.2, 1.2, 2.1, 2.0, 1.8, 1.7, 1.6 - Overall balance 3/ (2016–2023 series, Billions of BYN): -1.6, -0.4, -1.5, -5.1, -1.7, -1.4, -1.2, -0.9 ### Financing and debt projections (selected) - Financing (cash) (2016–2023 series, Billions of BYN): 1.6, 0.4, 1.5, 5.1, 1.7, 1.4, 1.2, 0.9 - Foreign financing, net (2016–2023 series, Billions of BYN): 2.1, 5.8, 2.3, 5.6, 0.9, 1.2, 1.2, 1.0 - Gross public and publicly guaranteed debt (percent of GDP, 2016–2023 series): 50.8, 56.2, 62.6, 70.6, 78.2, 83.1, 88.6, 94.1 - Public debt (percent of GDP, 2016–2023 series): 40.1, 46.2, 51.7, 58.8, 66.1, 70.8, 76.1, 81.2 - Nominal GDP (billions of BYN, 2016–2023 series): 94.9, 105.2, 121.2, 130.3, 141.1, 150.1, 159.1, 168.2 *Sources: Ministry of Finance; SPF; and IMF staff estimates.* --- ### Annex I: Balance of Payments (BoP) vulnerabilities — key findings - Belarus’s financial account appears less susceptible to portfolio flows compared to other emerging market economies; vulnerabilities are rooted in high concentration of financing and trade. - Traditionally volatile flows are not a major source of current account financing: - Foreign direct investment (FDI) has accounted for the bulk of financing in recent years. - Portfolio flows consist almost entirely of government issued Eurobonds at medium-to-long term maturities; issuance has been relatively limited. - Short term loans have not been a systematic source of financing current account deficits. - External gross financing needs are elevated: - Gross financing needs were projected at 26 percent in 2018, high relative to regional peers and above the 15 percent of GDP threshold considered safe for emerging markets. - Trade credits account for half of total gross financing needs and for 70 percent of short-term amortization, on average for recent years. - Financing sources are relatively undiversified: - Government, banks, and corporates rely substantially on limited sources, primarily direct and indirect financing from Russia and the Eurasian Fund for Stability and Development; these flows have been volatile historically. - Trade concentration increases vulnerability: - Russia accounted for 45 percent of total exports in 2017 and about three-fourths of non-commodity exports. - Potash and refined oil account for one third of goods export proceeds. - Belarus is highly dependent on Russia for energy discounts and transfers; the implicit subsidy value has halved post-2008 but remains substantial and is subject to renegotiation. *Sources: Belarusian authorities and IMF staff calculations.* --- ### Annex II: Public Debt Sustainability Analysis — summary findings and stress tests ### Key risks and baseline - Public debt sustainability risks are substantial: - Majority of general government debt is in foreign currency, making debt vulnerable to exchange rate depreciation. - Contingent liabilities from SOEs add to risks. - Under the baseline scenario: - Public debt is projected to peak at 56 percent of GDP in 2023. - Gross financing needs are forecasted to reach 8 percent of GDP in the medium term. - Background context: - At end-2017, general government and publicly guaranteed (PPG) debt amounted to 53.4 percent of GDP. - The share of FX-denominated debt is about 90 percent (over 44 percent in US$ and over 40 percent in EUR). - Realized off-balance sheet debt from contingent liabilities totaled 8 percent of GDP over 2015–17, mostly related to SOE recapitalization/debt restructuring. - Baseline macro assumptions: - Medium-term growth projected to converge to potential of 2 percent of GDP (after a cumulative drop of 6.4 percent over 2015–16). - Baseline assumes an additional realization of contingent liabilities of about 7 percent of GDP over 2018–2023. - Primary balance excluding NPP-related expenditure expected to deteriorate from 4.4 percent of GDP in 2018 to 3.1 percent in 2023. - Overall deficit will decline to less than 1 percent of GDP in the medium-term, given interest payments (2½ to 3 percent of GDP) and ongoing off-balance sheet operations. - Gross financing needs projected to reach around 6–8 percent of GDP annually over the medium term. - Primary balance required to stabilize debt in the baseline scenario is 1 percent of GDP. ### Stress tests and scenarios (selected) - Exchange rate depreciation and contingent liabilities are major drivers of debt dynamics; stress tests highlight exchange rate vulnerability. - Real GDP growth shock: - A 1 standard deviation shock to GDP growth for two consecutive years leads to negative growth over 2019−20, a worsening primary balance (negative in 2019–2020 before recovery in 2021). - Under this scenario, gross debt exceeds 70 percent of GDP in 2023 (a peak), while gross financing needs reach 11.3 percent of GDP in 2023 (a peak). - Real exchange rate shock: - A shock involving a 56 percent loss in value relative to the US$ (the maximum achieved in the past decade) would push gross debt close to 111 percent of GDP in 2023 (a peak). - Gross financing needs would reach 17 percent of GDP in 2023 (a peak). - These movements reflect high debt dollarization. *Notes: The DSA focuses on gross PPG debt given the limited liquidity of some government assets. Main DSA assumption changes relative to the 2017 Article IV include a better medium-term overall fiscal balance trajectory, lower than expected realization of off-balance sheet risks in 2018, and downward revisions in the share of short-term debt in total debt.* --- *Sources: Ministry of Finance; SPF; National Bank of the Republic of Belarus; and IMF staff estimates and projections.* ### 9. Primary balance and interest rate shocks. The primary balance shock introduces a ### 9. Primary balance and interest rate shocks. The primary balance shock introduces a ### Primary balance shock - Introduces a deterioration of the primary balance in 2018–19 (shock equal to one-half of the 10-year historical standard deviation, or 2 percent of GDP), in comparison with the baseline. - The primary balance shock drives the debt ratio up to 59.7 percent in 2023 (a peak). ### Interest rate shock - Introduces rate hikes from 2019 (by 200 bps). - The interest rate shock drives the debt to GDP ratio close to 57 percent of GDP in 2023. ### Combined macro-fiscal shock - A combined macro-shock scenario pushes the debt-to-GDP ratio to slightly above 215 percent in 2023 (a peak). - The macro-fiscal shock combines: - the growth and interest rate shocks, - a primary balance shock as in the standard examples in the stress tests, - the real exchange rate shock consistent with a maximum movement of the real exchange rate over the past 10 years and a pass-through coefficient of 0.25. - The effect of these shocks on debt ratios and gross financing needs is large and reflects in particular the sensitivity of debt to exchange rate depreciation, which makes the largest contribution to the change in the debt path. ### Comparison of fiscal definitions used by staff and the authorities - Staff uses a broader measure of fiscal balances and debt than the authorities, to capture fiscal risks. - Authorities have made progress aligning presentation of fiscal aggregates with the Fund, including reclassifying injections to statutory capital as expenses and excluding budget loans from expenses (changes to the budget classification starting in 2018). - Main differences for 2015–17 are summarized in staff and authorities’ measures below. ### Belarus: Fiscal Balance, 2015–17 (Percent of GDP) - 2015 - State (authorities' definition) 1/: 1.8 - Of which: budget loans: -0.8 - State (staff definition) 2/: 1.3 - Of which: NPP: -1.3 - General Government (staff definition) 3/: 0.9 - Overall (staff definition) 4/: -3.0 - Of which: off-balance sheet items: -3.9 - 2016 - State (authorities' definition) 1/: 1.3 - Of which: budget loans: -0.2 - State (staff definition) 2/: 0.3 - Of which: NPP: -1.1 - General Government (staff definition) 3/: 0.5 - Overall (staff definition) 4/: -1.7 - Of which: off-balance sheet items: -2.2 - 2017 - State (authorities' definition) 1/: 2.8 - Of which: budget loans: 0.1 - State (staff definition) 2/: 1.6 - Of which: NPP: -1.1 - General Government (staff definition) 3/: 1.8 - Overall (staff definition) 4/: -0.3 - Of which: off-balance sheet items: -2.1 - Notes (as in source): - 1/ Republican and local governments (authorities' definition). - 2/ Republican (incl. NPP) and local governments; excludes budget loans through 2017. - 3/ Includes SPF (consolidated). - 4/ Includes debt creating off-balance sheet operations, i.e., transactions related to different forms of debt restructuring by general government, and execution of general government guarantees (given past evidence, events of debt restructuring of financial and non-financial SOEs are assigned high probability of costs ultimately being covered by general government (following actual repayments are deducted from the total amount)). ### Belarus: Public Debt, 2015–17 (Percent of GDP) - 2015 - Republican government (authorities' definition): 36.5 - General government (staff definition): 39.0 - Of which: Local governments: 1.4 - Of which: SDR allocation: 1.1 - General government guarantees: 14.0 - General government debt incl. guarantees (staff definition): 53.0 - 2016 - Republican government (authorities' definition): 38.9 - General government (staff definition): 42.3 - Of which: Local governments: 2.3 - Of which: SDR allocation: 1.0 - General government guarantees: 11.2 - General government debt incl. guarantees (staff definition): 53.5 - 2017 - Republican government (authorities' definition): 40.1 - General government (staff definition): 43.9 - Of which: Local governments: 2.9 - Of which: SDR allocation: 1.0 - General government guarantees: 9.5 - General government debt incl. guarantees (staff definition): 53.4 ### Public DSA and risk assessment highlights - Heat map and indicators (as presented by IMF staff) use benchmarks and color-coding for risk assessment: - Debt burden benchmark of 70% is used to highlight cells green/yellow/red/white. - Gross financing needs benchmark of 15% is used to highlight cells green/yellow/red/white. - Other numeric benchmarks cited: 200 and 600 basis points for bond spreads; 5 and 15 percent of GDP for external financing requirement; 0.5 and 1 percent for change in the share of short-term debt; 15 and 45 percent for the public debt held by non-residents; and 20 and 60 percent for the share of foreign-currency denominated debt. - Market perception and indicators shown (values cited in source figures): - Bond spread: 376 bp (example figure) - External Financing Requirement examples: 12, 5, 15 (benchmarks noted) - Public Debt Held by Non-Residents example: 73% ### Belarus Public Sector DSA – Baseline Scenario (As of November 13, 2018) - Nominal gross public debt (percent of GDP) by year: - 2016: 36.7 - 2017: 53.5 - 2018: 53.4 - 2019: 51.7 - 2020: 54.1 - 2021: 55.4 - 2022: 55.4 - 2023: 55.7 - 2023 (cumulative noted elsewhere): 56.0 - Of which: guarantees (percent of GDP): 12.0 (2016), 11.2 (2017), 9.5 (2018), 9.0 (2019), 9.0 (2020), 8.5 (2021), 8.2 (2022), 7.8 (2023), 7.7 (2023 alternative). - Public gross financing needs (percent of GDP): 6.7 (2016), 5.2 (2017), 3.1 (2018), 5.8 (2019), 8.2 (2020), 6.0 (2021), 5.8 (2022), 7.1 (2023), 8.0 (alternative). - Net public debt: 51.5 (2016), 50.8 (2017), 49.2 (2018), 52.0 (2019), 54.0 (2020), 54.5 (2021), 54.9 (2022), 55.2 (2023). - Real GDP growth (in percent): 3.9 (2016), -2.5 (2017), 2.4 (2018), 3.7 (2019), 2.4 (2020), 2.8 (2021), 2.3 (2022), 2.0 (2023). - Inflation (GDP deflator, in percent): 28.5 (2016), 8.3 (2017), 8.2 (2018), 11.1 (2019), 5.1 (2020), 5.3 (2021), 3.9 (2022), 3.9 (2023), 3.6 (alternate). - Nominal GDP growth (in percent): 33.1 (2016), 5.6 (2017), 10.8 (2018), 15.2 (2019), 7.6 (2020), 8.2 (2021), 6.4 (2022), 6.0 (2023), 5.7 (alternate). - Effective interest rate (in percent): 6.3 (2016), 5.3 (2017), 5.2 (2018), 5.2 (2019), 6.2 (2020), 7.3 (2021), 6.8 (2022), 6.4 (2023), 5.9 (alternate). - Change in gross public sector debt (annual, percent of GDP): 4.5 (2016), 0.5 (2017), 0.0 (2018), -1.8 (2019), 2.5 (2020), 1.3 (2021), 0.0 (2022), 0.3 (2023), 0.3 (cumulative noted), 2.5 (cumulative total). - Identified debt-creating flows (annual, percent of GDP) and components (2016–2023 shown in table): - Primary deficit: 1.0 (2016), -2.5 (2017), -3.7 (2018), -1.7 (2019), -0.2 (2020), -3.2 (2021), -3.3 (2022), -3.2 (2023), -3.1 (cumulative), -14.6 (cumulative total). - Primary (noninterest) revenue and grants: 39.8 (2016), 39.0 (2017), 38.9 (2018), 39.7 (2019), 37.5 (2020), 37.5 (2021), 37.0 (2022), 36.8 (2023), 36.8 (cumulative), 225.3 (total). - Primary (noninterest) expenditure: 40.8 (2016), 36.6 (2017), 35.2 (2018), 38.0 (2019), 37.3 (2020), 34.3 (2021), 33.7 (2022), 33.7 (2023), 33.7 (cumulative), 210.7 (total). - Automatic debt dynamics: -1.6 (2016), 2.3 (2017), -2.4 (2018), -4.6 (2019), -0.7 (2020), -0.5 (2021), 0.2 (2022), 0.2 (2023), 0.1 (cumulative), -5.3 (total). - Interest rate/growth differential: -6.7 (2016), -0.1 (2017), -2.7 (2018), -4.6 (2019), -0.7 (2020), -0.5 (2021), 0.2 (2022), 0.2 (2023), 0.1 (cumulative), -5.3 (total). - Real interest rate contribution: -6.0 (2016), -1.4 (2017), -1.5 (2018), -2.9 (2019), 0.5 (2020), 0.9 (2021), 1.5 (2022), 1.2 (2023), 1.1 (cumulative), 2.3 (total). - Real GDP growth contribution: -0.7 (2016), 1.3 (2017), -1.2 (2018), -1.7 (2019), -1.1 (2020), -1.4 (2021), -1.2 (2022), -1.0 (2023), -1.1 (cumulative), -7.6 (total). - Exchange rate depreciation contribution: 5.1 (2016), 2.4 (2017), 0.3 (2018), (dots thereafter indicate negligible/projected zeros in table). - Other identified debt-creating flows: 2.7 (2016), 3.9 (2017), 3.2 (2018), 1.2 (2019), 1.7 (2020), 0.5 (2021), 0.6 (2022), 1.0 (2023), 0.9 (cumulative), 5.9 (total). - Contingent liabilities: 2.4 (2016), 2.2 (2017), 2.1 (2018), 1.0 (2019), 1.6 (2020), 1.4 (2021), 1.2 (2022), 1.1 (2023), 1.0 (cumulative), 7.2 (total). - Non-budget support debt flows: 2.0 (2016), 1.8 (2017), 1.1 (2018), 0.8 (2019), 0.1 (2020), -0.4 (2021), -0.2 (2022), -0.2 (2023), 0.2 (cumulative), 0.5 (total). - Residual, including asset changes: 2.3 (2016), -3.3 (2017), 2.9 (2018), 3.4 (2019), 1.6 (2020), 4.5 (2021), 2.4 (2022), 2.3 (2023), 2.3 (cumulative), 16.5 (total). - Source: IMF staff. ### Composition of public debt and alternative scenarios (selected assumptions and projections) - Baseline underlying assumptions (selected): - Real GDP growth: 3.7 (2018), 2.4 (2019), 2.8 (2020), 2.3 (2021), 2.0 (2022), 2.0 (2023). - Inflation: 11.1 (2018), 5.1 (2019), 5.3 (2020), 3.9 (2021), 3.9 (2022), 3.6 (2023). - Primary Balance: 1.7 (2018), 0.2 (2019), 3.2 (2020), 3.3 (2021), 3.2 (2022), 3.1 (2023). - Effective interest rate: 5.2 (2018), 6.2 (2019), 7.3 (2020), 6.8 (2021), 6.4 (2022), 5.9 (2023). - Historical and Constant Primary Balance scenarios reported with their own parameter values in source tables. ### Belarus Public DSA – Stress Tests (selected scenarios and outputs) - Primary Balance Shock scenario (selected series 2018–2023): - Real GDP growth: 3.7, 2.4, 2.8, 2.3, 2.0, 2.0 - Inflation: 11.1, 5.1, 5.3, 3.9, 3.9, 3.6 - Primary balance: 1.7, -1.7, 1.3, 3.3, 3.2, 3.1 - Effective interest rate: 5.2, 6.2, 7.3, 6.8, 6.4, 5.9 - Real GDP Growth Shock scenario: - Real GDP growth: 3.7, -2.2, -1.8, 2.3, 2.0, 2.0 - Primary balance: 1.7, -2.0, -0.9, 3.3, 3.2, 3.1 - Effective interest rate: 5.2, 6.2, 7.3, 6.9, 6.5, 6.0 - Real Interest Rate Shock scenario: - Effective interest rate: 5.2, 6.2, 7.7, 7.4, 7.2, 6.8 - Real Exchange Rate Shock scenario: - Inflation: 11.1, 1.1, 4.5, 5.3, 3.9, 3.9, 3.6 (table shows variant inflation path) - Effective interest rate: 5.2, 21.2, 7.2, 6.7, 6.2, 5.8 (noting the spike in 2019 in table) - Combined Shock scenario (selected): - Real GDP growth: 3.7, -2.2, -1.8, 2.3, 2.0, 2.0 - Primary balance: 1.7, -2.0, -0.9, 3.3, 3.2, 3.1 - Effective interest rate: 5.2, 21.2, 6.7, 6.6, 6.4, 6.2 - Additional Realized Risks scenario (example primary balance path): 1.7, -4.8, -1.8, -1.7, -1.8, -1.9 - Visual outputs in source show gross nominal public debt under baseline and stress tests with scales up to 350 percent of GDP in some charts and up to 700 percent of revenue in others. ### Annex III: External Debt Sustainability Analysis — key points - Following the sharp increase in the debt-to-GDP ratio in 2015-16 due to the rubel depreciation, the external debt burden decreased in 2017. - Total external debt increased in level terms by US$2.4 billion to almost US$40 billion, but the denominator effect (nominal GDP growth of over 11 percent) and a slight appreciation of the rubel reduced the debt-to-GDP ratio to 73.3 percent of GDP in 2017, some 5 percent of GDP lower than in 2016. - Under the baseline projections, the debt-to-GDP ratio is projected to decline by some 9 percentage points in the medium term. - An important factor is the improvement in the trade and current account balance as construction of the nuclear power plant tails off. - Gross external financing needs are also projected to decline in percent of GDP. - These gross financing needs exaggerate liquidity vulnerabilities, given that a large portion of them is constituted of trade credits with typically high and stable rollover rates. - The historical scenario would see a sharp increase in external debt to 90 percent of GDP; the historical period (the last ten years) encompasses two‒three external crises and should be seen as a tail scenario. - A one-off 30 percent depreciation would increase the debt-to-GDP-ratio to 96 percent in the medium term; 2015–16 was an example of such an exchange rate shock materializing. - Growth and current account shocks would cause the debt burden to increase, while an interest rate shock would not make a material difference compared to the baseline. - The adverse scenario in Annex VII is an example of a current account shock; there, external debt does not increase only because of the simplifying assumption that the gap is entirely financed by reserves. Should the gap be partially covered by external debt issuance, the latter would increase materially. ### Annex III. Figure notes (selected) - Bound tests present baseline and scenario paths for external debt (percent of GDP) with shocks: - Interest rate shock example: baseline 64, interest rate shock path 65 (illustrative labels in source figure). - Historical scenario in figure reaches 90. - Non-Interest Current Account Shock example: baseline 64, scenario 78. - Combined Shock 3/ example: baseline 64, combined shock 75. - Real Depreciation Shock 4/ example: baseline 64, real depreciation shock 96 (with a one-time 30 percent depreciation in 2017). - Additional figure annotations list baseline and scenario averages for growth, inflation, and other variables in boxed values (examples in source: Baseline: 4.9, 5.1, 3.2; Scenario: 2.3, 0.1, 2.4; Historical: 0.5, -2.2, -5.9). *Source: IMF staff (cr1909).* ### Annex III. Table 1. Belarus: External Debt Sustainability Framework, Baseline Scenario, 2013–2023 ### Annex III. Table 1. Belarus: External Debt Sustainability Framework, Baseline Scenario, 2013–2023 ### Baseline external debt and debt dynamics (selected series, in percent of GDP unless otherwise indicated) - Baseline: External debt (2013–2023): 52.5, 50.8, 67.9, 78.6, 73.3, 68.3, 69.0, 67.5, 66.8, 66.1, 64.3 - Debt-stabilizing non-interest current account: -2.0 - Change in external debt (2013–2023): 1.1, -1.6, 17.1, 10.7, -5.3, -5.0, 0.7, -1.5, -0.7, -0.7, -1.8 - Identified external debt-creating flows (4+8+9, 2013–2023): 1.3, 2.6, 21.1, 13.6, -10.0, -1.5, 0.9, -1.1, -0.6, -0.5, -0.5 - Residual, incl. change in gross foreign assets (2-3, 2013–2023): -0.3, -4.3, -4.0, -2.9, 4.7, -3.5, -0.2, -0.4, -0.1, -0.2, -1.2 ### Components of identified flows and automatic dynamics - Current account deficit, excluding interest payments (2013–2023): -8.5, -5.0, -1.1, -1.0, 0.6, -0.3, 0.9, -1.0, -0.7, -0.8, -0.6 - Deficit in balance of goods and services (2013–2023): 3.1, 0.6, -0.2, 0.1, -0.3, 0.3, 1.2, -1.6, -1.8, -2.1, -2.0 - Net non-debt creating capital inflows (negative, 2013–2023): -2.0, -1.9, -2.4, -2.0, -1.8, -1.7, -1.7, -1.6, -1.6, -1.6, -1.6 - Automatic debt dynamics (contribution, 2013–2023): -5.1, -0.6, 22.4, 14.6, -7.5, 0.5, 1.7, 1.6, 1.7, 1.9, 1.6 - Contribution from nominal interest rate (2013–2023): 1.6, 1.6, 2.2, 2.3, 2.2, 2.9, 3.2, 3.4, 3.3, 3.2, 2.9 - Contribution from real GDP growth (2013–2023): -0.4, -0.8, 2.7, 2.0, -1.7, -2.5, -1.5, -1.9, -1.5, -1.3, -1.3 - Contribution from price and exchange rate changes (2013–2017 shown): -6.2, -1.3, 17.5, 10.3, -8.1, .................. (projection line includes the impact of price and exchange rate changes) ### External ratios, financing needs, and scenario benchmark - External debt-to-exports ratio (in percent, 2013–2023): 90.0, 92.4, 116.6, 125.4, 109.2, 100.1, 101.6, 97.1, 95.1, 94.5, 93.4 - Gross external financing need (in billions of US dollars, 2013–2023): 23.1, 26.3, 19.5, 17.3, 16.9, 15.6, 16.3, 15.3, 16.2, 16.5, 17.8 - Gross external financing need (in percent of GDP, 2013–2023): 30.7, 33.4, 34.6, 36.2, 31.0, 26.2, 26.1, 23.4, 24.0, 23.6, 24.1 - Scenario with key variables at their historical averages (10-Year Historical / 10-Year Standard Average): 68.3, 73.0, 77.1, 81.3, 85.7, 90.0, -2.5 ### Key macroeconomic assumptions underlying baseline (selected annual series) - Real GDP growth (in percent, 2013–2023): 1.0, 1.7, -3.8, -2.5, 2.4, 2.4, 4.4, 3.7, 2.4, 2.8, 2.3, 2.0, 2.0 - GDP deflator in US dollars (change in percent, 2013–2023): 13.8, 2.6, -25.6, -13.1, 11.4, 0.6, 14.7, 5.6, 2.3, 1.6, 1.4, 1.6, 3.2 - Nominal external interest rate (in percent, 2013–2023): 3.5, 3.2, 3.0, 2.9, 3.2, 3.2, 0.4, 4.4, 4.9, 5.2, 5.0, 5.0, 4.7 - Growth of exports (US dollar terms, in percent, 2013–2023): -15.1, -1.7, -24.3, -8.8, 22.1, 6.5, 28.4, 11.3, 4.2, 6.9, 4.8, 3.2, 3.7 - Growth of imports (US dollar terms, in percent, 2013–2023): -5.4, -5.6, -25.3, -8.4, 21.4, 4.0, 22.2, 12.3, 5.6, 2.7, 4.5, 2.9, 3.8 - Current account balance, excluding interest payments (in percent of GDP, 2013–2023): -8.5, -5.0, -1.1, -1.0, 0.6, -5.9, 5.2, 0.3, -0.9, 1.0, 0.7, 0.8, 0.6 - Net non-debt creating capital inflows (in percent of GDP, 2013–2023): 2.0, 1.9, 2.4, 2.0, 1.8, 2.7, 1.3, 1.7, 1.7, 1.6, 1.6, 1.6, 1.6 ### Definitions and formula notes (as in source) - Automatic dynamics derived as [r - g - r(1+g) + ea(1+r)]/(1+g+r+gr) times previous period debt stock, with r = nominal effective interest rate on external debt; r = change in domestic GDP deflator in US dollar terms, g = real GDP growth rate, e = nominal appreciation, a = share of domestic-currency denominated debt in total external debt. - Contribution from price and exchange rate changes defined as [-r(1+g) + ea(1+r)]/(1+g+r+gr) times previous period debt stock. - Gross external financing need defined as current account deficit, plus amortization on medium- and long-term debt, plus short-term debt at end of previous period. ### External Stability Assessment — key findings - Current account gap and REER: - Staff assesses the current account gap to be minus 2–3 percent of GDP, and the real effective exchange rate (REER) to be overvalued by about 10 percent. - EBA lite current account approach: current account norm of 1.9 percent of GDP; model without adjustment yields a current account gap of minus 3.4 percent of GDP. Allowing for persistent model overestimation gives a gap of minus 2–3 percent of GDP. - Using a semi-elasticity of the current account to the REER of -0.25 implies a REER overvaluation of about 10 percent (note footnote: lower than EBA’s -0.5). - Reserves and NIIP: - Gross international reserves: US$4.9 billion at end-2016; US$7.3 billion at end-2017; US$7.1 billion as of end-October 2018. - Reserves remain below desirable levels: 52 (72) percent of the ARA metric for countries with non-floating (floating) exchange rate regimes. - Net international investment position (NIIP) around -74 percent of GDP as of end-June 2018. - External sustainability approach: - Stabilizing NFA at current value (around -76 percent of GDP) is insufficient. Target NFA chosen: -60 percent of GDP by 2037 yields a current account norm of -2.0 percent of GDP versus baseline projection of -2.2 percent of GDP in 2023 (gap of minus 0.2 percent). Using the same elasticity gives a slight REER overvaluation of 0.7 percent, though staff judge this small gap inconsistent with other vulnerabilities. ### Risk Assessment Matrix — highlighted external risks and recommended responses - Risk: No compensation or partial compensation for tax maneuver in Russia; or preferential gas price not renewed in 2020. - Relative likelihood: Low - Expected impact: High — reduced export margins on refined oil products, lower budget transfers from Russia, lower customs duties, lower growth, renewed BOP pressures, potential BYR depreciation, higher fiscal deficits, possible FX liquidity risks in banks. - Policy recommendations: - A flexible exchange rate to cushion the shock (limit interventions to dampening excessive volatility). - Tightening of monetary policy might be needed. - Fiscal adjustment to contain BOP pressures and adverse debt dynamics. - Advance structural reforms to improve economic efficiency and enhance economic diversification. - Risk: Escalation of geopolitical tensions. - Relative likelihood: High - Expected impact: Medium/High — spillovers through trade and financial linkages. - Policy recommendations: Same as above (flexible exchange rate, fiscal adjustment, structural reforms). - Risk: Sharp tightening of global financial conditions. - Relative likelihood: Medium - Expected impact: Medium — could complicate new issuance even though no external market refinancing needed in next 18 months. - Policy recommendations: As above. - Risk: Larger-than-expected liabilities from quasi-fiscal activities. - Relative likelihood: Medium/High - Expected impact: Medium — higher public debt, potential recapitalizations of state-owned banks. - Policy recommendations: - Further fiscal adjustment to achieve debt targets. - Enhance monitoring of fiscal risks from SOEs and proactively pursue faster and broader structural reforms in the SOE sector. - Risk: Greater reform drive by the new government. - Relative likelihood: Uncertain - Expected impact: High — would raise medium term growth prospects and reduce vulnerabilities. ### Adverse scenario (zero compensation for oil subsidy loss from 2020, no policy response) - Assumptions: - Extreme scenario of zero compensation in 2020 and beyond. - No secondary shocks and no policy adjustment; nominal exchange rate projected as in baseline. - Projected impacts (summarized): - Growth could fall to zero or negative, with much of the effect likely permanent. - Current account deficit would worsen gradually by some 3 percentage points relative to the baseline, to close to 5½ percent of GDP. - Financing these higher external deficits while preserving international reserves would require some U$6.5 billion in additional (unidentified) financing. - Fiscal deficits would be higher; public debt would rise to 70 percent of GDP by 2023 (and remain on an upward trend) versus 56 percent of GDP in the baseline. - Banks likely to be stressed via exposure to oil refineries, lower GDP growth, and pressures on unhedged debtors in the face of possible rubel depreciation. - Policy implication: Absent full compensation, Belarus will need additional adjustment relative to the baseline to preserve sustainability; negotiations with Russia on compensation are a priority for the authorities. *Source: IMF staff calculations and Annexes in the IMF country report (Annex III, Annex V, Annex VI, Annex VII).* ### Annex VIII. FSAP Update: Status of Main Recommendations ### Annex VIII. FSAP Update: Status of Main Recommendations ### Systemic Risks - Action Plan adopted by the Council of Ministers (COM) and the NBRB on February 27, 2017, detailing measures and timeframe. - Near-term focus: assessing banks’ asset quality and strengthening capital, enhancing supervisory and regulatory requirements, improving monitoring of financial stability and risks including from foreign currency exposures. - AQRs and capital actions: - Implemented. AQR of the largest nine banks, accounting for 92 percent of the banking sector assets, completed in July 2016. - Follow-up measures taken to improve capital adequacy ratios of three banks with potential capital shortfalls: recapitalization, improving the quality of collateral, optimization of expenses, and attraction of subordinated loans. - AQR of the remaining 15 banks completed in mid-2017. Banks with potential capital shortfalls have submitted plans to ensure regulatory capital adequacy. - Pillar 2 / SREP: - Status: In progress. - The NBRB prepared a draft methodology for supervisory review and evaluation process (SREP), being implemented with support from the EU-funded Twinning program that started in early 2018. - The program assists in adapting SREP to the Belarusian context, performing assessment for the five largest banks, and training supervisors. - Bottom-up stress testing: - Status: In progress (NT). - The NBRB started conducting annual bottom-up solvency and liquidity stress testing from 2017. - Results supplement top-down stress testing and are considered in assessing credit risk and prudential measures. - Results were discussed with participating banks, presented to the Financial Stability Committee, and aggregate results were published in “Financial Stability in the Republic of Belarus in 2016”. - Reserve requirements for foreign currency deposits: - Status: Partially implemented (NT). - Reserve requirement for FX deposits increased to 11 then 15 percent from 7.5 percent from February 2017, and further to 17 percent from January 2018. - Taking into consideration the recommendation of a March 2017 IMF TA, the NBRB will revisit accumulation of required reserves in foreign currency in 2020. - Directed lending: - Status: In progress (NT). - Authorities implementing phased reduction in directed lending as per Government Action Plan for 2016 – 2020 (approved April 2016), envisaging reduction in stock of directed lending by 2.1 percent of GDP in 2017 and by 2.2 percent of GDP in 2018. ### Financial Oversight - Strengthen loan provisioning / restructuring and interest accrual standards: - Status: Implemented (I). - New NBRB Instruction on Provisioning issued end of 2017: defines restructured debt (changes in contract terms or a new loan to pay off current debt) and requires classification as risk group IV or above and provisioning accordingly. - Banks can reclassify restructured loans to lower risk groups if debtor demonstrates timely and full servicing for at least 12 months after restructuring; debt cannot be classified as risk group I. - Temporary forbearance: - Status: In progress (I). - NBRB Board taking efforts to create an environment for fair competition and eliminate differentiated regulatory approaches, privileges, preferences, and exemptions in prudential requirements, including for state-majority banks. - Collection of data on unhedged borrowers in foreign currency: - Status: Implemented (I). - Information collected as part of amendments to the instruction on special provisions (September 28, 2006 No. 138) assigning such debts to risk group II and gradual increase of contributions to special provisions. - Since July 2017, National Bank collects such information regularly: before May 1, 2018 as part of explanatory notes to banks’ prudential reports, and after May 1, 2018 in the form of established prudential reports. - Risk-weight / provisioning for foreign currency loans to unhedged borrowers: - Status: Implemented (NT). - NBRB introduced provisioning requirement on foreign currency loans to unhedged borrowers effective in July 2017 (NBRB Resolution No. 11 of January 2017), found to be more effective than higher risk weight based on historical experiences. - A schedule set to increase provisioning in steps to 5 percent in 2020. - As of October 1, 2018, the provisions on loans to unhedged borrowers stood at 10.9 percent. - Early termination of foreign currency deposits: - Status: Partially implemented (I). - NBRB introduced irrevocable deposits in November 2015 (Decree No. 7). Prior to this, banks were obliged to fulfill within five days requests to withdraw term deposits. - Risk assessment of early withdrawal of foreign currency deposits is conducted monthly by monitoring liquidity coverage ratios for foreign currencies in aggregate and broken down by key foreign currency. - Liquidity indicators and supervision: - Status: Implemented (I). - The NBRB started monitoring liquidity coverage ratios (LCRs) by key currencies for each bank. *Annex VIII. FSAP Update: Status of Main Recommendations (cr1909) — IMF* ### 2015. Pursuant to NBRB Resolution of May 18, 2017 No. 180, ### cr1909 - 2015. Pursuant to NBRB Resolution of May 18, 2017 No. 180, ### Liquidity standards and bank liquidity metrics - Basel III liquidity coverage ratios (LCR, NFSR) introduced as safe and sound functioning standards for banks; requirements for compliance reports and analytical information on tools for monitoring liquidity risks established as of January 1, 2018. - Analytical information required from banks includes: - information on estimating the liquidity coverage ratio (LCR) in foreign currency; - funding concentration ratio (for major currencies). - As of October 1, 2018: - LCR for operating banks totaled 93.2 percent in Belarusian rubels; - LCR for operating banks totaled 104.7 percent in foreign currency. ### Insurance supervision and regulatory reform (Ministry of Finance — MoF) - Develop risk-based insurance supervision with EWS, stress testing, and onsite risk inspection (MoF). - Time: NT (near-term). - Status: In progress. MoF developing frameworks for risk-based supervision, early warning system, stress testing and on-site inspections for the insurance sector; plans to introduce them by end-2017. - Introduce a risk-sensitive capital regime for insurances and regulation following IAIS (MoF). - Time: NT. - Status: Not implemented. MoF is studying international supervisory practices to develop reform plans for risk-oriented supervisory methods based on monitoring and forecasting of insurers’ financial positions. - Strengthen insurance supervisor’s operational independence and remove conflicts of interest (MoF). - Time: NT. - Status: Not implemented. MoF is exploring possibility of dividing regulator functions and owner functions within MoF. ### Financial Stability Council and crisis management - Recommendation: Financial Stability Council should include a subcommittee on crisis management that includes DIA as a member (NBRB, MoF, MoE, DIA). - Time: I (Immediate). - Status: In progress. Key developments: - Financial Stability Council established in June 2016. - Working committee for development of financial market crisis resolution mechanism is one of three working committees. - FSC held meeting on May 30, 2018 and adopted a regulation on functioning and composition. - FSC instructed working committees to consider relevant financial stability issues. - FSC scheduled to meet every six months; second meeting delayed until new government appoints a co-chair. - DIA is not a member of FSC itself but is represented at the working committee. ### Financial infrastructure and payment system - Refine risk management framework to include all FMIs, risk-based scenarios and testing (NBRB). - Time: I. - Status: Implemented. Strategy for Managing Risks in the Payment System of the Republic of Belarus (Resolution of the Board No. 155, April 2017) adopted, identifying benchmarks for managing risks in the payment system. - Draft law and amend regulations to protect settlement finality, netting and collateral (NBRB). - Time: NT. - Status: In progress. Framework Law on Payment Services drafted, revised after comments, sent to COM. - Stress test payment system to assess sufficiency of liquidity under stressed conditions (NBRB). - Time: NT. - Status: Implemented. Comprehensive stress tests conducted in March 2017, including verification of mechanisms for interbank settlements involving BELKART and automated information system settlement. ### Governance and central bank independence (NBRB) - Discontinue restrictions on the operational independence of the NBRB (NBRB). - Time: NT. - Status: In progress. Amendments to Banking Code eliminated “the performance of actions that provide grounds for a loss of confidence in the given individual” as grounds for removal of Chairman and members of National Bank Executive Board. - Amend NBRB statute to introduce concept of independence for the NBRB (NBRB). - Time: MT (medium-term). - Status: In progress. Amendments made including goal of price stability and discontinuation of transferring part of NBRB’s income to DIA. Draft law prepared and under consideration by government agencies before submission to parliament. - Divest banks’ stakes due to resolution to avoid conflicts of interest (NBRB, State Property Committee, Ministry of Foreign Affairs). - Time: MT. - Status: Not implemented. Developments: - Government signed Memorandum of Understanding (MOU) with EBRD in May 2015 on re-privatization of Belinvestbank, plans to sell controlling stake by 2020. - NBRB working to divest Moscow-Minsk Bank, fully owned by NBRB; MOU signed with EBRD in September 2017 for divestment, planned sale by 2020. - Discontinue employing resources and powers to enforce monetary policy or criminal law (NBRB). - Time: NT. - Status: In progress. Decree No. 510 (October 2017) aimed at limiting number of inspections in criminal case investigations. - Allow Development Bank (DB) to lend only to viable projects not financed by commercial banks (DB, MoE, MoF, NBRB). - Time: NT. - Status: In progress. Draft amendments to decree on mandate of Development Bank prepared to limit mandate to areas with market failure; under consideration by Presidential Administration. ### Insolvency, debt restructuring and NPL resolution - Amend Bankruptcy Law to upgrade priority of secured creditors and establish effective procedures for rehabilitating viable businesses (Government). - Time: NT. - Status: In progress. Draft Law on Insolvency and Bankruptcy drafted and submitted to Parliament in July 2016; scheduled for House consideration during autumn session of 2017. - Establish mechanisms to enable and incentivize out-of-court debt restructuring (Government). - Time: NT. - Status: In progress. Government preparing amendments to “Law Concerning Business Entities” for conversion of debt into shares among creditors, and drafting a Presidential Decree simplifying restructuring procedures. - Delegate NPL resolution to a single entity with powers for restructuring/privatization (NBRB). - Time: I. - Status: Not implemented. An Asset Management Company (AMC) for agricultural sector loans established in 2016 but with major shortcomings: - Loans transferred to AMC and to local governments in exchange for government bonds at face value (risk shifted to government). - Creditors received blanket reduction in interest rates and lengthened maturities. - AMC acts as a collection agency and does not have resolution powers. - MOF, NBRB and stakeholders working to expand AMC purview; authorities drafting regulatory act defining conditions for troubled assets market. - Designate the NBRB as a resolution authority (NBRB). - Time: NT. - Status: In progress. Developments: - Concept for Resolving Troubled Banks prepared with World Bank TA proposing DIA authority to resolve troubled bank. - Decision to apply resolution proposed to be made by NBRB and Financial Stability Council. - Strategy approved by Financial Stability Committee of NBRB and Financial Stability Council (Protocol No. 6, December 27, 2017). - Presidential Decree on resolving troubled banks drafted with WB TA; draft decree being internally reconciled and to be submitted for approval in early 2019. - Establish comprehensive powers for bank recovery and resolution using FSB Key Attributes (NBRB). - Time: I. - Status: In progress. Concept for Resolving Troubled Banks prepared with WB TA; Strategy approved in December 2017 with WB comments taken into account. ### Emergency liquidity assistance (ELA), recovery planning, and deposit insurance - Establish an ELA framework and define conditions for support (NBRB). - Time: I. - Status: Implemented. Key actions: - NBRB Board Resolution No. 515 adopted in September 2016 setting principles and criteria for access to emergency liquidity assistance. - NBRB received Fund TA in March 2017 to develop internal operational procedures including governance, collateral and counterparty policy, and risk control measures. - Operational guideline prepared; NBRB adopted Executive Board resolutions No. 540 (December 2017) and No. 367 (August 2018) to promote ELA framework. - Require all banks to establish and test recovery plans; initiate planning for systemic banks (NBRB). - Time: MT. - Status: Implemented. Banks required to develop contingency plans in line with NBRB Board Res. No. 550, October 2012. - Limit coverage of deposits, shorten the payout period over time and end NBRB’s co-financing (DIA). - Time: MT. - Status: In progress. Developments: - Presidential Decree No. 3, June 2017 eliminated provision calling for annual transfer of 80 percent of NBRB earnings to DIA. - NBRB and DIA working group prepared a concept paper for improving deposit insurance system; approved by Financial Stability Council in December 2017. ### Fund relations, technical assistance, and statistical framework (selected) - Membership status: Joined July 10, 1992; Article VIII. - Quota and holdings (as of October 31, 2018): - Quota: 681.50 SDR million (100.00 percent of Quota). - Fund holdings of currency: 681.50 SDR million (100.00 percent). - Reserve Tranche Position: 0.02 SDR million (0.00 percent). - SDR Department: - Net cumulative allocation: 368.64 SDR million (100.00 percent of Allocation). - Holdings: 371.81 SDR million (100.86 percent). - Outstanding Purchases and Loans: None. - Financial arrangements (historic approvals): - Stand-By 01/12/2009–03/30/2010 Amount Approved 2,269.52 SDR million; Amount Drawn 2,269.52 SDR million. - Stand-By 09/12/1995–09/11/1996 Amount Approved 196.28 SDR million; Amount Drawn 50.00 SDR million. - Projected Payments to the Fund (forthcoming; SDR million): - Charges/Interest: 2018 0.01; 2019 0.01; 2020 0.01; 2021 0.01. - Total: 2018 0.01; 2019 0.01; 2020 0.01; 2021 0.01. - Exchange rate arrangements: - Currency: Belarusian ruble (BYN). - De jure exchange rate regime: managed float. - De facto arrangement: other managed from a crawl-like arrangement, effective January 9, 2015. - On July 1, 2016, the Belarusian ruble was rebased, dropping four zeros. - Technical Assistance (selected MCM and FAD missions 2010–2018): - MCM: Monetary Policy Modeling (November 2018; August 2018; May–June 2018; February–March 2018; November–December 2016; November 2017; September 2017; May–June 2017; February–March 2017; February–March 2017; etc.). - MCM: ELA and Reserve Requirement (February–March 2017). - FAD: Institutional processes in respect of tax policy design, revenue forecasting and other revenue analyses (April–May 2018); Streamlining Tax Expenditures and Revenue Mobilization (March 2017); Developing a Reform Strategy for SOEs (November 2016); Oversight and Management of SOEs (June 2016). - Statistical issues (as of November 30, 2018): - General: Data provision has some shortcomings but is broadly adequate for surveillance. - National Accounts: BelStat compiles quarterly and annual GDP estimates; good quality; full set of accounts annually; regional GDP since 2008. - Price Statistics: CPI covers 31 towns; PPI covers entire territory with about 19,000 price quotations. - Government Finance Statistics: Broad compliance with GFSM 2014; areas needing improvement include expense classification, inconsistency with monetary data, gaps in balance sheet data and valuation, coverage of foreign-loan-financed operations, and compilation for public corporations. - Monetary and Financial Statistics: NBRB compiles SRFs monthly/quarterly in line with MFSM. - Financial Sector Surveillance: Belarus reports 12 core FSIs and 12 of 13 encouraged FSIs for deposit takers quarterly. - External Sector Statistics: NBRB publishes quarterly BOP and IIP in BPM6 format dating back to 2000. - Data dissemination timetable (selected indicators; Date of Latest Observation / Date Received): - Exchange Rates: November 2018 / 11/30/2018. - International Reserve Assets and Reserve Liabilities: October 2018 / 11/15/2018. - Reserve/Base Money: November 2018 / 11/23/2018. - Broad Money: November 2018 / 11/23/2018. - Consumer Price Index: October 2018 / 11/9/2018. - Revenue, Expenditure, Balance and Composition of Financing – General Government: Q3/18 / 10/31/2018. - GDP/GNP: Q2 2018 / 10/31/2018. - Gross External Debt: Q2 2018 / 09/14/2018. *Source: cr1909 - 2015. Pursuant to NBRB Resolution of May 18, 2017 No. 180,* ### 2018. Despite the economic turbulence in 2015-2016, the deterioration in credit quality has ### cr1909 - 2018. Despite the economic turbulence in 2015-2016, the deterioration in credit quality has ### Credit quality and nonperforming loans (NPLs) - By October 1, 2018 NPLs accounted for 4.1 percent of total assets with high coverage ratios. - Asset Management Company created after the 2016 Asset 4uality Review to address NPLs transferred from banks’ balance sheets. - Authorities determined to further develop a market for distressed assets and strengthen the operational framework of the Asset Management Company. ### De-dollarization and currency policy - De-dollarization retains pace underpinned by recent policy decisions. - Authorities agree with staff’s recommendations outlined in the report and Selected Issue Paper (SIP). - Planned instruments to reduce dollarization include prudential policies, supervisory measures, and improved communications. - As of March 1, 2019, the authorities will further limit the use of foreign currency for interbank and FX-bonds transactions, and at the domestic insurance market. - Ministry of Finance plans to extend B