## _cr05214 ## Source details **Canonical URL:** [_cr05214](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2005/_cr05214.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2005/_cr05214.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2005/_cr05214.pdf.json) --- ### Executive Summary - Real GDP grew by 11 percent in 2004. - General government operations were in balance in 2004. - Year-on-year inflation fell to 11 percent by April 2005. - A surge in the current account deficit in late 2004 was largely reversed in early 2005. - Gross official reserves were US$987 million (0.6 months of imports) at end-April 2005. ### Background and Recent Developments - Political and economic management: - President Lukashenko first took office in July 1994; a 2004 referendum lifted presidential term limits. - The state retained direct control over at least three-quarters of the economy through centrally-mandated wage targets, rapidly increasing directed lending, an extreme golden share rule, and administrative price controls, caps on trade mark-ups and producer profit margins. - Output and inflation: - Real GDP growth: 11 percent in 2004 and 9½ percent in January-April 2005. - Twelve-month inflation declined from 28 percent at end-2003 to 11.1 percent by April 2005. - Nominal depreciation slowed under the crawling band; 2.5 percent real effective exchange rate depreciation in 2004 was partially reversed in the first four months of 2005. - External and social indicators: - Three-fourths of exports to the EU consisted of energy or energy-intensive products. - Poverty head count fell by 2004 to less than half its 1997 level. - Data and measurement notes: - National accounts methodology broadly in line with international practice, but enterprise data may be biased owing to pressures to report achievement of output targets and an accounting system that understates costs. - A US$220 million technical conversion of deposits not earlier included in the reserves definition contributed to the 2004 increase in reserves. ### Fiscal Developments and Quasi-Fiscal Activities - Fiscal outcomes: - 2004 general government budget: balanced. - Revenues rose as higher profit tax receipts more than compensated for lost revenues from a VAT rate cut. - Expenditures fell by 1 percentage point of GDP due to lower spending on education and net lending. - Delay until late December of a US$175 million Russian government loan; when disbursed it facilitated spending of 6.2 percent of GDP in December, eliminating a surplus and leading to a balanced general government budget for the year. - Q1 2005 developments: - Preliminary data point to a large surplus in Q1 2005; seasonality and larger-than-budgeted VAT receipts (from switching to the destination principle in trade with Russia) boosted revenues. - An April Presidential Decree left revenue projections unchanged but increased investment expenditures by 0.3 percentage points, raising the deficit to 1.8 percent of GDP. - Government deposits at end-April 2005 reached 5 percent of GDP split evenly between the NBRB and selected commercial banks. - Quasi-fiscal operations and consolidation: - Directed bank lending for government programs surged to 3.4 percent of GDP in 2004. - Wage increases imposed on the enterprise sector in excess of GDP growth are estimated at almost 2½ percent of GDP. - Consolidation steps: Social Protection Fund (SPF) consolidated into central treasury from April 2004; Innovation Funds from 2005. - VAT unified for all Belarusian trade; inflationary NBRB financing of the budget was discontinued; privatization receipts recorded below the line from 2004. - General Government Fiscal Developments (percent of GDP, 2001–04): - Revenue: 2001 44.9; 2002 44.6; 2003 45.8; 2004 46.2 - Expenditure (cash): 2001 46.8; 2002 46.4; 2003 47.2; 2004 46.2 - Primary balance (cash): 2001 -1.2; 2002 -1.2; 2003 -0.9; 2004 0.5 - Overall balance (cash): 2001 -1.9; 2002 -1.8; 2003 -1.4; 2004 0.0 - Quasi-fiscal activities by banks: 2001 2.6; 2002 1.7; 2003 2.3; 2004 3.4 ### Monetary Policy and Banking System - Disinflation drivers: - Disinflation in 2004 resulted from more restrained base money growth, an improved net government position, a crawling band to the Russian ruble, and rising demand for rubels. - Rubel deposits grew by 74 percent, from 46 to 53 percent of total deposits in 2004. - Share of monetary forms of payments rose to 84 percent in 2004, up from 74 percent in 2003. - Credit and liquidity: - Two-fifths of the 36 percent increase in real credit to the economy was due to directed lending for agriculture, industry, and housing construction (maturities up to 40 years). - Accelerating credit growth led to a liquidity crunch in the banking system in late 2004; bank liquidity improved in Q1 2005 partly due to increasing government deposit placements. - Banking sector structure and risks: - Two largest state-owned banks accounted for 56 percent of banking system assets and two-thirds of capital at end-2004. - Share of nonperforming loans fell to 4.6 percent at end-2004 (half since end-2002), partly reflecting rapid credit expansion driven by directed lending. - Single large private bank accounted for well over half of bank profit in 2004 with a return on equity of 22.3 percent; the two largest state-owned banks posted returns on equity below 3.5 percent. - Bank recapitalizations, 2000–04: Total reported 1,540 (table shows percent of GDP 0.7, 0.2, 1.4, 1.6, 1.0 for 2000–2004). - Financial sector supervision: - FSSA reports significant improvements in financial regulation and supervision, but notes largest banks require recurrent government recapitalizations to remain solvent. ### External Sector - Current account and reserves: - Current account deficit reached 4.6 percent of GDP in 2004; swung into a surplus in Q1 2005. - Gross official reserves doubled since end-2003 but remained low at US$987 million (0.6 months of imports) at end-April 2005. - The 2004 surge in the current account deficit was boosted in December by an estimated US$½ billion in one-off imports due to temporary tariff exemptions and purchases advanced in anticipation of the VAT switch with Russia. - External indebtedness at end-2004 was 18½ percent of GDP, with over two-thirds short term—equivalent to almost four times gross official reserves. - Trade and FDI: - Exports and imports grew by about 40 percent in 2004. - FDI fell further to minimal levels with privatization stalled and the golden share rule expanded. ### Policy Issues, Staff Recommendations, and Appraisal - Sustainability concerns: - Current policies judged ultimately unsustainable: real wage growth has outpaced productivity increases since 1995; international reserves are precariously low; the share of loss-making enterprises remains high; market-oriented structural reforms have stalled. - Rapid population aging will intensify long-term pressure on the pension and health system. - Macro policy guidance: - Fiscal policy: aim for retaining balance in 2005 instead of the envisaged expansion. - Quasi-fiscal activities: streamline and bring on-budget. - Monetary policy priority: single-digit inflation by end-2005; NBRB should be accorded operational independence. - Exchange rate: crawling band can help achieve the inflation objective, but retain a measure of exchange rate flexibility. - Preserve household confidence in the rubel and the banking system; fiscal and quasi-fiscal support essential for disinflation. - Structural reform priorities: - Phase out government direct managerial and regulatory intervention in economic activity. - Abolish centrally-mandated wage targets and the golden share rule. - Expand the private sector and address financial sector weaknesses. - Staff appraisal summary: - Macroeconomic policy framework needs clarification and restraint. - Fiscal consolidation and transparency in quasi-fiscal operations are priorities. - Market-oriented structural reforms are essential to lay the foundation for sustainable growth and to reduce systemic financial sector risks. ### Exchange Rate, Competitiveness, and Labor Costs (Section 12 highlights) - Exchange rate and inflation interaction: - Domestic inflation was largely offset by a "6.6 percent nominal effective depreciation" during the year. - The rubel’s real exchange rate vis-à-vis the Russian ruble depreciated by 3.7 percent (this currency dominates the REER given its 2/3 weight). - The real exchange rate against the dollar appreciated markedly, bolstering dollar wages. - Unit labor costs and competitiveness: - "Unit labor costs picked up on the back of rapid wage growth." - Real wages in 2004 were 170 percent higher than in 1995, while productivity rose by some 80 percent during the same period. - Overall, Belarusian exports marginally increased their market share in both CIS and non-CIS countries. - Currency union with Russia: - The planned currency union with Russia will be delayed due to unresolved areas: fiscal interaction, modalities of monetary policy decision making, the conversion exchange rate, and rules for fiscal prudence. - Growth outlook divergence: - Authorities projected "continued rapid growth around 8 percent over the medium term." - Staff projected "growth at 7.1 percent in 2005, followed by a slowdown to near-stagnation in a few years" under current policies. - Under staff’s reform scenario, growth would dip in 2005–06 given tighter macro policies and structural reforms, but remain strong over the medium term. ### Monetary Policy and Credit Growth (Section 26 highlights) - Staff recommendation on credit growth: - Restrain domestic credit growth in 2005; real credit growth should not exceed the NBRB’s indicative target of 14–18 percent. - NBRB should inject liquidity strictly on market terms and eschew bilateral transactions and money-financed recapitalizations. - Future bank recapitalizations should be financed through the budget, avoiding additional money creation. - Banking sector stability and directed lending: - Systemically important state banks remain weak and dependent on periodic recapitalizations and government deposits. - Phase out directed lending to avoid regular state recapitalizations; remove caps on lending interest rates. - Safeguards for NBRB role in rescues: define lender-of-last-resort role, guidelines distinguishing illiquidity from insolvency, and modalities of NBRB and government engagement. - External vulnerabilities and scenarios: - Baseline medium-term scenario: current account deficit around 3 percent of GDP with foreign reserves stuck at around half a month’s imports. - Reform scenario: reforms boost competitiveness and FDI; after initial deterioration due to technology imports, current account improves and reserves gradually climb toward three months of imports. - Stress-test: hypothetical 30 percent decline in exports to Russia in 2006 would double the current account deficit to nearly 7 percent of GDP and deplete reserves, leaving the economy vulnerable. ### Structural Reform Agenda (Box 2 selected measures) - Price liberalization: - Reduce list of regulated prices; curtail ceilings on mark-ups; independent regulator for monopolies; raise utility prices toward full cost-recovery. - Fiscal policy and social safety net: - Bring all government-controlled quasi-fiscal activities on-budget; implement Part II of the Tax Code; simplify SME taxation; eliminate ad hoc tax exemptions; centralize central government funds in the STA at the NBRB; reform the pension system. - Monetary policy and banking sector: - Phase out directed lending; remove caps on lending interest rates. - Incomes policy: - Discontinue enforcing economy-wide wage targets; limit wage bill growth in government and soft-budget enterprises. - Enterprise sector reforms: - Launch transparent privatization; eliminate the golden share rule; harden budget constraints; simplify SME registration; develop timetable for internationally accepted accounting standards. ### Fiscal Projections and Key Tables (selected figures preserved) - General Government Operations (percent of GDP, selected series): - Revenue: 46.2 44.1 44.9 43.7 43.9 43.0 - Expenditure (cash): 46.2 45.9 45.2 43.6 44.4 43.9 - Primary balance (cash): 0.5 -1.0 0.0 0.5 -0.1 -0.4 - Overall balance (cash): 0.0 -1.8 -0.4 0.0 -0.5 -0.8 - Memorandum item: Change in arrears: 0.0 ... 0.2 -0.4 0.5 0.0 - Balance of Payments — Current Policies (millions of U.S. dollars, selected): - Exports of goods: 7,334; 7,965; 10,073; 13,917; 15,743; 17,084 - Imports of goods: -8,141; -8,879; -11,329; -15,983; -17,950; -19,424 - Current account balance: -394; -311; -424; -1,043; -1,004; -1,013 - Gross official reserves (levels): 359; 476; 499; 770; 782; 805 - Reserves in months of imports: 0.5; 0.6; 0.5; 0.6; 0.5; 0.5 - Medium-Term Macroeconomic Framework (selected, current policies): - Real GDP growth rate: 5.8, 4.7, 5.0, 7.0, 11.0, 7.1, 4.0, 3.0, 2.0, 1.0, 0.8 - Inflation (annual average): 168.6, 61.1, 42.6, 28.4, 18.1, 12.1, 12.5, 13.5, 14.3, 14.8, 15.3 - Reform scenario (selected): Real GDP growth (reform): 5.8, 4.7, 5.0, 7.0, 11.0, 6.0, 6.2, 6.4, 6.6, 6.7, 6.7; Inflation (reform): 168.6, 61.1, 42.6, 28.4, 18.1, 11.5, 11.2, 8.0, 6.0, 4.0, 3.0 ### External and Public Debt Sustainability (selected) - External debt (percent of GDP, baseline): 16.7, 19.5, 20.9, 18.8, 18.7, 18.5, 19.7, 19.6, 19.8, 19.9, 19.9 - Gross external financing need (in billions of US dollars): 1.9, 1.9, 2.0, 2.5, 3.3, 4.4, 5.4, 6.6, 7.8, 9.2, 10.3 - Public sector debt (percent of GDP, baseline): 15.0, 13.2, 11.2, 10.4, 9.0, 7.9, 7.2, 7.7, 8.6, 9.6, 10.9 - Debt-stabilizing primary balance (examples): - Baseline: 7.9, 7.1, 6.8, 6.5, 6.2, 6.0 - Bound tests (examples): B3 and B5 produce sharply higher required primary balances under adverse shocks (see source tables for full series). ### Data, Statistics, and Fund Relations - Statistical improvements: - Minstat switched to the 1993 SNA; first quarterly national accounts published in January 1996; full annual accounts prepared for 1990–2003. - Industrial production index improvements initiated from 2002 data; new IPI planned for publication in 2006. - CPI and PPI monthly data reported to the Fund; PPI compiled with 2001 production weights starting with 2003 data. - MoF extended coverage of general government operations by including innovation funds and SPF in the budget. - NBRB monetary and balance sheet data provided with short lags; balance of payments published quarterly in BPM5 format. - Fund relations and technical assistance: - Membership: Joined July 10, 1992; Article VIII. - Stand-by arrangement: Approval date 09/12/1995; Amount approved (SDR million) 196.28; Amount drawn (SDR million) 50.00. - FSAP and ROSCs: Fiscal ROSC and data ROSC published; two FSAP missions in 2004; an FSSA report under preparation; safeguards assessment conducted. - Authorities subscribed to the IMF’s SDDS on December 22, 2004. ### Executive Board and Directors’ Conclusions (selected) - Directors recognized improved macroeconomic performance, strong economic growth, and reduced inflation in 2004. - Directors cautioned the economy remains vulnerable; current strategy may not produce sustainable growth without wide-ranging structural reforms and phasing out massive quasi-fiscal activities. - Directors emphasized central bank should make low inflation its primary objective and be granted full operational autonomy. - Directors urged improving environment for FDI and noted the golden share rule was counterproductive and urged its elimination or limitation to a handful of preannounced strategic cases. - Directors welcomed technical cooperation (completion of FSAP, SDDS subscription, publication of fiscal and data ROSCs). _Italic: Source: _cr05214 - Executive Summary and selected sections (IMF staff report excerpts)._ ### Executive Summary ...................................................................................................... ### _cr05214 - Executive Summary ...................................................................................................... ### Overview - Real GDP grew by 11 percent in 2004, helped by centrally-mandated wage growth, surging credit, and favorable terms of trade effects. - General government operations were in balance in 2004. - Year-on-year inflation fell to 11 percent by April 2005. - A surge in the current account deficit in late 2004 was largely reversed in early 2005. - Gross official reserves were US$987 million (0.6 months of imports) at end-April 2005. ### Background and Recent Developments - Political and economic management: - President Lukashenko first took office in July 1994; a 2004 referendum lifted presidential term limits. - The state retained direct control over at least three-quarters of the economy through: - centrally-mandated wage targets; - rapidly increasing directed lending; - an extreme golden share rule; - administrative price controls, caps on trade mark-ups and producer profit margins. - Output and inflation: - Real GDP growth: 11 percent in 2004 and 9½ percent in January-April 2005. - Twelve-month inflation declined from 28 percent at end-2003 to 11.1 percent by April 2005. - Nominal depreciation slowed under the crawling band; 2.5 percent real effective exchange rate depreciation in 2004 was partially reversed in the first four months of 2005. - External and social indicators: - Three-fourths of exports to the EU consisted of energy or energy-intensive products. - Belarus’s income distribution noted as remarkably equal (lowest Gini in the CIS); poverty head count fell by 2004 to less than half its 1997 level. - Data and measurement notes: - National accounts methodology broadly in line with international practice, but enterprise data may be biased owing to pressures to report achievement of output targets and an accounting system that understates costs. - A US$220 million technical conversion of deposits not earlier included in the reserves definition contributed to the 2004 increase in reserves. ### Fiscal Developments and Quasi-Fiscal Activities - Fiscal outcomes: - 2004 general government budget: balanced. - Revenues rose as higher profit tax receipts more than compensated for lost revenues from a VAT rate cut. - Expenditures fell by 1 percentage point of GDP due to lower spending on education and net lending. - Delay until late December of a US$175 million Russian government loan; when disbursed it facilitated spending of 6.2 percent of GDP in December, eliminating a surplus and leading to a balanced general government budget for the year. - First quarter 2005: - Preliminary data point to a large surplus in Q1 2005; seasonality and larger-than-budgeted VAT receipts (from switching to the destination principle in trade with Russia) boosted revenues. - An April Presidential Decree left revenue projections unchanged but increased investment expenditures by 0.3 percentage points, raising the deficit to 1.8 percent of GDP. - Government deposits at end-April 2005 reached 5 percent of GDP split evenly between the NBRB and selected commercial banks. - Quasi-fiscal operations and consolidation: - Quasi-fiscal activities expanded in 2004: directed bank lending for government programs surged to 3.4 percent of GDP; wage increases imposed on the enterprise sector in excess of GDP growth are estimated at almost 2½ percent of GDP. - Consolidation steps: Social Protection Fund (SPF) consolidated into central treasury from April 2004; Innovation Funds from 2005. - VAT unified for all Belarusian trade; inflationary NBRB financing of the budget was discontinued; privatization receipts recorded below the line from 2004. - Table excerpts (General Government Fiscal Developments, 2001–04, in percent of GDP): - Revenue: 2001 44.9; 2002 44.6; 2003 45.8; 2004 46.2 - Expenditure (cash): 2001 46.8; 2002 46.4; 2003 47.2; 2004 46.2 - Primary balance (cash): 2001 -1.2; 2002 -1.2; 2003 -0.9; 2004 0.5 - Overall balance (cash): 2001 -1.9; 2002 -1.8; 2003 -1.4; 2004 0.0 - Overall balance (accrual): 2001 -3.1; 2002 -1.9; 2003 -1.1; 2004 0.0 - Memorandum: Change in expenditure arrears: 2001 1.2; 2002 0.1; 2003 -0.3; 2004 0.0 - Memorandum: Quasi-fiscal activities by banks: 2001 2.6; 2002 1.7; 2003 2.3; 2004 3.4 ### Monetary Policy and Banking System - Disinflation drivers: - Disinflation in 2004 resulted from more restrained base money growth, an improved net government position, a crawling band to the Russian ruble, and rising demand for rubels (dedollarization and growing trust in banks). - Rubel deposits grew by 74 percent, from 46 to 53 percent of total deposits in 2004. - Share of monetary forms of payments rose to 84 percent in 2004, up from 74 percent in 2003. - Credit and liquidity: - Two-fifths of the 36 percent increase in real credit to the economy was due to directed lending for agriculture, industry, and housing construction (maturities up to 40 years). - Accelerating credit growth led to a liquidity crunch in the banking system in late 2004; bank liquidity improved in Q1 2005 partly due to increasing government deposit placements. - Banking sector structure and risks: - Liquidity problems concentrated in the two largest state-owned banks, together accounting for 56 percent of banking system assets and two-thirds of capital at end-2004. - Share of nonperforming loans fell by half since end-2002 to 4.6 percent at end-2004, partly reflecting rapid credit expansion driven by directed lending. - State banks’ profitability remained low; the single large private bank accounted for well over half of bank profit in 2004 with a return on equity of 22.3 percent; the two largest state-owned banks posted returns on equity below 3.5 percent. - Bank recapitalizations, 2000–04 (in billions of rubels): Belagroprombank total 588? (table shows fragmented numbers); Belarusbank total 681?; Belpromstroibank 26?; Total 1,540 (percent of GDP column shows 0.7, 0.2, 1.4, 1.6, 1.0 for 2000–2004). (Source: Belarusian authorities.) - Financial sector supervision: - The Financial System Stability Assessment (FSSA) reports significant improvements in financial regulation and supervision, but notes that the largest banks require recurrent government recapitalizations to remain solvent and that systemic banks could become insolvent without recurrent large government recapitalizations. - State ownership of banks remained predominant and “recommended” credits continued to drive credit growth despite debtors’ low profitability and creditworthiness. ### External Sector - Current account and reserves: - Current account deficit reached 4.6 percent of GDP in 2004, reflecting in part temporary factors, but swung into a surplus in Q1 2005. - Gross official reserves doubled since end-2003 but remained low at US$987 million (0.6 months of imports) at end-April 2005. - The 2004 surge in the current account deficit was boosted in December by an estimated US$½ billion in one-off imports due to temporary tariff exemptions and purchases advanced in anticipation of the VAT switch with Russia. - External indebtedness at end-2004 was 18½ percent of GDP, with over two-thirds short term—equivalent to almost four times gross official reserves. - Trade and FDI: - Exports and imports grew by about 40 percent in 2004. - FDI fell further to minimal levels with privatization stalled and the golden share rule expanded. ### Policy Issues, Discussions, and Staff Recommendations - Sustainability concerns: - Current policies are ultimately unsustainable and risks are mounting: real wage growth has outpaced productivity increases since 1995; international reserves are precariously low; the share of loss-making enterprises remains high; market-oriented structural reforms have stalled. - Rapid population aging will intensify long-term pressure on the pension and health system. - Macro policy guidance: - Fiscal policy should aim for retaining balance in 2005 instead of the envisaged expansion. - Quasi-fiscal activities should be streamlined and brought on-budget. - Monetary policy priority: single-digit inflation by end-2005; the NBRB should be accorded operational independence to achieve it. - The crawling band can help achieve the inflation objective, but a measure of exchange rate flexibility should be retained. - Preserving household confidence in the rubel and the banking system, and receiving greater support from fiscal and quasi-fiscal policies will be essential for continued disinflation. - Structural reform priorities: - Phase out the government’s direct managerial and regulatory intervention in economic activity. - Abolish centrally-mandated wage targets and the golden share rule. - Expand the private sector. - Address financial sector weaknesses. - Dialogue summary: - Authorities emphasized social aspects of their policies and expected continued good macroeconomic performance. - Staff argued policies were unsustainable, with ambitious wage targets threatening to decapitalize enterprises and—together with the slow exchange rate crawl—to undermine productivity growth and external competitiveness. - Staff highlighted the excessive government footprint in the economy and the lack of structural prerequisites for long-term supply growth. ### Staff Appraisal (summary points reflected in the Executive Summary) - Macroeconomic policy framework needs clarification and restraint. - Fiscal consolidation and transparency in quasi-fiscal operations are priorities. - Monetary policy needs operational independence for the NBRB and some exchange rate flexibility within the crawling band. - Market-oriented structural reforms are essential to lay the foundation for sustainable growth and to reduce systemic financial sector risks. *Source: _cr05214 - Executive Summary (IMF).* ### 12. The real effective exchange rate remained broadly unchanged while unit labor ### _cr05214 - 12. The real effective exchange rate remained broadly unchanged while unit labor ### Exchange rate, inflation, and unit labor costs - Domestic inflation was largely offset by the "6.6 percent nominal effective depreciation" during the year. - "The rubel’s real exchange rate vis-à-vis the Russian ruble depreciated by 3.7 percent (this currency dominates the REER given its 2 ⁄3 weight)." - "However, the real exchange rate against the dollar appreciated markedly, bolstering dollar wages." - "Unit labor costs picked up on the back of rapid wage growth," with the text noting limited consequences on measured competitiveness so far because "key trading partners experienced similar increases." - "Overall, Belarusian exports have marginally increased their market share in both CIS and non-CIS countries." ### Structural reform and enterprise sector findings - "Market-oriented structural reforms have stalled." - "The cost recovery of utility services for households declined by 12 percentage points in 2004 to 54 percent." - "Privatization, limited to small municipal property, yielded 0.1 percent of GDP." - "The share of the private sector remained under 25 percent." - "The government’s close monitoring of 178 state-owned enterprises that account for 13½ percent of GDP" highlights the concentrated industrial structure and scope for centralized management. - "Debt conversions and share buybacks resulted in increased state ownership in several large enterprises and banks." ### Currency union with Russia - "The planned currency union with Russia will be delayed." - Key unresolved areas preventing implementation by January 2006 included: "fiscal interaction between Russia and Belarus, the modalities of monetary policy decision making, the conversion exchange rate, and rules for fiscal prudence." ### Policy discussions, risks, and outlook - Authorities' view: social, centrally-managed policies are effective; they "did not see immediate reasons for foregoing further rapid wage increases, phasing out directed credit or speeding up structural reforms." - Staff view: Belarus is on "an unsustainable path characterized by centralized demand stimulation but lacking the prerequisites of long-term supply growth." - Historical relative growth of wages and productivity: "Real wages in 2004 were 170 percent higher than in 1995, while productivity rose by some 80 percent during the same period." - Staff warnings: - Ambitious centrally-mandated wage targets risk "decapitaliz[ing] enterprises by squeezing their profit margins" and undermining productivity and external competitiveness. - Further monetary expansion driven by recommended credits would increase inflation pressures and require bank recapitalization. - Growth projections divergence: - Authorities projected "continued rapid growth around 8 percent over the medium term." - Staff projected "growth at 7.1 percent in 2005, followed by a slowdown to near-stagnation in a few years" under current policies. - Under the staff’s reform scenario, growth would dip in 2005–06 given tighter macroeconomic policies and structural reforms, but remain strong over the medium term. - Demographic pressures and vulnerability: - Dependency ratio projections show worsening trends and "doubling of the dependency ratio," calling for urgent reforms. - Labor force projected decline: "the labor force is projected to enter a long-term phase of decline from 2007, plummeting by 14½ percent in the 15 years through 2020." - Vulnerabilities include precariously low international reserves, persistent arrears, excessive inventory levels, and a high, albeit declining, share of loss-making enterprises. ### Fiscal policy findings and recommendations - Authorities' stance for 2005: view "less restrictive fiscal policy in 2005 both desirable and financeable"; "the 2005 budget—as amended—would represent a marked fiscal expansion." - Staff recommendation: retain budget balance in 2005 by containing and rationalizing expenditures to lower the size of government and support disinflation. - Specific fiscal proposals from staff: - "Expenditure should be restrained, coupled with a policy of saving revenue overperformance." - Follow with "a deficit of ¾ percent of GDP in 2006" as quasi-fiscal activities are brought on budget. - If fiscal room remains, reduce tax burden by "cutting the distorting turnover tax levied concurrently with the VAT, combined with a simplification of tax rate structures and a rapid phase-out of discretionary tax preferences." - Contain expenditures by "limiting the growth of budgetary funds, streamlining subsidies, net lending and the wage bill, and improving the targeting of social spending (e.g., house maintenance subsidies)." - Bring remaining off-budget operations into the budget over time and minimize budgetary amendments to enhance transparency and predictability. - Gradually shift "central government deposits ... from state banks to the Single Treasury Account (STA) with the NBRB." - Fiscal statistics table excerpts (In percent of GDP) for General Government Operations, 2004-06 (values preserved as in source): - Revenue: 46.2 44.1 44.9 43.7 43.9 43.0 - Expenditure (cash): 46.2 45.9 45.2 43.6 44.4 43.9 - Noninterest: 45.7 45.1 44.9 43.2 44.0 43.4 - Primary balance (cash): 0.5 -1.0 0.0 0.5 -0.1 -0.4 - Overall balance (cash): 0.0 -1.8 -0.4 0.0 -0.5 -0.8 - Overall balance (accrual): 0.0 -1.8 -0.5 0.4 -1.0 -0.8 - Memorandum item: Change in arrears: 0.0 ... 0.2 -0.4 0.5 0.0 ### Monetary and exchange rate policy recommendations - Shared objective: "lowering inflation" to "8–10 percent by year-end" is the priority monetary objective for 2005. - Recommendations to strengthen the monetary framework: - Accord the NBRB "operational independence to achieve the inflation objective." - Maintain household confidence in the rubel and the banking system; ensure support from fiscal, quasi-fiscal, and structural policies. - Reduce constraints on NBRB stemming from "an overly ambitious credit policy, low foreign exchange reserves, and structural weaknesses in the banking system." - Exchange rate regime guidance: - The crawling band "could help achieve the inflation objective, [but] a measure of exchange rate flexibility should be retained" due to "low official reserves" and uncertainty in terms of trade, competitiveness, and short-term capital flows. - "Policy transparency would be greatly enhanced by confirming the policy focus on the Russian ruble as the peg currency." - Close monitoring of external competitiveness recommended in light of "continued rapid wage growth and the likely intensification of competition in Russia’s markets as third-country exporters gain improved access." * _cr05214 - 12. The real effective exchange rate remained broadly unchanged while unit labor* ### 26. Staff argued for restraining domestic credit growth—including directed lending—in ### _cr05214 - 26. Staff argued for restraining domestic credit growth—including directed lending—in ### Monetary policy and credit growth - Staff recommended restraining domestic credit growth in 2005 to avoid jeopardizing the achievement of the inflation objective. - Real credit growth to the economy should not exceed the NBRB’s indicative target of 14–18 percent to allow the NBRB to stay its anti-inflationary course. - The NBRB should inject liquidity strictly on market terms, eschewing bilateral transactions (notably, refrain from purchasing at face value the low-yielding government securities used in the end-2004 bank recapitalization). - The NBRB reiterated insistence that future bank recapitalizations be financed through the budget, avoiding additional money creation. - Close monetary-fiscal coordination is critical: changes in the large stock of government deposits currently held in the banking system could significantly impact banks’ liquidity and should be carefully coordinated with the NBRB; enhanced coordination is also important regarding government securities operations. - Monetary policy priority: lowering inflation should remain the overriding objective; the NBRB should be given necessary operational independence and retain a measure of exchange rate flexibility. - Strengthened fiscal-monetary coordination and government abstinence from administrative intervention in price formation are needed for credible monetary policy implementation. ### Banking system stability and directed lending - Several systematically important state banks were weak and remained dependent on periodic government recapitalizations, fresh government deposits, central bank liquidity injections and ready access to interbank excess liquidity. - Safeguards desirable to limit the NBRB’s role in any rescue operations: define the role of the NBRB as lender of last resort, set guidelines for distinguishing bank illiquidity from insolvency, and define modalities of NBRB and government engagement in each case. - Staff argued the strategy of safeguarding financial stability through regular top-ups of fragile banks’ capital while assuming continued remonetization should be reassessed. - Using state banks as conduits for directed lending to selected sectors without due regard to profitability or creditworthiness: - Prevents the banking system from effectively channeling financial resources toward their best use. - Results in government-mandated redistribution of household savings to areas designated by policymakers. - Perpetuates state banks’ loss-making activity, could undermine public trust, and delay economic adjustment, undermining remonetization and productivity growth. - Policy recommendation: phase out directed lending to avoid the need for regular bank recapitalizations by the state; remove caps on lending interest rates. ### External sector vulnerabilities and scenarios - The significant end-2004 deterioration in the current account is likely to be largely reversed in 2005, but concerns remain about the rise in short-term liabilities. - External debt ratios remain relatively moderate, but the share of short-term debt is on the rise, raising roll-over risk. - The golden share rule is judged excessive, sharply reducing availability of FDI and undermining investor quality; dismantling the golden share rule would facilitate larger net FDI inflows. - Two scenarios and debt sustainability findings: - Baseline medium-term scenario: current account deficit would hover around 3 percent of GDP with external financing remaining limited and foreign reserves stuck at around half a month’s imports. The economy would remain highly vulnerable to shocks. - Reform scenario: authorities introduce reforms boosting competitiveness and FDI inflows; after initial current account deterioration reflecting higher technology imports, external financing would shift toward non debt-creating inflows; current account would subsequently improve and foreign reserves would gradually climb toward three month’s of imports. - Staff’s debt sustainability projections generally indicate a modest build-up of external debt through 2008; public debt dynamics generally do not give rise to concerns, but under some stress test scenarios the debt could approach uncomfortable levels. - Stress-test scenario on Russia exposure: - Hypothetical 30 percent decline in exports to Russia relative to the baseline projection in 2006. - After foreign reserves are depleted, imports adjust downward and stagnate in 2006 (compared with an 8.2 percent increase in the baseline). - This shock would double the current account deficit to nearly 7 percent of GDP. - In the medium term, lower output growth and real depreciation would help reduce the current account deficit, but with external financing constrained, foreign reserves would remain low and the country would be vulnerable to further shocks. - Staff concern: end-2004 surge in the current account deficit financed by running up short-term liabilities to 12.8 percent of GDP coupled with low banking system foreign exchange reserves is a serious concern. - Recommendation: effective mechanisms for controlling the contracting and guaranteeing of external debt are needed; ensure foreign financing is used efficiently. - Authorities noted exploring alternative external financing, including a possible syndicated loan, but medium-term sources of financing for 2005 and beyond remained largely unidentified. ### Structural policy agenda and reform priorities - Start of long-delayed market-oriented structural reforms would lay the foundation for sustainable growth; authorities urged to take advantage of favorable external environment to launch reforms at minimum cost. - Priority objectives: reduce the dominant role of government in the economy; harden budget constraints for enterprises and banks; make the tax and regulatory environment predictable; level playing field for private and public enterprises to enhance competitiveness. - Critical measures to boost long-term supply growth include transparent privatization and elimination of centralized wage targets and the golden share rule. - Reforms needed to ensure a currency union with Russia delivers net benefits; if joining, agreement required with Russia on conversion exchange rate, monetary policy decision-making modalities, transfers, rules for fiscal prudence, and necessary legislative action. - The authorities noted the proposed agenda but did not commit to implementing it, citing concern about avoiding mistakes made by other transition economies. - Box 2. Structural Reform Agenda (selected measures) - Price liberalization: - Reduce the list of regulated prices, including on exports; - Curtail ceilings on mark-ups on goods and services (domestic or imported); - Put in place an independent regulator for monopolies; - Raise utility prices permanently toward full cost-recovery levels. - Fiscal policy and social safety net: - Bring all government-controlled quasi-fiscal activities on-budget; - Implement Part II of the Tax Code to streamline tax legislation and reform tax policy; - Simplify SME taxation, utilizing presumptive taxes, where appropriate; - Eliminate ad hoc tax exemptions and deferrals; - Gradually reduce subsidies and lending to inefficient enterprises; - Launch a comprehensive public administration and civil service reform; - Improve targeting of social support from the budget; - Centralize central government funds in the STA held at the NBRB; - Reform the pension system to ensure its long-term viability. - Monetary policy and banking sector: - Phase out directed lending to avoid the need for regular bank recapitalizations by the state; - Remove caps on lending interest rates. - Incomes policy: - Discontinue enforcing economy-wide wage targets; - Limit wage bill growth in government and in enterprises with soft budget constraints; - Allow greater flexibility in employment and wage setting in non-public enterprises. - Enterprise sector reforms: - Launch transparent privatization and eliminate the golden share rule to promote FDI; - Harden budget constraints by reducing state support and enforcing bankruptcy against nonviable enterprises; - Reduce state controls on enterprise activities; - Simplify registration of small and medium-sized enterprises and rules governing their activity; - Develop a timetable for introducing internationally accepted accounting standards in the enterprise sector. ### Staff appraisal: overall assessment and policy recommendations - Recent outcomes: double-digit growth in 2004 benefiting from relatively restrained fiscal and monetary policies tilted by government-mandated quasi-fiscal operations (notably rapid increases in directed credit and wages); disinflation aided by remonetization, an effective exchange rate anchor, discontinuation of inflationary financing for the budget in 2004, and administrative controls in price formation. - Progress in fiscal management: ministry of finance integrated several large extrabudgetary funds into the central budget and held general government operations in balance in 2004. - However, centralized macroeconomic management is ultimately unsustainable without enterprise and financial sector restructuring. - The past decade saw a massive cumulative excess of growth in real wages over productivity; these trends cannot be expected to continue. - Sustained growth requires supply response from restructuring and reform, greater FDI, and reduced government role. - Demographic challenge: aging population will raise fiscal costs of pension and health systems and undermine revenues due to declining number of active workers. - Timing: “Now is the best time” to address growth sustainability through policy and structural reforms to begin catching up with successful EU-member neighbors. - Fiscal policy recommendation: avoid envisaged fiscal loosening in 2005; fiscal policy needs to remain tight after incorporating quasi-fiscal activities to reduce size of government and allow room for meaningful tax reductions over the medium term. - Monetary policy recommendation: focus on disinflation, give the NBRB operational independence, retain exchange rate flexibility, and strengthen reserve position. - Currency union with Russia: lasting benefits require fulfillment of key macroeconomic conditions and agreements with Russia on multiple technical issues; benefits enhanced by prudent macroeconomic policies and early structural reforms. - Staff commends authorities for strengthened technical cooperation with the IMF and progress: completion of FSAP, SDDS subscription, and publication of fiscal and data transparency ROSCs. *Source: IMF Staff Report excerpt* ### 43. The next Article IV consultation is expected to be held on the standard 12-month ### _cr05214 - 43. The next Article IV consultation is expected to be held on the standard 12-month ### Overview - "The next Article IV consultation is expected to be held on the standard 12-month cycle." - Table coverage: Selected Economic Indicators, Monetary Accounts (Current Policies and Reform Scenario), Fiscal Indicators and Projections for Belarus covering 2001–06, with staff projections for 2005–06. ### Output and real activity - GDP (nominal in billions of rubels): 17,173; 26,138; 36,565; 49,445; 58,900; 59,363; 58,392; 69,458; 68,862. - Real GDP (annual growth rates): 1/4.7; 5.0; 7.0; 11.0; 8.5; -10.0; 7.1; 6.0; 4.0; 6.2. - Industrial production (selected entries): 5.9; 4.3; 6.8; 15.6. - Note: "The Belarusian national accounts have overstated real growth by about 1-2 percent. A new industrial production index, which would improve the estimates is calculated but not published yet." ### Prices, wages, and inflation indicators - GDP deflator (y-o-y): 79.5; 44.9; 30.7; 21.8; 12.0; -13.0; 12.1; 11.5; 12.5; 11.2. - Consumer prices, eop (y-o-y): 46.1; 34.8; 25.4; 14.4; 8.0; -10.0; 12.0; 10.5; 12.9; 9.0. - Consumer prices, aop: 61.1; 42.6; 28.4; 18.1; 12.0; -13.0; 12.1; 11.5; 12.5; 11.2. - Producer prices, eop (y-o-y): 39.1; 42.7; 28.6; 18.9. - Wages (thousands of rubels per month): 125.0; 191.6; 253.5; 350.1. - Real average monthly wage (1996=100): 213.9; 231.9; 238.7; 279.0; 326.4. - Average monthly wage (in U.S. dollars): 89.5; 107.3; 123.3; 162.0; 225.0. ### Exchange rates - Rubel/USD (average): 1,383; 1,784; 2,052; 2,160; 2,240. - Rubel/USD (end-of-period): 1,580; 1,920; 2,156; 2,170; 2200-2275. - Rubel/Ruble (RUR) (average): 47.35; 56.97; 66.92; 74.98; 77.40. - Rubel/Ruble (RUR) (end-of-period): 52.30; 60.40; 73.20; 77.91; 75.86-77.65. ### General government finances (as percent of GDP) - Revenue: 44.9; 44.6; 45.8; 46.2; 44.1; 44.9; 43.7; 43.9; 43.0. - Expenditure (cash): 46.8; 46.4; 47.2; 46.2; 45.9; 45.2; 43.6; 44.4; 43.9. - Expenditure (commitment): 48.1; 46.5; 46.9; 46.1; 45.9; 45.4; 43.3; 44.9; 43.9. - Balance (cash): -1.9; -1.8; -1.4; 0.0; -1.8; -0.4; 0.0; -0.5; -0.8. - Balance (commitment): -3.1; -1.9; -1.1; 0.0; -1.8; -0.5; 0.4; -1.0; -0.8. - Note: "Consolidates the state government and Social Protection Fund budget; and, from 2002, the activities of the innovation funds, formally incorporated into the state government budget from 2005." ### Balance of payments and external sector (in millions of U.S. dollars) - Exports of goods: 7,334; 7,965; 10,073; 13,917; 16,433; 15,743; 15,887; 17,084; 17,945. - Imports of goods: -8,141; -8,879; -11,329; -15,983; -17,972; -17,950; -18,156; -19,424; -20,434. - Current account balance: -394; -311; -424; -1,043; -411; -1,004; -1,067; -1,013; -1,132. - As percent of GDP: -3.2; -2.1; -2.4; -4.6; -1.4; -3.7; -4.0; -3.4; -3.6. - Gross official reserves (levels): 359; 476; 499; 770; ...; 782; 917; 805; 1,262. - Reserves in months of imports of goods and services: 0.5; 0.6; 0.5; 0.6; ...; 0.5; 0.6; 0.5; 0.7. - Medium- and long-term debt (as percent of GDP): 9.2; 9.8; 8.1; 5.9; 4.6; 4.4; 4.4; 4.4; 4.2. - Short-term debt (as percent of GDP): 10.4; 11.0; 10.8; 12.8; 11.1; 14.2; 14.3; 15.3; 14.8. ### Monetary and banking aggregates (selected levels and changes) - Annual average broad money velocity (level): 8.2; 8.0; 7.1; 6.6; 5.8; 5.7; 5.8; 5.1; 5.6. - Annual average rubel broad money velocity (level): 18.2; 16.1; 13.3; 11.2; 9.2; 9.2; 9.4; 7.8; 8.9. - NBB net domestic credit (selected entries): 156.5; 31.0; 98.1; -6.0; ...; 1.6; -43.2; 87.7; 53.6. - Reserve money (selected entries): 102.8; 320.5; 1,141.9; 41.9; 19.7; 32.0; 12.9; 26.6; 14.4. - Banking system net domestic credit (selected entries): 66.4; 53.7; 68.9; 35.8; ...; 30.5; 19.6; 27.0; 15.6. - Rubel broad money (selected entries): 96.9; 59.6; 71.0; 58.1; 40.0; 30.0; 35.0; 20.0. - Refinance rate (percent per annum, end-of-period): 48; 38; 28; 17. - Monetary Survey (selected levels, end-of-period, in billions of rubels): - Net foreign assets: 904; 1,163; 1,552; 1,227; 1,056; 1,523; 2,051; 2,066; 2,086; 2,110; 2,246. - Broad money: 3,924; 6,132; 6,478; 7,256; 7,851; 8,839; 9,247; 9,865; 10,472; 11,159; 13,133. - Rubel broad money: 1,993; 3,408; 3,639; 4,279; 4,698; 5,388; 5,735; 6,173; 6,592; 7,005; 8,406. - Foreign currency deposits: 1,920; 2,705; 2,827; 2,957; 3,127; 3,426; 3,498; 3,678; 3,867; 4,140; 4,713. - 12-month % change in broad money (selected): 50.3; 56.3; 52.6; 50.0; 46.2; 44.1; 42.7; 36.0; 33.4; 26.2; 17.7. - 12-month % change in rubel broad money (selected): 59.6; 71.0; 67.1; 63.2; 60.8; 58.1; 57.6; 44.3; 40.3; 30.0; 20.0. - Annual rubel broad money velocity 2/: 16.1; 13.5; 13.5; 12.2; 12.1; 11.2; 10.9; 10.2; 9.9; 9.4; 8.9. - Annual broad money velocity 2/: 8.0; 7.3; 7.3; 7.0; 7.0; 6.6; 6.5; 6.2; 6.1; 5.8; 5.7. - Broad money multiplier: 3.5; 3.6; 3.4; 3.8; 3.9; 3.7; 4.0; 4.0; 4.1; 4.1; 4.2. - Rubel broad money multiplier: 2.1; 2.1; 2.0; 2.3; 2.4; 2.4; 2.5; 2.5; 2.6; 2.6; 2.7. - Accounting exchange rate (Rbl/US$) (selected): 1,920; 2,156; 2,150; 2,155; 2,167; 2,170; 2,153; 2,157; 2,166; 2,180; 2,207. ### Fiscal indicators and projections (state budget, Social Protection Fund, general government) - State (republican and local) budget — Revenue (in billions of rubels): 5,735; 8,663; 12,843; 17,417; 19,218; 20,193; 18,997; 23,129; 21,949. - Personal income tax: 534; 773; 1,024; 1,404; 1,758; 1,767; 1,748; 2,048; 1,976. - Profit tax: 637; 643; 934; 1,625; 1,685; 1,874; 1,868; 2,128; 2,226. - VAT: 1,447; 2,165; 2,895; 3,815; 4,547; 4,944; 4,911; 5,749; 5,798. - Customs duties: 300; 524; 957; 1,095; 1,410; 1,312; 1,293; 1,520; 1,613. - State budget — Expenditure (cash, in billions of rubels): 6,023; 9,135; 13,333; 17,595; 20,258; 20,385; 19,089; 23,377; 22,658. - Wages and salaries (in billions of rubels): 1,266; 2,061; 2,848; 3,880; ...; 4,912; 4,664; 5,801; 5,506. - Capital expenditures (in billions of rubels): 1,119; 1,999; 3,154; 4,367; ...; 4,098; 4,219; 4,341; 5,150. - Balance (cash) — State budget (in billions of rubels): -289; -472; -490; -178; -1,040; -192; -93; -248; -709. - Social Protection Fund — Revenue (in billions of rubels): 1,984; 3,055; 3,978; 5,453; 6,748; 6,504; 6,514; 7,618; 7,691. - Expenditure (in billions of rubels): 2,021; 3,061; 3,988; 5,262; 6,763; 6,521; 6,398; 7,701; 7,546. - Balance (cash): -37; -6; -101; 91; -15; -17; 116; -83; 145. - General government — Revenue (in billions of rubels): 7,714; 11,649; 16,765; 22,833; 25,966; 26,647; 25,511; 30,497; 29,639. - Expenditure (cash, in billions of rubels): 8,039; 12,127; 17,264; 22,821; 27,021; 26,857; 25,488; 30,828; 30,203. - Balance (cash): -326; -478; -500; 13; -1,055; -210; 23; -331; -564. - Memorandum items: - Stock of expenditure arrears: 313; 332; 227; 220; ...; 328; 0; 6650. - Government debt (trillions of rubels): 2.3; 2.9; 3.8; 4.5; 4.8; 4.7; 4.5; 5.0; 4.8. - Government external debt (millions of US$): 682; 781; 733; 732; ...; 745; 741; 777; 832. - GDP (trillions of rubels): 17.2; 26.1; 36.6; 49.4; 58.9; 59.4; 58.4; 69.4; 68.9. ### Fiscal aggregates as percent of GDP (selected) - State budget revenue (percent of GDP): 33.4; 33.1; 35.1; 35.2; 32.6; 34.0; 32.5; 33.3; 31.9. - VAT (percent of GDP): 8.4; 8.3; 7.9; 7.7; 7.7; 8.3; 8.4; 8.3; 8.4. - Expenditure (cash) (percent of GDP): 35.1; 34.9; 36.5; 35.6; 34.4; 34.3; 32.7; 33.7; 32.9. - General government revenue (percent of GDP): 44.9; 44.6; 45.8; 46.2; 44.1; 44.9; 43.7; 43.9; 43.0. - General government expenditure (cash) (percent of GDP): 46.8; 46.4; 47.2; 46.2; 45.9; 45.2; 43.6; 44.4; 43.9. - General government balance (cash) (percent of GDP): -1.9; -1.8; -1.4; 0.0; -1.8; -0.4; 0.0; -0.5; -0.8. *Sources: Belarusian authorities; National Bank of Belarus; Ministry of Finance, SPF; and Fund staff estimates.* ### 5. Financing (cash) 3/ ### 5. Financing (cash) 3/ ### Financing composition and memorandum items (2001–06) - Privatization: 0.1, 1.6, 0.1, 0.1, 0.2, 0.1, 0.1, 0.1, 0.4 - Foreign financing, net: 0.1, 0.1, -0.1, 0.6, 0.9, 0.1, 0.0, 0.1, 0.3 - Domestic financing, net: 1.5, 0.5, 1.5, -0.8, 0.8, 0.2, -0.2, 0.3, 0.1 - Banking system: 1.5, 0.0, 1.2, -1.5, ..., -0.2, -0.2, 0.0, 0.0 - Central bank (incl. IMF): 1.1, -1.0, 0.7, -0.7, 0.0, -0.5, -0.5, 0.0, 0.0 - Deposit money banks (incl. SPF): 0.5, 1.0, 0.5, -0.8, ..., 0.3, 0.3, 0.0, 0.0 - Nonbank: 0.0, 0.5, 0.2, 0.7, ..., 0.5, 0.0, 0.3, 0.1 Memorandum items: - Change in expenditure arrears (current year GDP): 1.2, 0.1, -0.3, 0.0, ..., 0.2, -0.4, 0.5, 0.0 - Stock of expenditure arrears (12 month GDP): 1.8, 1.3, 0.6, 0.4, ..., 0.6, 0.0, 1.0, 0.0 - Government debt/GDP: 13.2, 11.2, 10.4, 9.0, 8.1, 7.9, 7.8, 7.2, 7.0 - o/w: external debt/GDP: 6.3, 5.7, 4.3, 3.2, ..., 2.9, 2.8, 2.7, 2.7 - GDP (trillions of rubels): 17.2, 26.1, 36.6, 49.4, 58.9, 59.4, 58.4, 69.5, 68.9 Notes: - Source: Ministry of Finance, SPF, and IMF staff estimates. - Footnotes in source: 1/ Includes innovation funds from 2002, formally incorporated into the state government budget from 2005. 2/ Includes changes in expenditure arrears. 3/ The actual deficits from above the line include all the closing expenditure for the year carried out in January of the following year and correspond to the authorities fiscal year reports. The deficit values from the financing side include January closing expenditure in the year they were actually paid. ### Balance of Payments — Current Policies (selected annual levels and projections, in millions of U.S. dollars unless otherwise indicated) - Current account balance (2001–06): -394, -311, -424, -1,043, -1,004, -1,013 - Merchandise trade balance: -807, -914, -1,256, -2,066, -2,207, -2,340 - Exports: 7,334; 7,965; 10,073; 13,917; 15,743; 17,084 - Imports: -8,141; -8,879; -11,329; -15,983; -17,950; -19,424 - Services (net): 301, 433, 585, 713, 847, 934 - Income (net): -43, -29, 25, 266, 290 - Transfers (net): 154, 199, 222, 285, 293, 303 - Capital and financial accounts: 282, 441, 437, 1,192, 1,025, 1,036 - Capital account: 56, 53, 69, 49, 49, 46 - Financial account: 265, 270, 368, 1,144, 977, 989 - Direct investment (net): 96, 45, 31, 70, 168, 168 - Portfolio investment (net): -20, -9, 6, 0, 34, 37 - Trade credits (net): -56, -65, 13, 44, 0, 34, 50, 49, 6 - Loans (net): 222, 127, 90, 379, 311, 254 - Other (net): -17, -11, 8, -32, 13, 51, 33, 0 - Errors and omissions: -5, -127, 41, 30, 70, 0 - Overall balance: -118, 355, 456, 212, 3 - Financing: 118, -3, -5, -4, 56, -21, -23 - Gross official reserves (levels reported variably): 359, 476, 499, 770, 782, 805 - In months of imports of goods and services: 0.5, 0.6, 0.5, 0.6, 0.5, 0.5 - Use of Fund resources (selected): -30, -30, -32, -17, -90 - Short-term loans and related: 578, 812, -168, 00 (reporting format in source) - O/w: Central Bank of Russia: 5195, -3, -16800 - Exceptional financing: 1/ 35, -55, -49, -1500 (note: source footnote 1/ Includes accumulation, repayment, and forgiveness of arrears.) Selected memorandum ratios (as percent of GDP): - Current account (as percent of GDP): -3.2, -2.1, -2.4, -4.6, -3.7, -3.4 - Trade balance (as percent of GDP): -6.6, -6.3, -7.1, -9.0, -8.2, -7.8 - Overall balance (as percent of GDP): -1.0, 0.0, -0.3, -0.8, 0.1, 0.1 - Y-o-y growth in exports of goods (percent): 10.4, 8.6, 26.5, 38.2, 13.1, 8.5 - Y-o-y growth in imports of goods (percent): 8.2, 9.1, 27.6, 41.1, 12.3, 8.2 - Medium and long-term debt (% of GDP): 9.2, 9.8, 8.1, 5.9, 4.4, 4.4 - Short-term debt (% of GDP): 10.4, 11.0, 10.8, 12.8, 14.2, 15.3 - Debt service ratio (as percent of exports of goods and services): 7.6, 7.1, 8.9, 7.3, 7.8, 7.3 - Public and public-guaranteed debt service ratio (as percent of exports of goods and services): 1.3, 1.6, 2.2, 2.4, 0.6, 0.3 - External arrears levels and percent of GDP: 489, 434, 385, 370, 370, 370; In percent of GDP: 4.0, 3.0, 2.2, 1.6, 1.4, 1.2 Notes: - Sources: Belarus authorities and IMF staff estimates. ### Balance of Payments — Reform Scenario (table present in source) - The source contains a separate Table 7 labeled "Belarus: Balance of Payments, 2001-06 (Reform Scenario)". (Numerical detail appears in adjacent tables for Current Policies and alternative projection sets; refer to the source tables for the full reform-scenario series.) ### Medium-Term Macroeconomic Framework, 2000–10 (selected series, percent of GDP unless otherwise specified) Current Policies (selected lines): - Gross national savings (2000–10): 22.8, 20.6, 20.0, 24.2, 23.8, 23.6, 22.8, 21.9, 20.9, 19.8, 18.9 - government: 8.2, 3.4, 5.7, 7.5, 8.9, 6.4, 5.3, 3.3, 1.7, 1.5, 1.2 - non-government: 14.6, 17.2, 14.3, 16.7, 14.9, 17.2, 17.6, 18.6, 19.1, 18.4, 17.7 - Gross domestic savings: 22.0, 19.7, 18.9, 22.8, 22.4, 22.2, 21.5, 20.7, 19.8, 18.8, 17.9 - Net factor income and transfers: 0.8, 0.9, 1.2, 1.4, 1.4, 1.3, 1.3, 1.2, 1.1, 1.0, 1.0 - Gross domestic investment: 25.4, 23.8, 22.2, 26.6, 28.3, 27.3, 26.2, 25.2, 24.1, 23.1, 22.0 - Savings-investment balance / Current account balance: -2.6, -3.2, -2.1, -2.4, -4.6, -3.7, -3.4, -3.3, -3.3, -3.2, -3.2 Memorandum items: - Nominal GDP (billions of rubels): 9,134; 17,173; 26,138; 36,565; 49,445; 59,363; 69,458; 81,180; 94,616; 109,674; 127,430 - Real GDP growth rate (percent): 5.8, 4.7, 5.0, 7.0, 11.0, 7.1, 4.0, 3.0, 2.0, 1.0, 0.8 - Inflation (annual average rate, percent): 168.6, 61.1, 42.6, 28.4, 18.1, 12.1, 12.5, 13.5, 14.3, 14.8, 15.3 Reform scenario (selected lines show modest differences): - Gross national savings (2000–10): 22.8, 20.6, 20.0, 24.2, 23.8, 21.0, 21.9, 23.0, 23.9, 24.6, 25.3 - Gross domestic investment (2000–10): 25.4, 23.8, 22.2, 26.6, 28.3, 25.0, 25.5, 26.0, 26.5, 27.0, 27.5 - Savings-investment balance / Current account balance (reform): -2.6, -3.2, -2.1, -2.4, -4.6, -4.0, -3.6, -3.0, -2.6, -2.4, -2.2 - Nominal GDP (billions of rubels, reform scenario memorandum): 9,134; 17,173; 26,138; 36,565; 49,445; 58,392; 68,862; 79,104; 89,358; 99,138; 108,957 - Real GDP growth rate (reform, percent): 5.8, 4.7, 5.0, 7.0, 11.0, 6.0, 6.2, 6.4, 6.6, 6.7, 6.7 - Inflation (annual average rate, percent, reform): 168.6, 61.1, 42.6, 28.4, 18.1, 11.5, 11.2, 8.0, 6.0, 4.0, 3.0 Sources: Belarus authorities; and Fund staff estimates. ### External Debt Sustainability Framework (2000–10) — baseline and stress tests (selected indicators) Baseline projections and debt dynamics: - External debt (percent of GDP, 2000–10): 16.7, 19.5, 20.9, 18.8, 18.7, 18.5, 19.7, 19.6, 19.8, 19.9, 19.9 - Change in external debt (2000–10): -1.7, 2.9, 1.3, -2.0, -0.1, -0.2, 1.1, -0.1, 0.2, 0.1, 0.0 - Identified external debt-creating flows (4+8+9): 0.8, 3.2, -1.3, -2.3, -0.4, 1.9, 2.1, 2.2, 2.4, 2.6, 2.6 - Current account deficit, excluding interest payments: 2.1, 3.0, 2.2, 1.9, 4.2, 2.9, 1.9, 0.9, 0.3, -0.3, 0.0 - Exports (percent of GDP): 60.0, 67.9, 63.2, 64.9, 68.4, 65.5, 64.0, 59.6, 55.1, 51.1, 47.4 - Imports (percent of GDP): 63.4, 72.3, 66.8, 68.7, 74.4, 70.5, 68.7, 64.0, 59.5, 55.3, 51.5 - Net non-debt creating capital inflows (negative): -0.9, -0.7, -0.9, -1.0, -0.8, -0.6, -0.6, -0.5, -0.5, -0.4, -0.4 - Automatic debt dynamics: -0.4, 0.9, -2.6, -3.2, -3.8, -0.3, 0.8, 1.9, 2.6, 3.3, 3.0 - Contribution from nominal interest rate: 0.5, 0.5, 0.4, 0.5, 0.4, 0.9, 1.5, 2.4, 2.9, 3.5, 3.1 - Contribution from real GDP growth: -1.0, -0.8, -0.8, -1.2, -1.6, -1.1, -0.7, -0.5, -0.3, -0.2, -0.1 - Contribution from price and exchange rate changes: 0.1, 1.2, -2.2, -2.5, -2.6, ... - Residual, incl. change in gross foreign assets (2-3): -2.5, -0.3, 2.6, 0.3, 0.2, -2.1, -1.0, -2.3, -2.2, -2.5, -2.6 - External debt-to-exports ratio (percent): 27.8, 28.8, 33.0, 29.0, 27.3, 28.3, 30.7, 32.9, 35.9, 38.9, 41.9 - Gross external financing need (in billions of US dollars): 1.9, 1.9, 2.0, 2.5, 3.3, 4.4, 5.4, 6.6, 7.8, 9.2, 10.3 - in percent of GDP: 14.8, 15.2, 13.6, 14.0, 14.4, 16.1, 18.0, 19.3, 20.4, 21.4, 21.4 Key macro assumptions (selected averages and projected series): - Real GDP growth (percent): historical average and projections show 5.8, 4.7, 5.0, 7.0, 11.0, 4.9, 6.1, 7.1, 4.0, 3.0, 2.0, 1.0, 0.8, 3.0 (source layout includes average/deviation/projected) - GDP deflator in US dollars (change percent): -0.6, -6.9, 12.4, 13.6, 15.7, 17.4, 46.8, 10.4, 6.9, 10.0, 10.4, 10.9, 10.8, 9.9 - Nominal external interest rate (percent): 2.9, 3.0, 2.3, 2.7, 2.6, 3.0, 0.9, 5.4, 8.9, 13.7, 16.9, 19.7, 17.5, 13.7 - Growth of exports (US$ terms, percent): 19.5, 10.3, 9.8, 24.9, 35.4, 21.6, 28.4, 13.2, 8.7, 5.4, 4.3, 3.7, 3.6, 6.5 - Growth of imports (US$ terms, percent): 21.4, 11.1, 9.0, 25.1, 39.0, 20.7, 26.6, 12.2, 8.3, 5.6, 4.6, 4.2, 4.0, 6.5 - Current account balance, excluding interest payments (percent of GDP): -2.1, -3.0, -2.2, -1.9, -4.2, -3.3, 1.6, -2.9, -1.9, -0.9, -0.3, 0.3, 0.0, -1.0 - Net non-debt creating capital inflows: 0.9, 0.7, 0.9, 1.0, 0.8, 1.3, 1.0, 0.6, 0.6, 0.5, 0.5, 0.4, 0.4, 0.5 Stress tests (selected scenarios and their impact on external debt ratio): - A1 (historical averages in 2006–10): external debt ratio path includes 18.5, 17.7, 16.4, 15.5, 14.6, 13.9 with debt-stabilizing non-interest current account 7/ = -3.5 - A2 (country-specific shock 2006: 30% reduction of exports to main trading partner): external debt ratio shows 18.5, 19.7, 19.6, 19.8, 19.9, 19.9 with debt-stabilizing non-interest current account 7/ = 0.6 - Bound Tests (B1–B6) produce wide ranges in projected external debt ratios, with example outcomes: - B3 (change in US dollar GDP deflator at historical average minus two standard deviations in 2006–07): external debt ratio series includes 18.5, 81.4, 355.1, 351.1, 354.6, 350.4 with debt-stabilizing non-interest current account 7/ = 9.7 - B5 (combination of B1-B4 using one standard deviation shocks): external debt ratio increases to 18.5, 31.9, 49.7, 50.2, 50.3, 50.2 with debt-stabilizing non-interest current account 7/ = 1.5 - B6 (one time 30 percent nominal depreciation in 2006): external debt ratio path 18.5, 26.0, 25.6, 25.7, 25.9, 25.8 with debt-stabilizing non-interest current account 7/ = 0.8 Notes on definitions and methodology: - Footnotes define automatic debt dynamics and contributions: r = nominal effective interest rate on external debt; ρ = change in domestic GDP deflator in US dollar terms; g = real GDP growth; ε = nominal appreciation; α = share of domestic-currency denominated debt in total external debt. - Gross external financing need is defined as current account deficit, plus amortization on medium- and long-term debt, plus short-term debt at end of previous period. ### Public Sector Debt Sustainability Framework (2000–10) — baseline and stress tests (selected indicators) Baseline projections (selected lines, percent of GDP): - Public sector debt (gross general government debt): 15.0, 13.2, 11.2, 10.4, 9.0, 7.9, 7.2, 7.7, 8.6, 9.6, 10.9 - o/w foreign-currency denominated: 9.0, 6.3, 5.7, 4.3, 3.2, 2.9, 2.6, 3.1, 3.4, 3.9, 4.4 - Change in public sector debt: 0.0, -1.8, -2.1, -0.8, -1.4, -1.1, -0.7, 0.4, 0.9, 1.1, 1.2 - Identified debt-creating flows (4+7+12): -8.1, -2.0, -0.1, -1.5, -2.7, -0.9, -0.1, 0.6, 1.1, 1.2, 1.4 - Primary deficit (percent of GDP): 0.0, 2.4, 1.4, 0.6, -0.5, 0.1, 0.5, 0.8, 1.1, 1.1, 1.1 - Revenue and grants: 45.8, 44.9, 44.6, 45.8, 46.2, 44.9, 43.9, 43.3, 42.7, 42.3, 42.5 - Primary (noninterest) expenditure: 45.8, 47.3, 45.9, 46.4, 45.6, 45.0, 44.4, 44.1, 43.9, 43.4, 43.6 - Automatic debt dynamics: -8.2, -4.5, -3.0, -2.2, -2.2, -1.1, -0.7, -0.4, -0.2, 0.0, 0.1 - Contribution from interest rate/growth differential: -9.2, -6.3, -4.0, -2.7, -2.2, -1.1, -0.7, -0.4, -0.2, 0.0, 0.1 - Of which real interest rate contribution: -8.9, -5.9, -3.6, -2.1, -1.4, -0.5, -0.4, -0.2, -0.1, 0.1, 0.2 - Of which real GDP growth contribution: -0.3, -0.4, -0.4, -0.6, -0.8, -0.5, -0.3, -0.2, -0.1, -0.1, -0.1 - Contribution from exchange rate depreciation: 0.9, 1.8, 0.9, 0.5, 0.0, ... - Other identified debt-creating flows: 0.1, 0.1, 1.6, 0.1, 0.1, 0.1, 0.1, 0.1, 0.2, 0.2, 0.2 - Privatization receipts (negative): 0.1, 0.1, 1.6, 0.1, 0.1, 0.1, 0.1, 0.1, 0.1, 0.1, 0.1 - Recognition of implicit or contingent liabilities: 0.0, 0.0, 0.0, 0.0, 0.0, 0.0, 0.1, 0.1, 0.1, 0.1, 0.1 - Residual, including asset changes (2-3): 8.1, 0.3, -2.0, 0.7, 1.2, -0.2, -0.6, -0.1, -0.2, -0.2, -0.2 - Public sector debt-to-revenue ratio: 32.8, 29.5, 25.1, 22.7, 19.5, 17.6, 16.5, 17.7, 20.1, 22.8, 25.6 - Gross financing need (percent of GDP): 5.2, 10.0, 8.6, 4.8, 2.7, 2.4, 2.6, 3.0, 3.7, 4.2, 4.8 - in billions of U.S. dollars (selected): 0.7, 1.2, 1.3, 0.8, 0.6, ... , 1.8, 2.3 Key macro-fiscal assumptions (selected): - Real GDP growth (percent): historical/projected series mirror external framework assumptions (e.g., 5.8, 4.7, 5.0, 7.0, 11.0, 4.9, 6.1, 7.1, 4.0, 3.0, 2.0, 1.0, 0.8, 3.0) - Average nominal interest rate on public debt (percent): 18.1, 9.1, 6.3, 6.4, 6.4, 9.2, 4.9, 6.0, 6.6, 11.2, 13.3, 16.0, 17.8, 11.8 - Average real interest rate (percent): -167.0, -70.4, -38.6, -24.3, -15.5, -145.1, 200.2, -6.1, -5.9, -2.6, -1.0, 1.2, 2.5, -2.0 - Inflation rate (GDP deflator, percent): 185.2, 79.5, 44.9, 30.7, 21.8, 154.3, 199.6, 12.1, 12.5, 13.7, 14.3, 14.8, 15.3, 13.8 - Growth of real primary spending (deflated by GDP deflator, percent): 12.2, 8.2, 1.9, 8.2, 9.1, 4.6, 13.3, 5.5, 2.7, 2.0, 1.4, -0.1, 1.4, 2.2 - Primary deficit (percent of GDP): 0.0, 2.4, 1.4, 0.6, -0.5, 0.4, 1.3, 0.1, 0.5, 0.8, 1.1, 1.1, 1.1, 0.8 Debt-stabilizing primary balance (selected scenario results and stress tests): - Baseline debt-stabilizing primary balance (percent of GDP): 7.9, 7.1, 6.8, 6.5, 6.2, 6.0 (with a debt-stabilizing primary balance change of -0.4 noted for one scenario) - Alternative scenarios and bound tests produce wide variation in required primary balances; examples: - A1 (historical averages in 2006–10): requirement 7.9, 7.1, 6.8, 6.5, 6.2, 6.0 with debt-stabilizing primary balance change = -0.4 - A2 (no policy change in 2006–10): 7.9, 6.8, 6.6, 6.6, 6.9, 7.5 with debt-stabilizing primary balance change = 0.8 - B1–B6 bound tests show dramatically larger required primary balances under severe shocks (examples: B2 yields 7.9, 13.5, 26.0, 37.4, 49.5, 62.5; B4 yields 7.9, 13.2, 21.7, 22.3, 23.6, 25.2). Notes on methodology: - Footnotes provide the formula linking interest rate, inflation, growth, exchange rate changes, and the share of foreign-currency denominated debt to debt dynamics. - Gross financing need is defined as public sector deficit, plus amortization of medium- and long-term public sector debt, plus short-term debt at end of previous period. - Footnote 8/ indicates the historical average real interest rate of minus 145 percent was replaced by the actual 2005 level of minus 6.1 percent to avoid unrealistic assumptions. ### Fund relations, safeguards, and technical assistance (selected) - Membership: Joined July 10, 1992; Article VIII. - Stand-by arrangement: Approval date 09/12/1995; Expiration date 09/11/1996; Amount approved (SDR million) 196.28; Amount drawn (SDR million) 50.00. - Safeguards assessment: On-site assessment in December 2003 concluded significant vulnerabilities in legal structure and independence, external and internal audit, and financial reporting. Authorities have begun addressing some issues and are considering measures for remaining concerns. - Exchange arrangements: Rubel unit of account adopted August 20, 1994; conversion rate and redenomination events noted; official exchange rate unification with market rate in mid-September 2000; crawling band vis-à-vis Russian ruble adopted January 2001; acceptance of Article VIII obligations on November 5, 2001; suspension of ad hoc exemptions from 30 percent surrender requirement in November 2001. Reported exchange rate for U.S. dollar: Rbl 2149 on May 25, 2005. - Article IV consultation: Belarus on 12-month cycle; eleventh Article IV consultation concluded May 7, 2004; staff visit December 20–22, 2004; 2005 Article IV consultation mission March 16–31, 2005. - FSAP and ROSCs: Fiscal ROSC and data ROSC published (URLs given in source). Two FSAP missions in 2004; an FSSA report under preparation; FSSA accompanies staff report. - Technical assistance (2000–05): Multiple missions listed across FAD, MFD, STA, FIN, and LEG covering government finance statistics; improving debt management; budget code and public expenditure management; tax policy; treasury development; banking supervision; monetary policy and operations; FSAP; anti-money laundering legislative issues; safeguards assessment; national accounts statistics; balance of payments; money and banking statistics; and multisector statistics. Resident advisors and resident representative office history summarized. _Italic: Source — Ministry of Finance, SPF, Belarus authorities, and IMF staff estimates as presented in the IMF staff report tables and appendices._ ### 1. The World Bank Group program in Belarus was rather limited during the period ### 1. The World Bank Group program in Belarus was rather limited during the period ### Overview - The World Bank Group program in Belarus was limited during 1995–2000. - The 1999 Country Assistance Strategy (CAS) set a strict trigger (exchange rate unification) for resumption of IBRD lending; the trigger was met in September 2000. - The current CAS was approved in 2002 to: advance cooperation in critical areas, help open up the economy and society, minimize social and environmental risks, and address global public good concerns. ### IMF–World Bank collaboration - The Bank and Fund teams work closely in Belarus and maintain an extremely good relationship. - Division of roles: - IMF: key role at the macro level. - World Bank: focuses on structural agenda, social and environmental issues. - Joint activities during 2004–05: - Public Expenditure Review (PER) — cited as an example of excellent cooperation. - Financial Sector Assessment Program (FSAP). - Country Economic Memorandum (CEM). ### Areas in which the World Bank leads — Social sphere - Technical assistance and analysis relevant to poverty and living conditions. - IDF grant for Strengthening of the Capacity of the Ministry of Social Protection in Policy Formulation and Analysis for preparation and introduction of Targeted Social Assistance Program (TSAP): - Implemented successfully during 2000-2003 and completed in June 2003. - Pension Policy Dialogue conducted with the government during FY 2004 to analyze the need for deep pension system reform. ### Areas in which the World Bank leads — Energy sector - Social Infrastructure Retrofitting Project: - Amount: US$22.6 million. - Aims: rehabilitation of heating system, thermal insulation, and lighting in over 450 public buildings (schools, hospitals, orphanages, community homes for the elderly and the disabled) and measures to increase energy efficiency. - Energy Sector Management Assistance Program (ESMAP) grant: - Amount: US$50,000. - Approved in 2004 to help the Committee on Energy Efficiency explore market mechanisms (Energy Servicing Companies, ESCOs) and learn from neighboring countries. ### Areas in which the World Bank leads — Environment - Belarus has made good progress in environmental protection but faces many problems, including the legacy of the Chernobyl catastrophe. - Chernobyl is central to the current CAS. - Proposed Post-Chernobyl Recovery Project: - Intended to “revitalize selected districts most affected by the Chernobyl accident by improving local people’s incomes and living conditions”. - Based on recommendations of the Chernobyl Review (2002) and intended to spearhead greater international support to affected regions. - PHRD Climate Change Pilot Project: - Amount: US$1.0 million. - Approved in 2003. - Aim: demonstrate GHG emission abatement opportunities through energy efficiency and renewable energy utilization in heat and hot water supply to social sector buildings; assist development and implementation of emission standards for biomass-fired boilers. - GEF POPs Enabling Activity Project: - Amount: US$499,300. - After two-year dialogue and preparation with UNEP, Belarus ratified the Stockholm Convention on Persistent Organic Pollutants (POPs) and selected the World Bank as a GEF Implementing Agency for POPs activities. ### Areas of shared responsibility — Economic development - Bank launched preparation of a new Country Economic Memorandum (CEM) for Belarus in 2004. - Major theme: Sources and Sustainability of Economic Growth. - Bank cooperates closely with IMF on CEM; one chapter, “Macroeconomic policies and risks”, is being prepared jointly. - Chapter contents: overview of macroeconomic developments since 1996, sources and structure of growth, role of macroeconomic policies, and risks associated with Belarus’ current macroeconomic position and policy adjustments (monetary, fiscal, debt management). ### Areas of shared responsibility — Private sector development - Structural reforms and private business development are the most challenging reform agenda. - Bank Group seeks to improve environment for private business via technical assistance, policy dialogue, and ESW. - Bank and IFC studies: Improving the Business Environment and Costs of Doing Business Surveys to define impediments and provide policy recommendations. - Fund focuses on macroeconomic policies for sustainable growth and private sector development and provides technical assistance on taxation, banking regulations, and banking supervision. ### Areas of shared responsibility — Public expenditure management - Current CAS emphasizes effectiveness, transparency, and accountability in public resource use. - 2003: World Bank with IMF participation completed the first Public Expenditure Review (PER) for Belarus. - Continuous technical assistance by IMF and Bank in public expenditure management. - Government priority areas: modernization of budget classification, Budget Code preparation, MTEF, reform of inter-budgetary fiscal relations, development of sector strategies. - FY2004: Bank provided technical assistance to the Ministry of Finance for Budget Code preparation. - FY2005: Focus on intergovernmental fiscal relations—clarification of revenue and expenditure assignments and development of formula for intergovernmental fiscal transfers. ### Areas of shared responsibility — Financial sector - Joint IMF/World Bank FSAP team visited Belarus in September and November 2004 at the request of the government and the National Bank. - FSAP focus: assessments of the banking system (including deposit insurance), securities markets, insurance industry, payment system, transparency in conducting monetary policy, regulations, oversight and governance arrangements. - Team continues working with NBRB and Belarusian authorities to finalize FSAP findings; some findings will be incorporated in IMF Article IV consultation mission and the CEM. - Bank and IMF carry joint responsibility for assistance in prevention of money laundering and combating financing of terrorism. ### Areas in which the IMF leads - IMF actively engages with authorities on macroeconomic program design, technical assistance, and support in: - Economic and financial statistics, tax policy, monetary operations, fiscal transparency. - IMF leads dialogue on objectives for monetary and exchange rate policies, public debt management, overall budget envelope and tax policy. - IMF analysis serves as input to Bank policy advice; Bank staff participate in IMF Article IV Consultation missions to ensure consistency. ### The World Bank Group Strategy - Belarus joined the World Bank in July 1992. - Under 1999 CAS: liberalization of the exchange rate was trigger for low case lending (one project per year). - Exchange rate unification in September 2000 allowed preparation of US$22.6 million Social Infrastructure Retrofitting Project (approved June 5, 2001). - Current 2002-04 CAS completed in February 2002: low case focused on areas compatible with government priorities and Bank’s corporate mandate—global public goods and interventions with high social content; triggers set for base case should the government advance in public expenditure reform and improve business environment. - CAS implementation results: - Positives: economy continued to grow, poverty incidence fell significantly, ESW highly commended, technical dialogue reported positive results, some likely sustainable. - Negatives: not a single lending operation was approved during this CAS period. - CAR (prepared summer 2004) recommended completion of key elements of current CAS before initiating new CAS, including completion of ongoing ESW (CEM and FSAP), continuation of environment initiatives, and resumption of Chernobyl Project preparation. - Bank commitments to date: - Total committed: US$190.6 million. - Grants provided: US$15.0 million. - IBRD active portfolio: one ongoing operation — Social Sector Energy Retrofitting Project totaling US$22.6 million. - Lending pipeline: Post-Chernobyl Recovery Project (tentative amount of US$45.0 million). - Non-lending analytical work (most recent): - Belarus: Chernobyl Review (report No.23883-BY, July 15, 2002). - Public Expenditure and Institutional Review (Belarus: Strengthening Public Resource Management, Report No.26041-BY, June 20, 2003). - Poverty Assessment Update (Belarus Poverty Assessment: Preparing for the Future, Report No.27431-BY). - Preparation of Country Economic Memorandum and Financial Sector Assessment Program (2004-ongoing). ### The IFC activities in Belarus - IFC advisory work in Belarus since 1993, beginning with advisory services on privatization of small businesses. - Current IFC focus: small and medium enterprise development and improvement of the business environment. - December 2004: IFC launched a Business Enabling Environment Project funded jointly with the Swedish International Development Cooperation Agency (SIDA): - Two-year technical assistance effort to reduce regulatory burden on SME and improve SME access to information and business support services. - IFC investment activities: - Total invested: US$44 million in financial and manufacturing sectors. - Examples: credit lines to Priorbank for on-lending to private enterprises; loan and equity for refurbishment, modernization and expansion of Dednovo brewery. - IFC continues to seek investment opportunities with participation of strategic investors despite difficult investment environment. ### Statistical issues (As of March 2, 2005) - Some weaknesses remain in Belarus’ statistical system, but authorities— with Fund technical assistance—have made significant efforts and improvements in key areas. - Ministry of Statistics (Minstat) publishes a large amount of data and has a predetermined publication schedule; provision of data over the last year has generally been adequate for regular analysis (Table 1). - Data usually provided in a timely fashion through the Resident Representative’s office. - IFS page published since November 1996 and updated regularly on a monthly basis. - A Statistics Law was signed by the President in February 1997. - A multisector statistical advisor sponsored by the Fund was in place from August 1996 to August 2000. - Authorities participated in a 2004 Data ROSC; final report published in February 2005 (see the TCIRS for partial summary ratings). ROSC mission found all statistical agencies should increase user confidence in the accuracy and reliability of official statistics. - Authorities subscribed to the IMF’s Special Data Dissemination Standard (SDDS) on December 22, 2004: http://www.belstat.gov.by/homep/en/specst/np.htm *Source: _cr05214 - 1. The World Bank Group program in Belarus was rather limited during the period* ### 5. The Ministry of Statistics, with technical assistance from the OECD and the IMF, ### 5. The Ministry of Statistics, with technical assistance from the OECD and the IMF, ### National accounts and GDP measurement - Switched to the System of National Accounts 1993 (1993 SNA) and discontinued net material product. - First set of quarterly national accounts published in January 1996; continuously updated on a timely basis. - Quarterly national accounts data are published in the IFS. - A full set of annual national accounts has been prepared for 1990–2003. - Progress and remaining concerns: - Minstat has made significant progress in improving coverage across statistics owing to an updated business register (based on administrative sources) and improved survey response discipline from the Statistical Law of 1996. - Concerns remain on GDP accuracy because of reporting shortcomings in newly emerging sectors (in particular services) and an active informal sector. - Imputations for nonresponse to enterprise surveys amount to only about half percent of GDP. - Activities of the informal sector, concentrated in agriculture and retail trade, may still need improvements in sources and methods. - Technical assistance findings: - A recent TA mission found most recommendations of previous TA missions in 1999 and 2000 and the 2004 data ROSC mission have been implemented. - Minstat uses sound methods in estimating GDP given the enterprise-level source data at both current and constant prices. - Industrial production index (IPI): - A systematic upward bias in measuring industrial output has been partially addressed through improvements in the IPI introduced starting with the data for 2002. - Authorities plan to begin publishing the new IPI in 2006. ### Prices - Monthly data on the Consumer Price Index (CPI) and the Producer Price Index (PPI) are reported to the Fund on a timely basis. - Both indices were developed with substantial technical assistance from the Fund. - Fund recommendations (inclusion of exports, adequate specification of items, better selection of representative products and prices) have either been adopted or are in the process of being adopted. - PPI weights and compilation: - Since January 2001, the PPI has been compiled using the 1999 weights. - Beginning with 2003 data, PPI is compiled with 2001 production weights. ### Government finance statistics (GFS) - Coverage and timeliness: - GFS on revenue and expenditure in functional classification are provided for the consolidated state budget (republican and local government budgets) and Social Protection Fund on a monthly basis, about three to four weeks following the end of the reference period. - Economic classification of monthly expenditure available since Q1 2001 for the republican budget, but only quarterly for the consolidated state budget. - New plan of budget accounts implemented from January 1998; several extrabudgetary accounts incorporated into the budget since start of 1998. - Central and local government annual data for 2000–02 were published in the 2004 GFS Yearbook. - Monthly data covering the budget sector, excluding social security, are published in IFS. - Improvements and systems: - MoF compiles detailed monthly data on tax and expenditure arrears of central and local governments. - Further implementation of the Treasury project promises significant improvements in preparing regular and timely reports on spending commitments and deliveries. - Detailed information on domestic bank financing of general government institutions is compiled by NBRB in coordination with MoF. - Data covering foreign financing of general government institutions as well as domestic and foreign debt and debt guarantees have improved significantly in the past year, improving reconciliation of spending and revenue records with financing data, although some discrepancies remain. - A system to improve recording of contingent liabilities is in preparation. - Post-2004 Data ROSC progress: - MoF extended coverage of general government operations by including data for innovation funds and the Social Protection Fund in the budget. - Increased number of officials involved in GFS compilation and increased provision of detailed budgetary metadata and methodological descriptions on MoF’s website. - MoF prepared new budgetary classification codes for revenue, expenditure and financing data to align them to the GFSM 2001 analytical framework. - GFSM 2001 migration: - A GFS TA mission (end of April, 2005) found fiscal, accounting, and statistical systems have a sound basis for migrating to the GFSM 2001. - Several areas require further work before satisfactory implementation; a migration plan for gradual implementation of this analytical framework was prepared with the authorities. ### Monetary statistics - With STA technical assistance, NBRB made significant progress in improving monetary statistics quality. - Data timeliness and reporting: - Balance sheet of the NBRB and the monetary survey are usually provided with a lag of no more than two weeks. - NBRB monthly balance sheet available on or about the fifth of the month following the reference period. - Monetary data for publication in IFS are reported with a lag of about two months. - Implementation efforts: - NBRB working on implementing new standardized report forms for monetary statistics based on sectoral balance sheets and surveys from the Monetary and Financial Statistics Manual. - Reconciliation: - Reconciliation of budget financing data with net credit to government derived from the banking system has improved recently, but some discrepancies remain; in such cases Fund staff relies on banking data. - Other monetary data: - Interest rate data on bank deposits and credits, and data on NBRB credit auctions and placement of NBRB and government securities are provided with a one-month lag. - Exchange rate data are readily available on NBRB’s web site and periodically reported to the Fund in electronic file. ### Balance of payments and external sector statistics - Overall quality and timeliness of data is satisfactory. - NBRB publishes quarterly balance of payments and international investment position statements in the BPM5 format on a regular basis. - Minstat publishes monthly foreign trade data with a lag of about six weeks. - Official reserve assets are available on a weekly basis, generally with little or no lag. - Net foreign assets position of commercial banks is compiled monthly with minimum delay. - Ministry of Finance tracks scheduled interest and amortization payments on public sector debt; timely information available on arrears on government and government-guaranteed debt. - TA and reporting improvements: - August/September 2003 TA mission noted most November 2000 mission report recommendations had been implemented. - International Transactions Reporting System broadened for more accurate classification of external transactions; coverage and reporting forms for enterprise surveys improved. - Since August 1998, Belarus has been reporting annual and quarterly balance of payments to STA for publication; quarterly international investment position statements are now also reported to STA for publication. - Dissemination: - Belarus has started to disseminate historical data on the reserves template on the IMF's website. Monthly time series start with November 2004 data. - Starting with Q1 2004, Belarus began to disseminate historical quarterly data on external debt on the World Bank’s external debt webpage. ### Table of Common Indicators (as of May 24, 2005) — selected dataset timing and assessment highlights - Exchange Rates: Date of latest observation 5/24/05; Date received 5/24/05; Frequency of Data D; Frequency of Reporting D; Frequency of publication D. - International Reserve Assets and Reserve Liabilities of the Monetary Authorities: Date of latest observation 5/01/05; Date received 5/10/05; Frequency W; Frequency of Reporting W; Frequency of publication W. - Reserve/Base Money: Date of latest observation 3/31/2005; Date received 4/15/2005; Frequency M; Frequency of Reporting M; Frequency of publication M. - Broad Money: Date of latest observation 3/31/2005; Date received 4/15/2005; Frequency M; Frequency of Reporting M; Frequency of publication M. - Central Bank Balance Sheet: Date of latest observation 3/31/2005; Date received 4/15/2005; Frequency M; Frequency of Reporting M; Frequency of publication M. - Consolidated Balance Sheet of the Banking System: Date of latest observation 3/31/2005; Date received 4/15/2005; Frequency M; Frequency of Reporting M; Frequency of publication M. - Interest Rates: Date of latest observation 3/31/2004; Date received 5/02/05; Frequency of Data D; Frequency of Reporting M; Frequency of publication M. - Consumer Price Index: Date of latest observation 3/05; Date received 4/17/05; Frequency M; Frequency of Reporting M; Frequency of publication M. - Revenue, Expenditure, Balance and Composition of Financing – General Government: Date of latest observation 3/05; Date received 5/03/05; Frequency M; Frequency of Reporting M; Frequency of publication M. - GDP/GNP: Date of latest observation Q1/05; Date received 4/05; Frequency Q; Frequency of Reporting Q; Frequency of publication Q. - Gross External Debt: Date of latest observation 12/04; Date received 03/05; Frequency Q; Frequency of Reporting Q; Frequency of publication Q. - Data quality assessments reflect the findings of the data ROSC published on February 1, 2005, based on a mission during March 23–April 7, 2004; methodological soundness and accuracy/reliability are rated using O (fully observed), LO (largely observed), LNO (largely not observed), NO (not observed), or NA (not available). ### Statement excerpts on economic developments, policies, and indicators (Statement by Johann Prader and Mikhail Nikitsenka, June 17, 2005) - Growth and macro performance: - GDP growth of about 45 percent since 1999, 11 percent in 2004 and 8.9 percent in the first five months of 2005. - 2004 budget balanced; inflation reduced; notable achievements on social indicators. - Domestic investment in 2004 was above 20 percent of GDP, about US 4.7 billion. - Investment volume grew by almost 22 percent during January-April 2005. - FDI remains small; reinvestment of enterprise profits constitutes more than half of total investment. - Net corporate profits grew by more than 60 percent in the previous year and were main source of finance for domestic investment. - Real sector improvements in 2004: - Enterprise profitability at 17 percent in industry and almost 8 percent in agriculture. - Reduction of enterprise inventories from 59 percent of monthly production on January 1, 2004 to 54 percent as of January 1, 2005. - Reduction in inter-enterprise and bank arrears. - Share of loss-making enterprises reduced from about 34 percent to 21 percent. - External sector and exports: - Exports expanded from US$ 6.6 billion in 2000 to almost US$ 14 billion in 2004. - Share of non-CIS countries in exports increased to 50 percent. - Exports grew 38 percent in 2004 and an additional 29 percent in Q1 2005. - From a negative balance in 2004, the current account became positive in Q1 2005. - Official reserves, foreign debt, and external arrears improved. - Wages and productivity: - Wage growth substantially outpaced labor productivity growth in 2004. - Authorities note the ratio between wage growth and productivity increase seems unsustainable; government refraining from mandatory wage planning in 2005 and setting only indicative targets. - Staff notes rapid wage growth had limited measured competitiveness effects because key trading partners experienced similar increases; continued rapid wage growth poses substantial risks. - Monetary and exchange regime: - Crawling band exchange rate regime contributed to exchange rate stability and competitiveness. - Inflation declined from triple-digit in 2000 to 14.4 percent in 2004. - Inflation averaged 0.8 percent per month in January-April 2005. - Share of local currency in total money circulation increased from 56 percent to 61 percent in 2004. - Authorities consider a cautious approach to currency union with Russia; January 1, 2006 target for union not considered feasible. - Banking sector and reserves: - Resource base of banking system rose six times over the last four years and strengthened by 45 percent in 2004. - Local currency deposits of the population increased by 74 percent in 2004. - Net foreign assets nearly tripled since 2003 to more than US$ 1 billion. - As of January 1, 2005 Belarus had 32 banks; 27 had foreign capital participation and 8 were fully foreign owned. - Financial soundness indicators (capital adequacy, asset quality, liquidity, foreign exchange risk) improved substantially over last five years. - Banking system remains underdeveloped and needs major improvement; 2004 FSAP missions and safeguards assessment (voluntarily requested in 2004) will support reforms. - Fiscal stance: - Balanced consolidated budget in 2004 and a 7.1 percent surplus in January-March 2005 confirm fiscal discipline. - Revenue collection in 2004 was good; government obligations to NBRB and commercial banks reduced. - Previous NBRB financing of the budget deficit has been completely abandoned. - The 2005 budget envisages tax cuts of about [text truncates in source]. *Source: _cr05214 - 5. The Ministry of Statistics, with technical assistance from the OECD and the IMF,* ### 0.5 percent of GDP. ### _cr05214 - 0.5 percent of GDP. ### Fiscal performance and inflation - Revenues from the VAT tax, the profit tax and taxes on foreign trade have exceeded initial projections for the first quarter of 2005. - Inflation was halved during 2004, and slowed down further to 11 percent in April 2005. - Inflationary financing of the general government budget from the National Bank was discontinued. - Budgetary consolidation progressed further. - International reserves have increased. - Government debt is at a low level. - A surge in the current account deficit in late 2004 was largely reversed in early 2005. - Under current policies, growth is expected at 7.1 percent in 2005 and 4 percent in 2006, gradually grinding even lower. ### Quasi-fiscal activities and budget consolidation - Significant progress has been made, with a significant reduction in quasi-fiscal activities in recent years. - The Government recognizes that a further reduction of these activities is needed and is actively working toward it. - Inclusion of the Pension Fund (Fund for Social Protection) and of sector innovation funds into the framework of the state budget is an important step towards reducing quasi-fiscal activities. - The system of recommended credits and subsidized interests (compensated through the state budget) is used as an instrument for national economic policy objectives and is preferred by the authorities to channel resources through the banking system. - Staff recommendation: cut back recommended credits and scale back the housing construction program through better targeting. - Directors urged accelerating consolidation of quasi-fiscal activities into the budget and reducing their magnitude to safeguard the budget balance. - Directors noted that lowering the high tax burden would require expenditure cuts. - Directors viewed that, given the strong momentum in the economy and the need to keep inflation under control, it would not be appropriate for fiscal policy to provide additional stimulus at this time, despite the easing of the budgetary financing constraint. ### Structural policies, privatization, and state involvement - Belarus has a comparatively deep involvement of the state in economic management; a quarter of the Belarus economy is already in private hands. - Because of a gradual approach to reforms, Belarus may be more centrally managed at this stage of transition than some other transition countries. - Movement towards harmonization of structural measures with those in Russia has continued. - In 2004 the average number of licenses required to operate a business was reduced from three to two. - The staff is said to overstate the negative role of the golden share; the share is applied only in limited circumstances including anti-competitive conduct, possible liquidation, failure to pay taxes, and failure to pay employee salaries for a period of at least six months. - The new Investment Code of Belarus, effective January 1, 2005, includes measures to encourage the inflow of foreign capital, cancels previously existing key preferences for companies with foreign capital, and unifies conditions for foreign and domestic investments. - Bank privatization continues: eight fully-owned foreign banks operate in Belarus; “Prior Bank” sold 61 percent of its capital to an Austrian bank. - IFC has recently increased its investment in Belarusian banks and in the manufacturing sector. - The Government has continued efforts to rationalize the social support system with more reliance on targeted social protection. - GDP growth was achieved without any substantial increase in consumption of energy: energy intensity of production decreased by 8 percent in 2004 and a further decrease of 10 percent is expected in 2005. ### Fund relations, technical assistance, and policy stance - Belarusian authorities view economic results of the past year as demonstrating improved macroeconomic policy performance and believe the country does not need financial assistance from the Fund. - Authorities cite gradual transformation to a market economy aimed at minimizing negative social consequences. - Belarus has had an excellent track record of implementing IMF technical assistance recommendations. - Improvements in the calculation of the industrial production index increased the accuracy of GDP estimates substantially. - Recommendations from FSAP and other missions had a very positive impact. - Belarus looks forward to maintaining technical cooperation and policy discussions with the Fund. - Authorities intend to continue policies of monetary and fiscal discipline and liberalization to improve the business climate and view cooperation with the Fund as contributing to economic growth foundations. ### Executive Board assessment and key risks - Directors recognized improved macroeconomic performance, strong economic growth, and reduced inflation realized in 2004. - Directors commended improvement in poverty indicators. - Directors cautioned the economy remains vulnerable and current strategy may not produce sustainable growth without wide-ranging structural reforms and phasing out massive quasi-fiscal activities. - Directors expressed concern about limited progress in enterprise and financial sector restructuring and extensive quasi-fiscal operations, notably directed credits and subsidized lending for housing through large state banks. - Rapid pace of wage increases over the past decade outpaced productivity growth; enforcement of highly ambitious U.S. dollar wage targets could lead to inflation pressures, enterprise decapitalization, and waning external competitiveness. - Directors emphasized the central bank should make low inflation its primary objective and be granted full operational autonomy. - Further disinflation will require containing credit growth and retaining exchange rate flexibility to safeguard against excessive real appreciation and to allow the NBRB to raise foreign reserves. - Directors stressed the need for transparent privatization, reduced government intervention, pickup in FDI, and improved competition and efficiency in product and labor markets. - Directors noted favorable external factors (notably Russian energy import pricing) are likely to wane. - Directors warned increasing dependence on short-term liabilities and limited foreign exchange reserves raised roll-over risk. - Directors urged substantially improving the environment for foreign direct investment and noted the golden share rule as applied in Belarus was counterproductive and urged its elimination or limitation to a handful of preannounced strategic cases. - For a beneficial currency union with Russia, key issues need to be appropriately addressed; prudent macroeconomic policies and early market-oriented structural reforms would increase the likelihood of success. - Directors welcomed constructive discussions and commended authorities for implementing technical assistance recommendations, noting completion of the Financial Sector Assessment Program, subscription to the Special Data Dissemination Standard, and publication of fiscal and data Reports on the Observance of Standards and Codes. - Directors supported continuation of technical cooperation. ### Selected economic indicators (excerpt) - Real GDP (annual change): 2001: 4.7 percent; 2002: 5.0 percent; 2003: 7.0 percent; Preliminary 2004: 11.0 percent. - Industrial production (annual change): 2001: 5.9; 2002: 4.3; 2003: 6.8; Preliminary 2004: 15.6. - CPI (end-of-period): 2001: 46.1; 2002: 34.8; 2003: 25.4; Preliminary 2004: 14.4. - Real average monthly wage (1996=100): 2001: 213.9; 2002: 231.9; 2003: 238.7; Preliminary 2004: 279.0. - Average monthly wage (in U.S. dollars): 2001: 89.5; 2002: 107.3; 2003: 123.3; Preliminary 2004: 162.0. - Reserve money (annual change): 2001: 102.8; 2002: 32.0; 2003: 51.1; Preliminary 2004: 41.9. - Rubel broad money (annual change): 2001: 96.9; 2002: 59.6; 2003: 71.0; Preliminary 2004: 58.1. - Banking system net domestic credit (annual change): 2001: 66.4; 2002: 53.7; 2003: 68.9; Preliminary 2004: 35.8. - Refinance rate (percent per annum, end-of-period): 2001: 48.0; 2002: 38.0; 2003: 28.0; end-2004: 17.0. - General government revenue (In percent of GDP): 2001: 44.9; 2002: 44.6; 2003: 45.8; 2004: 46.2. - General government expenditure (cash, In percent of GDP): 2001: 46.8; 2002: 46.4; 2003: 47.2; 2004: 46.2. - General government balance (cash, In percent of GDP): 2001: -1.9; 2002: -1.8; 2003: -1.4; 2004: 0.0. - Current account balance (In millions of U.S. dollars): 2001: -394; 2002: -311; 2003: -424; 2004: -1,043. - Current account as percent of GDP: 2001: -3.2; 2002: -2.1; 2003: -2.4; 2004: -4.6. - Gross international reserves (In millions of U.S. dollars): 2001: 359.4; 2002: 475.6; 2003: 499.0; 2004: 770.2. - Reserves (In months of imports of goods and services): 2001: 0.5; 2002: 0.6; 2003: 0.5; 2004: 0.6. - Medium- and long-term debt (as percent of GDP): 2001: 9.2; 2002: 9.8; 2003: 8.1; 2004: 5.9. - Short-term debt (as percent of GDP): 2001: 10.4; 2002: 11.0; 2003: 10.8; 2004: 12.8. - Exchange rate (Rubels per U.S. dollar, Average): 2001: 1,383; 2002: 1,784; 2003: 2,052; 2004: 2,160. - Exchange rate (Rubels per U.S. dollar, End-of-period): 2001: 1,580; 2002: 1,920; 2003: 2,156; 2004: 2,170. *Source: IMF Executive Board conclusion of the 2005 Article IV consultation with the Republic of Belarus (Public Information Notice No. 05/81, June 28, 2005) as contained in the provided text.* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2005/_cr05214.pdf_