## _cr06314 — Executive Summary

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### Background and outlook
- Belarus benefits from very favorable energy import prices that substantially contributed to recent macroeconomic results.
- Macroeconomic performance:
  - Real GDP growth averaged 7½ percent.
  - GDP growth averaged 8.2 percent in 2002–05.
  - Inflation fell to under 8 percent at end-2005 and headline inflation declined steadily to 6.9 percent in May 2006.
- Terms-of-trade and external conditions:
  - Terms-of-trade gains related to cheap imported energy reached about 12 percent of GDP in 2005.
  - In 2005, Belarus imported gas at US$47 per thousand cubic meters and crude oil at US$30/barrel.
  - The trading gains swung the current account into a surplus of 1.6 percent of GDP in 2005.
  - A 12¾ percent terms-of-trade improvement, together with strong partner country growth, supported the external position.
- Growth composition and underlying performance:
  - Domestic demand boosted in 2005: investment grew by 13½ percent and household consumption grew by 14½ percent.
  - Measures excluding the impact of favorable external conditions show underlying performance has fallen short of headline growth since 2001, especially in 2005.
- Inflationary pressures and capacity:
  - Ample production capacity and pervasive price controls contributed to declining inflation, but signs of inflationary pressures are emerging: rising unit labor costs, tighter capacity utilization in many sectors, a high and increasing ratio of PPI to CPI inflation, and estimates of underlying inflation.
  - Output gap indicators show a rapidly closing output gap; capacity utilization is high in many key sectors.
- Data caveats:
  - State controls and non-market mechanisms substantially alter the information content of macroeconomic data, complicating assessment of developments and policy impact.

### Key policy discussions and authorities vs. staff
- Key issues discussed:
  - Sustainability of macroeconomic performance in adverse external conditions.
  - How to ensure high and sustainable noninflationary growth while enhancing transition reforms.
  - Need for fundamental policy changes.
- Common ground (authorities and staff):
  - Recognition that macroeconomic performance had been strong while external circumstances were favorable.
  - Need to implement structural reforms to foster sustainable medium-term growth, including objectives to:
    - reduce the share of GDP redistributed by the budget and the tax burden;
    - strengthen the financial system;
    - facilitate development of small and medium-sized enterprises;
    - moderate real wage growth;
    - attract foreign investors.
- Authorities’ position:
  - Highlighted consolidation of manufacturing, strong social protection, and a pragmatic Belarusian model with a role for state and private sector.
  - Considered their reform agenda sufficient to ensure strong medium-term growth even in a less favorable external environment.
- Staff’s position:
  - Emphasized need for fundamental policy changes, notably fiscal tightening in anticipation of lower revenues as terms-of-trade gains cease or fall.
  - Recommended reducing dependence on fiscal and quasi-fiscal subsidies.

### Recommended structural reforms (staff)
- Immediate and priority measures:
  - Introduce hard budget constraints, including through a significant cut in government subsidies.
  - Phase out price controls and recommended (directed) lending.
  - Eliminate economywide mandatory wage targets.
  - Revise and limit the “golden share” rule to a handful of strategic enterprises.
  - Initiate transparent tenders to privatize selected enterprises other than natural monopolies.
- Follow-up and institutional reforms:
  - Transparently privatize banks and nonmonopoly enterprises.
  - Curb subsidies and enforce exit of inefficient enterprises.
  - Adopt international accounting standards for enterprises.
  - Strengthen social safety net, reform tax administration, public expenditure management, pension and health systems.

### Fiscal policy and recent developments
- Fiscal balance and windfalls:
  - Fiscal policy was gradually tightened during 2004 but relaxed at end-2005, reflecting in part pre-election spending.
  - After being in broad balance in 2004, the budget recorded a deficit of 0.7 percent of GDP in 2005, despite a 2¼ percent of GDP revenue windfall from the booming energy sector and from the switch to the destination principle for the VAT in trade with Russia from 2005.
  - Excluding oil-related revenues, the 2005 deficit would have been around 6 percent of GDP.
  - The final 2005 budget amendment released spending of 2¾ percent of GDP in December, primarily on wages and pensions, subsidies and transfers, and capital spending—including a large recapitalization of two state-owned banks.
- 2006 budget and near-term outlook:
  - The 2006 budget recorded a 3.1 percent of GDP surplus through May against a 5.2 percent of GDP surplus during the same period last year and a 3.4 percent of GDP surplus in 2004.
  - The surplus is projected to wind down by end-2006 given budgeted increases in wages and pensions and expected acceleration of spending by earmarked funds.
- Staff fiscal recommendation:
  - Fiscal tightening starting in 2006; target a moderate surplus of about ½ percent of GDP through expenditure restraint to create fiscal space for future tax cuts and to avoid lower revenues while committed to stretched expenditure levels.
- Fiscal reform measures to begin in 2006:
  - Identify permanent expenditure cuts to offset looming revenue losses.
  - Reduce budget rigidities by phasing out earmarking.
  - Incorporate remaining extrabudgetary funds into the budget and the Treasury Single Account.
  - Phase out subsidies and transfers to loss-making enterprises; discontinue bank recapitalizations associated with recommended lending.

### Monetary and exchange rate policy
- Exchange rate policy:
  - De jure targeting of the Belarusian rubel to the Russian ruble within a horizontal band (plus/minus 2 percent).
  - De facto, the Belarusian rubel allowed to move in line with market trends outside the band to limit daily fluctuations vis-à-vis the U.S. dollar.
  - Exchange rate stability vis-à-vis the U.S. dollar helped anchor inflation expectations, facilitated dedollarization, and supported a rapid increase in international reserves in 2005.
- Monetary policy stance and operations:
  - Monetary policy has been mildly accommodative.
  - Rising government deposits in the NBRB and some NBRB intervention largely sterilized the increase in international reserves and limited broad money growth to about 30 percent through November.
  - Policy changes prior to November included a reduction of 600 basis points in the refinance rate and of one percentage point in the reserve requirement.
  - Liquidity effects of the large drop in government deposits at end-2005 were broadly neutralized in early 2006 by partial rebuilding of such deposits and NBRB interventions.
  - In June, the NBRB cut the refinance rate by 50 basis points to 10½ percent and cut the reserve requirement by another percentage point.
  - International reserves remained broadly unchanged in January–June 2006.
- Staff monetary recommendations:
  - NBRB should refocus on inflation control as primary objective; accept more exchange rate flexibility if inconsistent with inflation target.
  - Discontinue large-scale liquidity support to banks and lending to the economy in support of government programs.
  - Eliminate interest rate caps and prune quantitative targets.
  - Strengthen NBRB operational independence and enhance coordination with the Ministry of Finance.

### Structural and sectoral issues
- Redistribution of terms-of-trade gains:
  - About a quarter of terms-of-trade gains accrues to the budget via taxes on consumption and export of imported energy and profits of energy companies; this windfall feeds transfers to state-owned enterprises and banks, budgetary wage hikes, and budgetary investment.
  - Remaining gains redistributed through non-budgetary channels: economywide mandated wage increases; large-scale recommended (directed) bank lending funded by increasing deposits; mandates to SOEs to keep domestic energy prices below full cost-recovery; and free gasoline to agriculture.
- Price regulation:
  - Pervasive price controls despite Article 394 of the Civil Code stipulating free price formation with exceptions.
  - Wholesale and retail prices regulated via fixed prices, price caps, markup ceilings, rate of return ceilings, governmental indicative prices, norms on manufacturers’ trade margins, and Council of Ministers’ mandatory ex-factory price limits based on projected inflation.
  - World Bank survey: of 1,200 respondents, 88 percent were inspected by pricing authorities in 2004 and 39 percent by the State Control Committee; violations can lead to seizure of excess earnings, penalties, and potential business closure.
- Financial sector and fiscal channels:
  - Large recommended lending occurs mainly through state-owned banks, which benefited from a 2005 decree requiring state enterprises to place their deposits with these banks.
  - The fiscal windfall was distributed via wages, transfers, subsidies, capital spending, and recapitalization of banks.

### Banking sector developments and fiscal support
- Lending and recapitalizations:
  - The largest (mainly public) banks continued to lend at the government’s behest for designated purposes—amounting to about 3½ percent of GDP in 2005—mostly at controlled and subsidized interest rates.
  - Resulting decline in these banks’ liquidity necessitated budgetary recapitalizations of 1.1 percent of GDP.
  - Central bank credit (mainly to agriculture under presidential directives) increased to about ½ percent of GDP at end-2005.
- Credit growth and asset quality:
  - Rapid growth in banking system credit raises concerns about credit quality, even though the share of nonperforming loans (NPLs) fell to below 2 percent at end-2005.
  - A tenth of NPLs remained unprovisioned in May 2006.
  - Some banks not complying with prudential requirements agreed to adjustment schedules with the NBRB.
- Profitability and capitalization indicators:
  - Return on Assets and Return on Equity remained low in early 2000s and were small positive by 2005–06 (figures cited in report).
  - Recurrent bank recapitalizations needed to keep systemic state banks afloat.

### External vulnerabilities and macro exposures
- Current account and reserves:
  - Current account surplus in 2005 masks a large and growing non-oil current account deficit as export volumes lag behind imports, mainly reflecting declining export market share in Russia.
  - Gross foreign exchange reserves up by two-thirds in 2005 but remain low at less than one month of imports and one-third of short-term debt (which comprises 80 percent of external debt).
  - Foreign direct investment extremely low at 1 percent of GDP, negligible from countries other than Russia.
- Competitiveness and labor:
  - Real wage growth exceeded productivity gains over most of the last six years, eroding competitiveness.
  - Appreciating bilateral real exchange rate vis-à-vis the U.S. dollar and the euro in recent years weakens non-CIS export prospects.
- Concentration risks:
  - About a hundred—mostly state-owned—enterprises accounted for 14 percent of GDP and 30 percent of republican budget revenues in 2005; they contributed a fifth of GDP growth.
- Russia energy prices:
  - Russia indicated Belarus’s energy import costs may rise substantially from 2007.

### Staff macro outlook and potential growth estimates
- Short- and medium-term projections:
  - Growth in 2006 should remain robust; staff project growth, driven by domestic demand, at around the lower end of the government’s projected range of 7–8½ percent.
  - Continued rapid noninflationary growth in 2007 and beyond is increasingly doubtful under current policies.
  - Panel regressions using a neoclassical growth model suggest annual potential growth of about 3½-4 percent over the next five years.
  - Staff projects gradually deteriorating current account deficits after 2006, stemming from weak export volume growth and stagnant terms of trade.
- Concerns about authorities’ medium-term outlook:
  - Projected current account surpluses and sharp increase in investment imply a considerable contraction in domestic consumption to raise savings from its current level of 31 percent of GDP.
  - Envisaged employment increases would require raising the share of employment in the working-age population by 10 percentage points from an already high 71 percent in 2005.
  - Projecting substantial increases in FDI appears overly optimistic without wide-ranging structural reforms and privatization.

### Box 4 — Illustrative No Policy–Change Scenario (Impact of Surging Energy Prices)
- Scenario assumptions:
  - Gas prices assumed to double to $95 per thousand cubic meters in 2007 and then converge to international prices by 2012.
  - Oil prices assumed to smoothly converge to international prices during 2007–12.
- Baseline medium-term projections (2007–2011):
  - Real GDP growth (in percent): 4.5, 3.8, 3.6, 3.4, 3.0 (2007–2011).
  - Inflation (eop, in percent): 9.0, 8.0, 7.0, 6.0, 5.0 (2007–2011).
  - General government balance (in percent of GDP): -1.2, -1.7, -2.3, -3.0, -3.5 (2007–2011).
  - Current account balance (in percent of GDP): -1.1, -2.1, -3.2, -4.5, -6.3 (2007–2011).
  - Memorandum items (oil and gas import prices, baseline):
    - Oil import price (U.S. dollars per ton): 270.0, 273.3, 277.5, 280.0, 279.4 (2007–2011).
    - Gas import price (U.S. dollars per thousand cubic meters): 51.9, 54.5, 57.2, 60.1, 63.1 (2007–2011).
- Risk (alternate) scenario projections (2007–2011):
  - Real GDP growth (in percent): -0.7, 0.3, 0.7, 0.9, 0.6 (2007–2011).
  - Inflation (eop, in percent): 16.4, 11.0, 10.5, 9.0, 8.0 (2007–2011).
  - General government balance (in percent of GDP): -2.5, -3.0, -3.6, -4.2, -4.7 (2007–2011).
  - Current account balance (in percent of GDP): -4.6, -6.5, -8.6, -11.1, -14.5 (2007–2011).
  - Memorandum items (alternate block oil and gas import prices):
    - Oil import price (U.S. dollars per ton): 270.0, 288.7, 311.4, 336.0, 362.5 (2007–2011).
    - Gas import price (U.S. dollars per thousand cubic meters): 95.0, 110.3, 128.0, 148.5, 172.3 (2007–2011).
- Projected impacts:
  - Fiscal balance gradually deteriorates to about 5 percent of GDP by 2011 in the illustrative scenario because revenues fall as enterprise profitability drops and larger subsidies and transfers are needed.
  - Current account deficit will rise to more than 10 percent of GDP over the medium term as the energy shock unfolds, generating a run-up in external debt.
  - Banking system capital adequacy would fall to barely above the regulatory 8 percent level under specified loan-loss assumptions.

### Fiscal and external sustainability, debt dynamics and stress tests
- Public sector debt projections (baseline):
  - Public sector debt (percent of GDP, 2001–2011): 13.2, 11.6, 10.4, 8.9, 8.4, 7.4, 7.7, 8.5, 9.9, 12.0, 14.6.
  - Government debt/GDP (financing table): 11.6, 10.4, 8.9, 8.4, ..., 7.3, 7.1.
  - Medium- and long-term external debt (as percent of GDP): 8.1, 4.8, 4.2, ..., 4.8, 4.8.
- External debt indicators and projections:
  - External debt (percent of GDP): 19.5, 26.8, 23.6, 21.4, 17.9, 16.0, 15.6, 16.4, 18.4, 21.7, 26.9.
  - Gross external financing need (in billions of US dollars): 1.8, 1.9, 3.4, 2.8, 3.9, 4.6, 4.8, 5.8, 7.3, 9.3, 11.2.
- Vulnerabilities:
  - Public debt projected to remain in a comfortable range under baseline but vulnerable to interest rate, GDP growth, primary balance, and exchange rate shocks (scenario tests include real interest rate shock, real GDP growth shock, primary balance shock, combination of one std.-dev. shocks, onetime depreciation (30 percent)).
  - External debt expected to rise significantly in the medium term; shocks to the exchange rate or current account would raise external debt materially.
- Key macro-fiscal baseline assumptions:
  - Real GDP growth (in percent, selected): 4.7, 5.0, 7.0, 11.4, 9.3, 7.2, 4.5, 3.8, 3.6, 3.4, 3.0.
  - Revenue and grants (percent of GDP): 44.9, 44.6, 45.8, 45.7, 48.4, 48.3, 47.1, 46.6, 46.1, 45.6, 45.1.
  - High share of fiscal subsidies: 9.2 percent of GDP.
  - Current level of savings: 31 percent of GDP.
  - Share of lossmakers in enterprise sector: 29½ percent in industry in May 2006.
  - Employment share in 2005: 71 percent.

### Structural reform shortcomings and business environment constraints
- Policy features limiting private-sector development:
  - Complex and changing administrative requirements.
  - State’s overarching role in a concentrated economy; excessive golden share rule.
  - Residence permit requirements restricting movement of labor to large cities.
- Trade regime and protection:
  - Weighted average tariffs on imports from outside Russia: 11 percent.
  - Numerous ad-hoc administrative restrictions: special government permits for certain imports; mandatory shares of domestically produced goods for retail outlets; state procurement favoring local firms.
- Staff view: these measures support inefficient domestic production, reduce competition, raise domestic prices, and increase cost of producing export goods.

### Case for bolder reforms and consequences of piecemeal changes
- Case for bolder reforms while economy is strong:
  - Builds policy room to address diminishing energy trade gains and to support reduction in fiscal subsidies and transfers.
  - Up-front reforms make covering their costs easier and improve investment climate to attract FDI.
- Consequences of piecemeal reforms:
  - Retaining state domination would create increasing macroeconomic and social costs as external environment worsens and traditional growth sources fade.
  - Financing costs could be borne for some time given low external debt, but would necessitate larger adjustment later.

### Data quality, statistical issues and institutional follow-up
- Data quality:
  - Quality and timeliness of statistical data are broadly adequate for surveillance, but administrative controls may affect the meaning of statistical data.
  - Specific limitations: CPI basket weights inaccessible; statistical discrepancy in national accounts relatively large.
  - 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."
- Institutional follow-up:
  - Next Article IV consultation proposed on standard 12-month cycle.
- Selected key statistics (as reported):
  - GDP (nominal in billions of rubels): 36,565 (2003); 49,992 (2004); 63,679 (2005); 73,650 (2006 Preliminary Official); 73,650 (2006 Staff); 83,968 (2007 Staff).
  - Gross domestic product (in billions of U.S. dollars): 17.8 (2003); 23.1 (2004); 29.6 (2005); 34.3 (2006 Preliminary Official); 34.2 (2006 Staff); 38.9 (2007 Staff).
  - Real GDP (annual change): 7.0 (2003); 11.4 (2004); 9.3 (2005); 7-8 (2006 Preliminary Official); 7.0 (2006 Staff); 4.5 (2007 Staff).
  - Consumer prices, eop (y-o-y): 25.4 (2003); 14.4 (2004); 8.0 (2005); 7.0 (2006 Preliminary Official); -9.0 (2006 Staff); 9.0 (2007 Staff).
  - General government revenue (percent of GDP): 44.5 (2003); 45.9 (2004); 46.0 (2005); 48.4 (2006 Preliminary Official); 48.3 (2006 Staff); 47.1 (2007 Staff).
  - General government expenditure (cash, percent of GDP): 46.6 (2003); 47.7 (2004); 46.0 (2005); 49.1 (2006 Preliminary Official); 47.6 (2006 Staff); 48.3 (2007 Staff).
  - Balance (cash, percent of GDP): -2.1 (2003); -1.7 (2004); 0.0 (2005); -0.7 (2006 Preliminary Official); -1.5 (2006 Staff); -1.2 (2007 Staff).
  - Gross official reserves (levels): 499 (2003); 770 (2004); 1,297 (2005); 1,275 (2006 Preliminary Official); 169 (2006 Staff); 118 (2007 Staff); 57 (2007 Staff alternative).
  - Reserves in months of future imports: 0.3 (2003); 0.5 (2004); 0.8 (2005); 0.9 (2006 Staff); 0.9 (2007 Staff).
  - Medium- and long-term external debt (percent of GDP): 8.1 (2003); 4.8 (2004); 4.2 (2005); 4.8 (2006 Staff); 4.8 (2007 Staff).
  - Short-term external debt (percent of GDP): 15.6 (2003); 16.7 (2004); 13.8 (2005); 11.2 (2006 Staff); 10.8 (2007 Staff).
  - High share of fiscal subsidies: 9.2 percent of GDP.
  - Current level of savings: 31 percent of GDP.

### Staff appraisal — outlook and policy priorities (summary)
- Recent performance:
  - Several years of high growth and falling inflation were driven by rising labor productivity, increasing capacity utilization, unfettered access to Russia’s expanding market, and redistribution of escalating terms-of-trade gains.
- Risks and vulnerabilities:
  - Once the energy windfall ceases to rise, the Belarusian development model will come under strain.
  - Continued centralized support will rapidly raise inflationary pressures given the vanishing output gap.
  - Without policy adjustment and structural reforms—liberalizing prices and wages, and curbing the state's role—growth will revert toward lower potential.
  - Significantly higher prices of energy imported from Russia impart considerable downside risks via compression of terms-of-trade gains, worsening the external current account and forcing significant cuts in fiscal subsidies and redistribution.
- Policy recommendations (condensed):
  - Fiscal: tighten starting in 2006; constrain recurrent expenditures; focus cuts on subsidies (including to banks), net lending, and transfers to loss-making enterprises; eliminate earmarking.
  - Institutional fiscal reforms: move central government deposits gradually to the NBRB; convert outstanding NBRB loans to the government into marketable securities; develop pension reforms expeditiously.
  - Monetary: refocus NBRB on inflation control; accept more exchange rate flexibility if inconsistent with inflation target; strengthen operational independence; discontinue direct lending to the economy; eliminate interest rate caps.
  - Financial sector: strengthen supervision and banking system soundness; ensure liabilities from directed lending are reflected in prudential indicators; enforce prudential requirements amid rapid credit growth; ensure transparency and competition in privatization.

*Source: IMF staff report — Executive Summary and supporting sections (content unit: _cr06314).*

### Executive Summary ......................................................................................................

### Executive Summary

### Background and outlook
- Belarus continues to benefit from very favorable energy import prices, which have substantially contributed to recent macroeconomic results.
- Macroeconomic performance:
  - Real GDP growth averaged 7½ percent (reference: past few years; 2002–05 noted elsewhere as 8.2 percent).
  - Inflation fell to under 8 percent at end-2005 and headline inflation declined steadily to 6.9 percent in May 2006.
  - GDP growth averaged 8.2 percent in 2002–05 (paragraph 1).
- Terms-of-trade and external conditions:
  - Hefty and increasing terms of trade gains related to cheap imported prices of energy reached about 12 percent of GDP in 2005.
  - In 2005, Belarus imported gas at US$47 per thousand cubic meters and crude oil at US$30/barrel (note: values given as comparisons to world market levels).
  - These trading gains swung the current account into a surplus of 1.6 percent of GDP in 2005.
  - A 12¾ percent terms-of-trade improvement, together with strong partner country growth, supported the external position.
- Growth composition and underlying performance:
  - Domestic demand was boosted strongly in 2005: investment grew by 13½ percent and household consumption grew by 14½ percent.
  - Measures of underlying growth that exclude the impact of favorable external conditions show underlying performance has fallen short of headline growth since 2001, especially in 2005.
- Inflationary pressures and capacity:
  - Ample production capacity and pervasive price controls have contributed to declining inflation, but signs of inflationary pressures are emerging: rising unit labor costs, tighter capacity utilization in many sectors, a high and increasing ratio of PPI to CPI inflation, and estimates of underlying inflation.
  - Capacity utilization is high in many key sectors; output gap indicators show a rapidly closing output gap.
- Data caveats:
  - State controls and non-market mechanisms substantially alter the information content of macroeconomic data, complicating assessment of developments and policy impact.

### Policy discussions (key issues and authorities vs. staff)
- Key issues discussed:
  - The sustainability of Belarus’s macroeconomic performance in adverse external conditions.
  - How to ensure high and sustainable noninflationary growth while enhancing transition reforms.
  - The need for fundamental policy changes.
- Common ground between authorities and staff:
  - Recognition that macroeconomic performance had been strong, while external circumstances had been favorable.
  - Need to implement some structural reforms to foster sustainable medium-term growth, including objectives to:
    - reduce the share of GDP redistributed by the budget and the tax burden;
    - strengthen the financial system;
    - facilitate the development of small and medium-sized enterprises;
    - moderate real wage growth;
    - attract foreign investors.
- Authorities’ position:
  - Highlighted achievements in consolidating manufacturing, maintaining strong social protection, and implementing a unique Belarusian economic development model with a pragmatic role for the state and private sector.
  - Considered their reform agenda sufficient to ensure strong medium-term growth even in a less favorable external environment.
- Staff’s position and emphasis:
  - Stressed that an unfavorable outlook underscores the need for fundamental policy changes.
  - Emphasized the need for fiscal tightening in anticipation of lower revenues as terms-of-trade gains cease growing or fall.
  - Recommended reducing the economy’s dependence on fiscal and quasi-fiscal subsidies.

### Recommended structural reforms (staff)
- Key recommended measures include:
  - Introducing hard budget constraints, including through a significant cut in government subsidies.
  - Phasing out price controls and recommended (directed) lending.
  - Eliminating economywide mandatory wage targets.
  - Revising and limiting the “golden share” rule to a handful of strategic enterprises.
  - Initiating transparent tenders to privatize selected enterprises other than natural monopolies.

### Fiscal policy and recent developments
- Fiscal balance and windfalls:
  - Fiscal policy was gradually tightened during 2004 but relaxed at end-2005, reflecting in part pre-election spending.
  - After being in broad balance in 2004, the budget recorded a deficit of 0.7 percent of GDP in 2005, despite a 2¼ percent of GDP revenue windfall from the booming energy sector and from the switch to the destination principle for the VAT in trade with Russia from 2005.
  - Excluding oil-related revenues, the 2005 deficit would have been around 6 percent of GDP.
  - The final 2005 budget amendment released spending of 2¾ percent of GDP in December, primarily on wages and pensions, subsidies and transfers, and capital spending—including a large recapitalization of two state-owned banks.
- 2006 budget and near-term outlook:
  - The 2006 budget recorded a 3.1 percent of GDP surplus through May against a 5.2 percent of GDP surplus during the same period last year and a 3.4 percent of GDP surplus in 2004.
  - The surplus is projected to wind down by end-2006, given the budgeted increase in wages and pensions for the rest of the year, and the expected acceleration of spending by earmarked funds.

### Monetary and exchange rate policy
- Exchange rate policy:
  - No change in exchange rate policy pursued by the NBRB: de jure targeting of the Belarusian rubel to the Russian ruble within a horizontal band (plus/minus 2 percent).
  - De facto, the Belarusian rubel is allowed to move in line with market trends outside the band to limit daily fluctuations vis-à-vis the U.S. dollar.
  - Exchange rate stability vis-à-vis the U.S. dollar has helped anchor inflation expectations, facilitated dedollarization, and supported a rapid increase in international reserves in 2005.
- Monetary policy stance and operations:
  - Monetary policy has been mildly accommodative.
  - Rising government deposits in the NBRB and some NBRB intervention largely sterilized the increase in international reserves and limited broad money growth to about 30 percent through November (year unspecified in excerpt).
  - Policy rate and reserve requirement changes: a reduction of 600 basis points in the refinance rate and of one percentage point in the reserve requirement had occurred prior to November (context implies 2004–05 period).
  - Liquidity effects of the large drop in government deposits at end-2005 were broadly neutralized in early 2006 by partial rebuilding of such deposits and NBRB interventions.
  - In June (year implied 2006), the NBRB cut the refinance rate by 50 basis points to 10½ percent and cut the reserve requirement by another percentage point.
  - International reserves remained broadly unchanged in January–June 2006.

### Structural and sectoral issues
- Redistribution of terms-of-trade gains (Box 1 highlights):
  - About a quarter of terms-of-trade gains accrues to the budget via taxes on consumption and export of imported energy and profits of energy companies; this windfall feeds transfers to state-owned enterprises and banks, and to the population (including budgetary wage hikes), and supports budgetary investment.
  - Remaining gains are redistributed through non-budgetary channels: economywide mandated wage increases; large-scale recommended (directed) bank lending funded by increasing deposits; mandates to state-owned enterprises to keep domestic energy prices below full cost-recovery; and free gasoline to agriculture.
- Price regulation (Box 3 highlights):
  - Direct and indirect interventions add up to pervasive price controls, despite Article 394 of the Civil Code stipulating free price formation with exceptions allowing presidential and state agency control.
  - Wholesale and retail prices are regulated by fixed prices, price caps, markup ceilings, rate of return ceilings, governmental indicative prices, norms on manufacturers’ trade margins, and Council of Ministers’ mandatory ex-factory price limits based on projected inflation.
  - World Bank survey data: of 1,200 respondents, 88 percent were inspected by pricing authorities in 2004 and 39 percent by the State Control Committee; violations can lead to seizure of excess earnings, penalties, and potential business closure.
- Financial sector and fiscal channels:
  - Large recommended lending occurs mainly through state-owned banks, which benefited from a 2005 decree requiring state enterprises to place their deposits with these banks.
  - The fiscal windfall was distributed throughout the economy via wages, transfers, subsidies, capital spending, and recapitalization of banks.

### Overall assessment and risks
- Belarus remains vulnerable to a deterioration of the external environment and faces challenging tasks in fostering transition to a market-based economy.
- Staff view: Without fundamental policy changes—especially fiscal tightening and reduced reliance on fiscal/quasi-fiscal subsidies—the favorable macroeconomic performance may not be sustainable if terms-of-trade gains cease or reverse.
- Authorities view: The Government believes its pragmatic state–private mix and reform agenda can sustain strong growth in the medium term even under less favorable external conditions.

*Source: IMF staff report — Executive Summary (content unit: _cr06314 - Executive Summary).*

### 9.      Bank recapitalizations have continued amid rapid credit growth (Figure 4). The

### 9.      Bank recapitalizations have continued amid rapid credit growth (Figure 4).

### Banking sector developments and fiscal support
- The largest (mainly public) banks continued to lend at the government’s behest for designated purposes—amounting to about 3½ percent of GDP in 2005—mostly at controlled and subsidized interest rates.
- The resulting decline in these banks’ liquidity necessitated budgetary recapitalizations of 1.1 percent of GDP.
- Central bank credit (mainly to agriculture under presidential directives) increased, reaching about ½ percent of GDP at end-2005.
- Rapid growth in banking system credit to the economy raises concerns about credit quality, even though the share of nonperforming loans (NPLs) fell to below 2 percent at end-2005.
- A tenth of NPLs remained unprovisioned in May 2006 (an improvement from a year ago).
- A few banks still not complying with prudential requirements on liquidity and maximum risk exposure have agreed to an adjustment schedule with the NBRB.
- Bank profitability and capitalization indicators cited:
  - Return on Assets and Return on Equity remain low (Figures show negative ROA/ROE in early 2000s and small positive by 2005–06).
  - Recurrent bank recapitalizations are needed to keep systemic state banks afloat (Figure 4: bank recapitalization left scale; regulatory capital and regulatory tier I capital right scale).

### External vulnerabilities and macroeconomic exposures
- Despite improvements, deep-seated external vulnerabilities remain:
  - The current account was in surplus in 2005, but the non-oil current account deficit is large and growing as export volumes lag behind imports, mainly reflecting declining export market share in Russia.
  - Russia has indicated that Belarus’s energy import costs may rise substantially from 2007.
  - Real wage growth has exceeded productivity gains over most of the last six years by a considerable margin, eroding competitiveness.
  - The appreciating bilateral real exchange rate vis-à-vis the U.S. dollar and the euro in recent years does not bode well for non-CIS export prospects.
  - Gross foreign exchange reserves—while up by two-thirds in 2005—remain low at less than one month of imports and one-third of short-term debt (which comprises 80 percent of external debt).
  - Foreign direct investment (FDI) is extremely low by international comparison at 1 percent of GDP, and negligible from countries other than Russia.
  - Concentration risks: about a hundred—mostly state-owned—enterprises accounted for 14 percent of GDP and 30 percent of republican budget revenues in 2005; they contributed a fifth of GDP growth.

### Structural reform shortcomings and labor/mobility constraints
- Structural reforms have not fostered the role of the private sector.
- Policy features limiting private-sector development include:
  - Complex and changing administrative requirements.
  - State’s overarching role in the concentrated economy.
  - An excessive golden share rule (applicable ex post).
  - Residence permit requirements restricting the movement of labor to large cities.
- Belarus lags well behind other countries in implementing structural reforms (EBRD Transition indicators: private sector share of GDP, privatization, price liberalization, trade & FX system, banking reform & interest rate liberalization—Belarus ranks lower than Russia, Poland, etc.).

### Fund surveillance and authorities’ stance
- Fund surveillance contributed to narrowing some differences between staff and authorities, and Fund advice and technical assistance had contributed toward formulating some policy and reform measures.
- Authorities remain unconvinced about the need to revise their overall policy approach and were not ready to discuss risks to the outlook pending the conclusion of talks with Russia on energy prices around end-2006.
- Authorities’ 2006–10 Socioeconomic Program targets:
  - Real GDP growth (percent growth): 2006–2010 = 7.8, 8.5, 8.5, 8.5, 9.3 (table shows 2006–2010).
  - Balance of trade in goods and services (U.S. dollar million): 450.2, 550.3, 650.4, 750.5, 900.
  - Fiscal deficit (percent of GDP; no range given): -1.5 for 2006–2010.
  - Investment in fixed capital (percent growth): 13.5, 15.8, 16.0, 16.0, 17.0.
  - Employment (percent of labor force): 70.0, 70.9, 72.5, 74.8, 77.8.
  - Employment (yoy percent increase): 0.6, 1.4, 1.6, 3.2, 4.0.
- Authorities assume inflation will fall to 5 percent by 2010, current account surpluses and substantial FDI inflows throughout 2006–10.

### Policy discussions, outlook, and staff assessment
- Staff view: recent growth critically benefited from fiscal and quasi-fiscal redistribution of terms-of-trade gains, facilitating high mandatory wage increases and strong investment growth while enterprise losses have remained high.
- Staff conclusions and warnings:
  - Markedly lower future GDP growth is likely, since the growth rate of subsidies, investment, and mandatory wage increases experienced in recent years is no longer sustainable.
  - Need for policy adjustment, with staff stressing the downside risk from significantly reduced subsidies from Russia as the horizon lengthens.
  - Compelling need for up-front fiscal tightening to mitigate the risk of having to undertake significant pro-cyclical tightening as terms-of-trade gains cease or reverse.
  - Early liberalization of prices and wages, reductions in subsidies and transfers to loss-making enterprises, followed by broader structural reforms, are priorities.
- Authorities disagreed with staff’s thrust, believing terms-of-trade gains were secondary and not ready to significantly alter policies.

### Staff macro outlook and potential growth estimates
- Short and medium-term staff projections and assessments:
  - Growth in 2006 should remain robust; staff project growth, driven by domestic demand, at around the lower end of the government’s projected range of 7–8½ percent.
  - Continued rapid noninflationary growth in 2007 and beyond is increasingly doubtful under current policies.
  - Panel regressions using a neoclassical growth model suggest annual potential growth of about 3½-4 percent over the next five years.
  - Staff projects gradually deteriorating current account deficits after 2006, stemming from weak export volume growth and stagnant terms of trade.
  - Concerns about the authorities’ medium-term outlook:
    - Projected current account surpluses and sharp increase in investment imply a considerable contraction in domestic consumption to raise savings from its current level of 31 percent of GDP.
    - Envisaged employment increases would require raising the share of employment in the working-age population by 10 percentage points from an already high 71 percent in 2005.
    - Projecting substantial increases in FDI appears overly optimistic without wide-ranging structural reforms, privatization, and policy changes.

### Box 4 — The Impact of Surging Energy Prices: illustrative No Policy–Change Scenario
- Scenario assumptions:
  - Gas prices are assumed to double to $95 per thousand cubic meters in 2007—at par with the 2006 level negotiated for Ukraine and below that for Armenia—and then converge to international prices by 2012.
  - Oil prices are assumed to smoothly converge to international prices during 2007–12.
- Methodology highlights:
  - The impact on baseline growth is averaged from five estimates: a production function model (Bruno and Sachs, 1985), the net import model (IEA, 2004), and panel regressions in Broda (2004), Becker and Mauro (2006), and Chapter I of the Selected Issues Paper.
  - Inflation first-round impact simulated using CPI weights of energy and utilities, pass-through rate of energy import prices to utilities (gradually increasing from 50 percent in 2007 to full pass-through by 2011), and gas intensity of heat and electricity production.
  - Fiscal balance, current account, and banking sector effects are modeled; banking system capital adequacy would fall to barely above the regulatory 8 percent level under specified loan-loss assumptions.
- Medium-term projections (Box 4 tables):
  - Baseline medium-term projections (2007–2011):
    - Real GDP growth (in percent): 4.5, 3.8, 3.6, 3.4, 3.0 (2007–2011).
    - Inflation (eop, in percent): 9.0, 8.0, 7.0, 6.0, 5.0 (2007–2011).
    - General government balance (in percent of GDP): -1.2, -1.7, -2.3, -3.0, -3.5 (2007–2011).
    - Current account balance (in percent of GDP): -1.1, -2.1, -3.2, -4.5, -6.3 (2007–2011).
    - Memorandum items (oil and gas import prices, baseline): Oil import price (U.S. dollars per ton): 270.0, 273.3, 277.5, 280.0, 279.4 (2007–2011); Gas import price (U.S. dollars per thousand cubic meters): 51.9, 54.5, 57.2, 60.1, 63.1 (2007–2011).
  - Risk scenario and supplementary projections (as presented):
    - Real GDP growth (in percent): -0.7, 0.3, 0.7, 0.9, 0.6 (2007–2011, alternate block).
    - Inflation (eop, in percent): 16.4, 11.0, 10.5, 9.0, 8.0 (2007–2011, alternate block).
    - General government balance (in percent of GDP): -2.5, -3.0, -3.6, -4.2, -4.7 (2007–2011, alternate block).
    - Current account balance (in percent of GDP): -4.6, -6.5, -8.6, -11.1, -14.5 (2007–2011, alternate block).
    - Memorandum items (oil and gas import prices in alternate block): Oil import price (U.S. dollars per ton): 270.0, 288.7, 311.4, 336.0, 362.5 (2007–2011); Gas import price (U.S. dollars per thousand cubic meters): 95.0, 110.3, 128.0, 148.5, 172.3 (2007–2011).
- Projected impacts summarized:
  - Fiscal balance gradually deteriorates to about 5 percent of GDP by 2011 in the illustrative scenario because revenues fall as enterprise profitability drops and larger subsidies and transfers are needed.
  - Current account deficit will rise to more than 10 percent of GDP over the medium term as the energy shock unfolds, generating a run-up in external debt.
  - Banking system capital adequacy would fall to barely above the regulatory 8 percent level with increasing credit risk (assuming 5 percent of loans to agriculture and 10 percent to other sectors becoming loss, and 20 percent of standard loans becoming substandard).
  - Excluding two large banks, the system appears much more fragile and relatively more exposed to the non-agriculture sector.

### Fiscal and external sustainability analysis and vulnerability to shocks
- Public debt projections (Figure 6): public debt projected to remain in a comfortable range under baseline but vulnerable to interest rate, GDP growth, primary balance, and exchange rate shocks (scenarios include real interest rate shock, real GDP growth shock, primary balance shock, combination of one std.-dev. shocks, onetime depreciation (30 percent)).
- External debt projections (Figure 6): while remaining low by international comparison, external debt is expected to rise significantly in the medium term; shocks to the exchange rate or the current account would raise external debt significantly.
- Staff view on medium-term growth without structural reforms:
  - Growth in 2006: staff project around the lower end of 7–8½ percent.
  - Potential growth over next five years: about 3½-4 percent.
  - Large share of fully depreciated productive equipment, policies precluding large technology-enhancing FDI inflows, and increasing export competition imply TFP is unlikely to sustain high growth rates.
- Additional numeric context and constraints:
  - Current level of savings: 31 percent of GDP.
  - High share of fiscal subsidies: 9.2 percent of GDP.
  - Share of lossmakers in enterprise sector: 29½ percent in industry in May 2006.
  - Employment share in 2005: 71 percent.

*Source: IMF staff report content provided in the source PDF.*

### 18.      Some common ground has emerged. The authorities envisaged gradual reforms as

### Some common ground has emerged

### Reform consensus and differences
- Authorities envisaged gradual reforms as part of their multiyear Socioeconomic program, notably:
  - some cuts in taxes and subsidies;
  - measures to strengthen the financial system;
  - facilitate small and medium-sized enterprise development;
  - moderate real wage growth;
  - attract foreign investors.
- Staff advocated deeper and less gradual reforms to:
  - accelerate withdrawal of state intervention (see Box 5 structural reforms);
  - create conditions for private sector growth while the economy remained strong;
  - foster efficient allocation of resources and boost productivity and potential growth.
- Authorities remained unconvinced of more radical reforms, objecting to:
  - phasing out recommended lending and centrally mandated wage increases;
  - wide-ranging privatization they viewed as risking social objectives.

### Fiscal policy and reform
- Staff recommendation:
  - fiscal tightening starting in 2006.
  - target a moderate surplus of about ½ percent of GDP through expenditure restraint to create fiscal space for future tax cuts and to avoid lower revenues while committed to stretched expenditure levels.
- Authorities’ positions and targets:
  - 2006 budget targets an overall deficit of 1.5 percent of GDP, but a broad balance is within reach on current policies.
  - For 2007, authorities target a fiscal deficit of 1½ percent of GDP and cited low public debt of 8.5 percent of GDP as supporting a moderate deficit.
  - Authorities were not prepared to commit to a budget surplus in 2006.
- Staff cautions for 2007 and beyond:
  - revenues would reflect stagnating terms-of-trade gains;
  - expansionary fiscal policy would heighten inflationary pressures and worsen competitiveness;
  - quality of expenditure, not quantity, is key to enhance productivity.
  - room needed to offset contingent liabilities (notably related to cumulative fiscal costs of recommended lending), to finance structural reforms that may be frontloaded, and to smooth impacts of adverse energy price developments.
- Fiscal reforms recommended to begin in 2006:
  - identify permanent expenditure cuts necessary to offset looming revenue losses;
  - reduce budget rigidities by phasing out earmarking;
  - incorporate remaining extrabudgetary funds into the budget and the Treasury Single Account, gradually moving all central budgetary funds to the latter;
  - phase out subsidies and transfers to loss-making enterprises;
  - discontinue bank recapitalizations associated with recommended lending.
- Under current projections (footnote):
  - the state budget deficit would be ½ percent of GDP smaller than budgeted, while the Social Protection Fund (SPF) would record a 1 percent of GDP surplus as in previous years (the budget conservatively assumes that the SPF would be in balance).

### Structural Reform Agenda (Box 5) — priority measures
- Immediate priorities to retrench state intervention, harden budget constraints, and attract FDI:
  - sharply reduce entry barriers for private firms and streamline the regulatory framework;
  - phase out controls on price formation to enhance price signals;
  - discard centrally mandated wage targets; implement rules in SOEs to keep wage growth in line with productivity increases;
  - phase out recommended lending to enhance market-based financial intermediation;
  - curb the golden share rule to apply only to a handful of strategic enterprises to attract private investors;
  - adopt international accounting standards for enterprises.
- Follow-up actions after preparation (but without undue delay):
  - transparently privatize banks and nonmonopoly enterprises;
  - curb subsidies and enforce exit of inefficient enterprises;
  - gradually reduce the tax and regulatory burden financed by cutting state support to enterprises.
- Concurrent institutional reforms:
  - put in place effective regulation of economic monopolies;
  - strengthen the social safety net to minimize social costs of labor reallocation;
  - reform tax administration, public expenditure management, and the pension and health systems to ensure fiscal sustainability.
- Golden share note:
  - From June 2006, it no longer applies to banks.

### Tax policy and aging
- Authorities intend to reduce the very high tax burden by 3–4 percentage points of GDP by 2010 and to streamline tax administration.
- Draft fiscal guidelines propose tax cuts of ¾ percentage point of GDP in 2007 by eliminating:
  - the Chernobyl tax of 3 percent of the wage bill;
  - the State Employment Fund contributions of 1 percent of the wage bill;
  - the local profit tax of 3 percent of net profits.
- Staff recommendations on tax reform:
  - earlier elimination of remaining distortionary taxes—particularly the turnover tax levied concurrently with the VAT;
  - offset revenue impact by reducing discretionary exemptions and concessions to expand the tax base;
  - simplify tax rate structures.
- Authorities agreed in principle that tax cuts should be compensated by expenditure cuts.
- Demographic context and pension reform:
  - fertility rate of 1.2;
  - population projected to continue falling by 2.1 percent in 2006–10;
  - elderly dependency ratio projected to rise and ratio of pension system contributors to beneficiaries to decline starting in 2008;
  - staff argued for pension reform to raise the effective retirement age (nominal retirement ages are 60 for males and 55 for females) and to enhance the link between lifetime contributions and pension benefits.

### Monetary and exchange rate policy
- NBRB agreed monetary and exchange rate policy should primarily aim at attaining the inflation—rather than exchange rate—objective.
- Current practice and staff recommendations:
  - NBRB currently sets targets for money supply (M1) and an explicit band for the Russian ruble exchange rate (and an implicit one vis-à-vis the U.S. dollar); targets can be revised during the year to achieve the inflation objective.
  - some exchange rate flexibility would help buffer the economy against real shocks;
  - NBRB should move further toward clearly indicating inflation as the primary objective in its 2007 monetary policy guidelines.
  - staff cautioned against setting further quantitative targets—notably for nominal exchange rates.
- Inflation objectives and policy stance:
  - NBRB commitment to lower inflation to 7-9 percent in 2006 and to 5 percent by 2010 was considered attainable by staff.
  - staff found the latest reduction in the refinance rate and in reserve requirements somewhat premature.
  - context: measured inflation might not fully reflect underlying pressures; preference for foreign currency as a store of value remained high with 40 percent of bank deposits foreign currency denominated.
- Monetary operations recommendations:
  - discontinue large-scale liquidity support to banks and lending to the economy in support of government programs;
  - eliminate interest rate caps (staff advocated elimination; NBRB concurred as a medium-term goal);
  - allow banks to better benefit from reserve requirements averaging;
  - shorten maturity of NBRB securities used in liquidity withdrawal operations to coincide with reliable liquidity forecast horizons.
- Coordination and operational independence:
  - enhance NBRB operational independence and strengthen cooperation with the Ministry of Finance;
  - replace outstanding NBRB loans to the government with marketable securities usable in open market operations;
  - move government deposits into the NBRB from banks gradually to facilitate NBRB liquidity management.

### Financial sector soundness
- Supervisory and regulatory improvements:
  - transparency of bank capital, corporate governance, and risk management strengthened;
  - increased use of external audits;
  - golden share rule eliminated for banks to encourage entry of strategic foreign investors;
  - progress toward a new banking code, laws on credit bureaus, deposit insurance and mortgages.
- Vulnerabilities amid rapid credit growth:
  - low NPL levels may not adequately reflect borrowers’ repayment capacity (NPLs exclude loans under central government guarantee);
  - loans written off in 2005 were about 0.35 percent of GDP, reducing NPLs and suggesting need to improve risk assessment procedures;
  - high capital adequacy ratios reflect recurrent recapitalizations and may not be a forward-looking safety measure.
  - stress tests showed improved resilience since 2004 but underscored need for considerable capital injections in case of a severe shock when two large banks were excluded.
- Recommended lending concerns:
  - recommended—effectively directed—lending for housing, agriculture, and other purposes increased banks’ vulnerabilities by:
    - bypassing appropriate risk management procedures;
    - necessitating large recurrent bank recapitalizations;
    - building up potentially large contingent liabilities;
    - generating maturity mismatches as affected banks funded themselves at short maturities, increasing systemic liquidity risk;
    - distorting financial resource allocation;
    - precommitting the budget to bear an interest cost during the loans’ long life span.
  - staff emphasized recommended lending should be phased out as rapidly as feasible; NBRB agreed it could be a medium-term objective.
- Supervision priorities:
  - ensure future liabilities from remaining directed lending are fully reflected in prudential indicators;
  - vigilantly enforce all prudential requirements to lower the risk that rapid credit growth increases NPL levels;
  - ensure transparency and competition in privatization and attract strategic foreign investors to the banking system.

### Trade regime
- Trade protection features:
  - weighted average tariffs on imports from outside Russia are a moderate 11 percent, but the regime retains numerous ad-hoc administrative restrictions:
    - importers must receive special government permits to import consumer goods considered products of comparative advantage for Belarus;
    - mandatory shares of domestically produced goods are prescribed for retail outlets;
    - state procurement favors local firms.
- Staff view:
  - these measures supporting inefficient domestic production hampered growth by reducing competition, raising domestic prices, and increasing the cost of producing export goods where imported inputs were affected.

### Staff appraisal — outlook and policy priorities
- Recent performance:
  - several years of high growth and falling inflation driven by rising labor productivity, increasing capacity utilization, unfettered access to Russia’s expanding market, and redistribution of escalating terms-of-trade gains.
- Risks and structural vulnerability:
  - once the energy windfall ceases to rise, the Belarusian development model will come under strain;
  - continued centralized support will rapidly raise inflationary pressures given the vanishing output gap;
  - without policy adjustment and structural reforms—liberalizing prices and wages, and curbing the state’s role—growth will revert toward lower potential;
  - significantly higher prices of energy imported from Russia impart considerable downside risks via compression of terms-of-trade gains, worsening the external current account and forcing significant cuts in fiscal subsidies and redistribution.
- Policy recommendations summarized:
  - Fiscal: tighten starting in 2006; constrain expenditures—especially recurrent ones—in 2006 and further reduce them as a share of GDP in 2007 and beyond; focus spending cuts on subsidies (including to banks), net lending, and transfers to loss-making enterprises; eliminate remaining earmarking.
  - Institutional fiscal reforms: move central government deposits gradually to the NBRB; convert outstanding NBRB loans to the government into marketable securities; develop pension reforms expeditiously to address demographic changes.
  - Monetary: refocus NBRB on inflation control; accept more exchange rate flexibility if inconsistent with inflation target; strengthen operational independence; prune quantitative targets; discontinue direct lending to the economy; eliminate interest rate caps.
  - Financial sector: continue strengthening supervision and banking system soundness; ensure liabilities from directed lending are reflected in prudential indicators; enforce prudential requirements to manage risks from rapid credit growth; ensure transparency and competition in privatization.

*Source: IMF staff report excerpt provided in the content unit.*

### 40.      The case for implementing bolder structural reforms while the economy is still

### 40.      The case for implementing bolder structural reforms while the economy is still

### Case for implementing bolder structural reforms
- Implementing bolder structural reforms while the economy is in a period of strength is compelling, reinforced by substantial downside risks to the outlook.
- Policy room built up would help address:
  - the diminishing gains from energy trade—notably its impact on fiscal revenues,
  - and support the necessary reduction in fiscal subsidies and transfers.
- Implementing productivity-enhancing structural reforms during rapid growth would make covering their up-front costs easier.
- An improved investment climate would help attract FDI, facilitating:
  - faster export growth through technology inflows,
  - and enhanced access to foreign markets.

### Consequences of piecemeal reforms
- Implementing only moderate changes and retaining state domination of the economy would create increasing macroeconomic and social costs as:
  - the external environment worsens,
  - and traditional sources of growth fade.
- While the costs could in principle be financed for some time given the current low external debt, this approach would necessitate larger adjustment down the road.

### Key reform tasks and policy recommendations
- Reduce state intervention and improve the business environment.
- Specific recommendations:
  - Eliminate directed lending as soon as feasible (cumulative long-term costs remain partially unaddressed by recurrent bank recapitalizations).
  - If subsidies to specific sectors are deemed necessary, channel them directly from the budget.
  - Discontinue pervasive controls on price formation.
  - Abolish cross-subsidization via state-owned enterprises.
  - Drastically curtail the golden share rule.
  - Cease mandatory wage increases.

### Data quality and statistical issues
- Quality and timeliness of statistical data are broadly adequate for surveillance, although macroeconomic analysis is encumbered in some areas.
- Belarus subscribes to the Special Data Dissemination Standard, publishing extensive statistics.
- However, administrative controls in the economy may affect the meaning of statistical data and hence hamper staff’s macroeconomic analysis in key areas.
- Specific statistical limitations:
  - The weights in the CPI basket remain inaccessible.
  - The statistical discrepancy in national accounts data is relatively large.
  - Note from table: "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."

### Institutional follow-up
- The next Article IV consultation is proposed to be conducted under the standard 12-month cycle.

### Key statistics and fiscal/monetary indicators (selected, as reported)
- GDP (nominal in billions of rubels): 36,565 (2003); 49,992 (2004); 63,679 (2005); 73,650 (2006 Preliminary Official); 73,650 (2006 Staff); 83,968 (2007 Staff)
- Gross domestic product (in billions of U.S. dollars): 17.8 (2003); 23.1 (2004); 29.6 (2005); 34.3 (2006 Preliminary Official); 34.2 (2006 Staff); 38.9 (2007 Staff)
- Real GDP (annual change): 7.0 (2003); 11.4 (2004); 9.3 (2005); 7-8 (2006 Preliminary Official); 7.0 (2006 Staff); 4.5 (2007 Staff)
- Consumer prices, eop (y-o-y): 25.4 (2003); 14.4 (2004); 8.0 (2005); 7.0 (2006 Preliminary Official); -9.0 (2006 Staff); 9.0 (2007 Staff)
- General government finances (percent of GDP, general government):
  - Revenue: 44.5 (2003); 45.9 (2004); 46.0 (2005); 48.4 (2006 Preliminary Official); 48.3 (2006 Staff); 47.1 (2007 Staff)
  - Expenditure (cash): 46.6 (2003); 47.7 (2004); 46.0 (2005); 49.1 (2006 Preliminary Official); 47.6 (2006 Staff); 48.3 (2007 Staff)
  - Balance (cash): -2.1 (2003); -1.7 (2004); 0.0 (2005); -0.7 (2006 Preliminary Official); -1.5 (2006 Staff); -0.1 (2006 Staff repeated); -1.2 (2007 Staff)
- Exports of goods: 10,073 (2003); 13,942 (2004); 16,095 (2005); 16,941 (2006 Preliminary Official); 17,854 (2006 Staff); 19,066 (2007 Staff)
- Imports of goods: -11,329 (2003); -16,126 (2004); -16,623 (2005); -17,073 (2006 Preliminary Official); -18,882 (2006 Staff); -20,781 (2007 Staff)
- Current account balance: -424 (2003); -1,206 (2004); 469 (2005); ... (2006 Preliminary Official); 57 (2006 Staff); -440 (2007 Staff)
- Gross official reserves: 499 (2003); 770 (2004); 1,297 (2005); 1,275 (2006 Preliminary Official); 169 (2006 Staff); 118 (2007 Staff); 57 (2007 Staff alternative)
- In months of future imports of goods and services: 0.3 (2003); 0.5 (2004); 0.8 (2005); ... (2006 Preliminary Official); 0.9 (2006 Staff); 0.9 (2007 Staff)
- Medium- and long-term external debt (as percent of GDP): 8.1 (2003); 4.8 (2004); 4.2 (2005); ... (2006 Preliminary Official); 4.8 (2006 Staff); 4.8 (2007 Staff)
- Short-term external debt (as percent of GDP): 15.6 (2003); 16.7 (2004); 13.8 (2005); ... (2006 Preliminary Official); 11.2 (2006 Staff); 10.8 (2007 Staff)

*Source: IMF staff report excerpt (text and tables provided).*

### 5. Financing (cash) 3/

### _cr06314 - 5. Financing (cash) 3/

### Financing (cash) — key components and memorandum items
- Privatization: 1.6 0.1 0.1 0.1 0.0 0.1 0.2
- Foreign financing, net: 0.1 -0.1 0.5 0.3 1.0 0.5 0.4
- Domestic financing, net: 0.5 1.5 -0.8 -0.1 0.5 -0.5 0.6
- Banking system: 0.0 1.2 -1.4 0.1 ... -0.6 0.6
- Central bank (incl. IMF): -1.0 0.7 -0.6 0.2 ... 0.4 0.4
- Deposit money banks (incl. SPF): 1.0 0.5 -0.8 -0.1 ... -1.0 0.1
- Nonbank: 0.5 0.2 0.7 -0.2 ... 0.1 0.0

Memorandum items:
- Change in expenditure arrears: 0.1 -0.3 0.0 0.0 -0.1 0.0 0.0
- Stock of expenditure arrears: 1.3 0.6 0.4 0.3 0.2 0.2 0.0
- Government debt/GDP: 11.6 10.4 8.9 8.4 ... 7.3 7.1
  - o/w: external debt/GDP: 5.7 4.3 3.2 2.6 ... 2.8 2.6
- GDP (trillions of rubels): 26.1 36.6 50.0 63.7 73.7 73.8 84.2

Notes:
- Source: Ministry of Finance, SPF, and Fund staff estimates.
- Footnotes indicate: 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, 2003–11 — levels and projections (In millions of U.S. dollars)
Current account and trade:
- Current account balance (2003–2011): -424 -1,206 469 57 -440 -921 -1,568 -2,422 -3,717
- Merchandise trade balance (2003–2011): -1,256 -2,184 -527 -1,028 -1,715 -2,357 -3,044 -3,877 -5,072
- Exports (2003–2011): 10,073 13,942 16,095 17,854 19,066 19,768 20,636 21,581 22,579
- Imports (2003–2011): -11,329 -16,126 -16,623 -18,882 -20,781 -22,126 -23,680 -25,458 -27,651

Other current account components:
- Services (net): 585 712 824 884 1,040 1,142 1,234 1,309 1,413
- Income (net): 25 -19 16 40 65 11 46 -68 -292
- Transfers (net): 222 285 157 161 170 183 195 214 234

Capital and financial accounts:
- Capital and financial accounts: 484 1,371 242 337 606 1,041 1,707 2,582 3,915
- Capital account: 69 58 41 616 2 626 160 60 0
- Financial account: 415 1,313 200 276 544 980 1,646 2,522 3,855
  - Direct investment (net): 170 163 303 272 225 221 217 213 209
  - Portfolio investment (net): 663 -42 -42 -42 -42 -42 -41 -40 0
  - Trade credits (net): 183 577 -353 -124 171 286 359 391 482
  - Loans (net): 903 793 673 433 796 491 1,245 2,090 3,333
  - Other (net): -351 32 -75 -175 -189 -134 -135 -133 -130

Balances and financing:
- Errors and omissions: -142 77 -139 0 0 0 0 0 0
- Overall balance: 464 425 713 941 661 201 391 611 98
- Financing: -46 -442 -571 -394 -166 -120 -139 -161 -198
- Gross official reserves change (same as Financing line): 14 -2 56 -539 -394 -166 -120 -139 -161 -198
- Use of Fund resources: -32 -17 -9 0 0 0 0 0 0
- Exceptional financing: -28 -169 -23 0 0 0 0 0 0
  - o/w: Central Bank of Russia: 12 -167 -53 0 0 0 0 0 0

Key ratios and memorandum items:
- Current account (as percent of GDP): -2.4 -5.2 1.6 0.2 -1.1 -2.1 -3.2 -4.5 -6.3
- Trade balance (as percent of GDP): -7.1 -9.4 -1.8 -3.0 -4.4 -5.4 -6.2 -7.2 -8.7
- Overall balance (as percent of GDP): 0.3 1.9 1.9 1.2 0.4 0.3 0.3 0.3 0.3
- Y-o-y growth in exports of goods (in percent): 26.5 38.4 15.4 10.9 6.8 3.7 4.4 4.6 4.6
- Y-o-y growth in imports of goods (in percent): 27.6 42.3 3.1 13.6 10.1 6.5 7.0 7.5 8.6
- Gross official reserves (2003–2011, levels): 499 770 1,297 1,691 1,857 1,977 2,116 2,277 2,475
  - In months of future imports of goods and services: 0.3 0.5 0.8 0.9 0.9 0.9 0.9 0.9 ...
- Medium and long-term debt (as percent of GDP): 8.1 4.8 4.2 4.8 4.8 5.5 7.3 10.3 15.0
- Short-term debt (exc. portfolio) (as percent of GDP): 15.6 16.7 13.8 11.2 10.8 10.9 11.1 11.4 11.8
- Debt service ratio (as percent of exports of goods and services, incl. arrears): 5.3 3.8 3.4 3.1 3.4 3.8 5.1 7.2 7.4
- Public and publicly-guaranteed debt service ratio (as percent of exports of goods and services): 2.2 2.3 0.8 0.2 0.2 0.2 0.2 0.2 0.2
- External arrears (levels): 448 288 326 326 326 326 326 326 326
  - In percent of GDP: 2.5 1.2 1.1 1.0 0.8 0.7 0.7 0.6 0.6

Sources: Belarusian authorities; and Fund staff estimates.

### Public Sector Debt Sustainability Framework (Table 6) — baseline and projections (2001–2011)
Baseline public sector debt indicators:
- Public sector debt (percent of GDP, 2001–2011): 13.2 11.6 10.4 8.9 8.4 7.4 7.7 8.5 9.9 12.0 14.6
  - o/w foreign-currency denominated: 6.3 5.7 4.3 3.2 2.6 2.3 2.4 2.7 3.1 3.8 4.6
- Change in public sector debt: -1.8 -1.7 -1.2 -1.5 -0.5 -1.1 0.3 0.8 1.4 2.1 2.5

Identified debt-creating flows (4+7+12):
- Identified debt-creating flows (2001–2011): 0.8 0.2 -1.5 -2.6 -1.7 -1.0 0.5 0.9 1.5 2.1 2.6
- Primary deficit (2001–2011): 2.4 1.4 0.6 -0.5 -0.2 -0.3 0.8 1.2 1.8 2.5 2.9
- Revenue and grants (percent of GDP): 44.9 44.6 45.8 45.7 48.4 48.3 47.1 46.6 46.1 45.6 45.1
- Primary (noninterest) expenditure (percent of GDP): 47.3 45.9 46.4 45.1 48.2 48.0 47.9 47.8 47.9 48.0 48.0

Automatic debt dynamics and contributions:
- Automatic debt dynamics: -1.6 -2.8 -2.2 -2.1 -1.6 -0.8 -0.5 -0.4 -0.4 -0.4 -0.4
- Contribution from interest rate/growth differential: -6.3 -4.0 -2.8 -2.3 -1.6 -0.8 -0.5 -0.4 -0.4 -0.4 -0.4
  - Of which contribution from real interest rate: -5.9 -3.6 -2.2 -1.4 -0.9 -0.3 -0.2 -0.1 -0.1 -0.1 0.0
  - Of which contribution from real GDP growth: -0.4 -0.4 -0.6 -0.9 -0.7 -0.5 -0.3 -0.3 -0.3 -0.3 -0.3
- Contribution from exchange rate depreciation: 4.7 1.2 0.6 0.2 0.0 ... ... ... ... ... ...

Other identified debt-creating flows:
- Other identified debt-creating flows (2001–2011): 0.1 1.6 0.1 0.1 0.1 0.1 0.2 0.1 0.0 0.0 0.0
  - Privatization receipts (negative): 0.1 1.6 0.1 0.1 0.1 0.1 0.2 0.1 0.0 0.0 0.0
  - Recognition of implicit or contingent liabilities: 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
  - Other (e.g., bank recapitalization): 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Residual (including asset changes):
- Residual (2-3): -2.6 -1.9 0.3 1.1 1.2 -0.1 -0.2 -0.1 0.0 0.0 0.0

Debt ratios and financing need:
- Public sector debt-to-revenue ratio: 29.5 26.0 22.7 19.6 17.4 15.2 16.3 18.2 21.6 26.4 32.3
- Gross financing need (percent of GDP): 4.5 3.1 2.2 0.9 1.0 0.8 2.0 2.5 3.3 4.2 5.0
  - in billions of U.S. dollars: 0.6 0.4 0.4 0.2 0.3 0.3 0.8 1.1 1.6 2.3 2.9

Scenario results:
- Scenario with key variables at their historical averages 7/: 7.4 5.1 3.5 2.5 1.9 1.4 -0.5
- Scenario with no policy change (constant primary balance) in 2005-10: 7.4 6.6 6.0 5.4 5.0 4.5 -0.1

Key macro-fiscal assumptions underlying baseline:
- Real GDP growth (in percent): 4.7 5.0 7.0 11.4 9.3 7.2 4.5 3.8 3.6 3.4 3.0
- Average nominal interest rate on public debt (in percent): 9.1 6.3 6.1 6.4 5.1 4.9 6.2 7.1 6.7 6.0 5.3
- Average real interest rate (nominal rate minus change in GDP deflator, in percent): -70.5 -38.7 -24.5 -16.3 -11.4 -3.2 -2.9 -1.3 -0.8 -0.5 -0.2
- Nominal appreciation (increase in US dollar value of local currency, in percent): -48.2 -22.5 -13.1 -5.1 0.4 ... ... ... ... ... ...
- Inflation rate (GDP deflator, in percent): 79.6 45.0 30.7 22.7 16.6 8.1 9.1 8.5 7.5 6.5 5.5
- Growth of real primary spending (deflated by GDP deflator, in percent): 8.2 1.9 8.2 8.4 16.7 6.8 4.2 3.6 3.8 3.8 2.9

Notes on methodology:
- Footnotes provide formulas for automatic debt dynamics (2/), contributions (3/,4/), definition of gross financing need (6/), scenario assumptions (7/,9/), and derivation of average nominal interest rate (8/).

### External Debt Sustainability Framework (Table 7) — baseline and stress tests (2001–2011)
Baseline external debt indicators:
- External debt (percent of GDP): 19.5 26.8 23.6 21.4 17.9 16.0 15.6 16.4 18.4 21.7 26.9
- Debt-stabilizing non-interest current account: -1.1
- Change in external debt: 2.9 7.2 -3.2 -2.1 -3.5 -2.0 -0.3 0.8 2.0 3.3 5.1
- Identified external debt-creating flows (4+8+9): 2.9 -1.7 -3.2 -8.1 -6.8 -3.1 -1.2 0.0 1.2 2.5 4.3

Components:
- Current account deficit, excluding interest payments: 2.7 1.7 2.0 -2.4 -1.9 -0.4 0.6 1.7 2.7 3.8 5.3
- Deficit in balance of goods and services: 4.1 3.3 3.8 6.5 -1.0 0.4 1.7 2.8 3.7 4.8 6.2
- Exports (percent of GDP): 68.2 63.5 64.9 67.8 61.4 58.8 55.4 51.2 48.2 45.9 44.4
- Imports (percent of GDP): 72.3 66.8 68.7 74.3 60.4 59.2 57.1 54.0 51.9 50.6 50.7
- Net non-debt creating capital inflows (negative): -0.7 -0.9 -0.8 -0.6 -0.5 -0.4 -0.4 -0.4 -0.3 -0.3 -0.3

Automatic debt dynamics and contributions:
- Automatic debt dynamics 1/: 1.0 -2.6 -4.3 -5.1 -4.3 -2.2 -1.5 -1.4 -1.2 -1.0 -0.7 -0.9
  - Contribution from nominal interest rate: 0.5 0.4 0.4 0.4 0.3 0.3 0.5 0.4 0.5 0.7 1.0 1.3
  - Contribution from real GDP growth: -0.8 -0.8 -1.5 -2.1 -1.6 -1.1 -0.6 -0.5 -0.5 -0.6 -0.6 -0.7
  - Contribution from price and exchange rate changes 2/: 1.3 -2.1 -3.2 -3.3 -3.1 -1.3 -1.3 -1.2 -1.1 -1.1 -1.1 -1.4
- Residual, incl. change in gross foreign assets (2-3): 0.0 8.9 0.0 6.0 3.2 1.1 0.9 0.8 0.8 0.8 0.8 0.0

Ratios and financing need:
- External debt-to-exports ratio (in percent): 28.6 42.1 36.3 31.6 29.2 27.2 28.2 32.1 38.3 47.4 60.5
- Gross external financing need (in billions of US dollars): 1.8 1.9 3.4 2.8 3.9 4.6 4.8 5.8 7.3 9.3 11.2
  - in percent of GDP: 14.8 13.1 19.1 12.1 13.3 ... 13.3 12.3 13.3 15.0 17.2 19.1

Key macroeconomic assumptions (selected):
- Real GDP growth (in percent): 4.7 5.0 7.0 11.4 9.3 6.9 3.1 7.2 4.5 3.8 3.6 3.4 3.0 3.0 3.7
- Exchange rate appreciation (US dollar value of local currency, change in percent): -48.2 -22.5 -13.1 -5.0 0.3 -34.1 27.4 0.0 -0.1 0.0 0.0 0.0 0.0 0.0 0.0
- GDP deflator in US dollars (change in percent): -7.0 12.4 13.6 16.5 16.9 5.0 16.8 8.1 8.9 8.5 7.5 6.5 5.5 5.5 7.4
- Nominal external interest rate (in percent): 3.0 2.3 1.9 2.0 1.9 2.8 1.0 1.6 3.4 2.5 3.2 4.1 5.2 5.2 3.7
- Growth of exports (US dollar terms, in percent): 10.9 9.8 24.4 35.4 15.8 14.1 14.6 11.0 7.3 4.2 4.7 4.9 5.2 5.3
- Growth of imports (US dollar terms, in percent): 11.1 9.0 25.1 40.3 4.0 13.2 17.1 13.6 9.9 6.5 7.0 7.5 8.7 7.9

Stress test scenarios (selected outcomes for debt-stabilizing non-interest current account):
- A1. Key variables at historical averages in 2006-10: 16.0 16.2 16.4 16.6 16.7 16.8 -2.7
- B1. Nominal interest rate = baseline + 1/2 s.d.: 16.0 15.7 16.6 18.6 22.0 27.2 -1.0
- B2. Real GDP growth = baseline - 1/2 s.d.: 16.0 15.8 16.9 19.1 22.7 28.2 -0.8
- B3. Non-interest current account = baseline - 1/2 s.d.: 16.0 17.0 19.0 22.2 26.6 33.0 -1.3
- B4. Combination of B1-B3 using 1/4 s.d. shocks: 16.0 16.4 18.0 20.8 24.8 30.8 -1.0
- B5. One time 30 percent real depreciation in 2006: 16.0 25.2 25.4 27.1 30.2 35.4 -1.6

Notes:
- Footnotes detail formulae for contributions and definitions of measures (1/ through 6/).

### Banking Sector Indicators (Table 8), 2001–06 — asset quality, capital, liquidity, profitability, market risk
I. Asset quality:
- NPLs (in percent of total loans): 14.9 9.0 3.7 2.8 1.9 1.8
- NPLs net of provision (in percent of regulatory capital): 32.9 31.2 13.1 13.1 11.4 6.3 8.3
- Fx-denominated loans (in percent of total loans): 50.7 52.7 50.4 43.8 37.0 36.6
- Non performing fx-denominated loans (in percent of NPLs): 69.3 49.2 47.0 46.5 35.2 33.3
- Fx-denominated loans to borrowers without access to fx (in percent of total loans) 2/: 2.3 3.5 6.3 8.5 7.7 7.4
- Loans classified as doubtful and loss (in percent of total NPLs): 63.6 51.8 47.2 50.7 45.9 36.9
- Required provisions (in percent of NPLs): 67.9 55.5 58.0 56.6 57.2 51.4
- Actual provisions (in percent of NPLs): 37.7 15.8 29.9 32.4 48.4 41.4
- Actual provisions to required provisions: 55.5 28.5 51.6 57.2 84.6 80.5

II. Capital adequacy:
- Regulatory capital (in percent of risk-weighted assets): 20.7 24.2 26.0 25.2 26.7 27.1
  - Regulatory Tier I (in percent of risk-weighted assets): n.a. 19.2 21.7 21.0 18.7 19.1
- Total capital (in percent of total assets): 15.1 18.7 20.4 20.1 19.8 20.5

III. Liquidity:
- Liquid assets to total assets 3/: 13.9 16.0 28.7 27.7 30.4 24.5
  - Liquid assets to short-term liabilities 4/: n.a. 67.2 60.9 63.0 95.9 85.5
  - Long-term assets to long-term liabilities 5/: 1.5 2.4 3.9 4.1 3.8 3.9
  - Loans to deposits: 114.1 112.7 111.7 123.2 119.9 124.5
  - Foreign exchange loans to foreign exchange deposits: 87.8 96.7 103.3 116.0 116.7 118.1
  - Foreign exchange deposits to total deposits: 65.9 60.5 54.5 46.5 38.0 38.6
  - Foreign exchange liabilities to total liabilities: 47.6 44.6 42.1 42.8 37.1 35.4
  - NBB credit to banks (in percent of liabilities): 3.8 3.7 3.2 3.5 3.6 3.8
- Average maturity of deposits (in months): 4.9 3.6 3.6 4.2 5.3 5.2
- Average maturity of assets (in months): 6.0 7.3 8.2 8.4 8.7 9.5

IV. Profitability:
- Return on assets (after tax: in percent, end-of-period): 0.8 1.0 1.5 1.5 1.3 0.3
- Return on equity (after tax: in percent, end-of-period): 4.9 6.5 8.4 7.8 6.8 1.3
- Adjusted ROA (with required loan provisioning): -1.1 -0.3 2.3 0.5 1.0 0.0
- Adjusted ROE (with required loan provisioning): -7.1 -1.4 9.5 2.8 5.4 0.0
- Noninterest income to gross income: 46.5 46.3 35.4 40.8 n.a. 43.1
- Noninterest expenses to gross income: 66.3 67.7 61.5 64.3 n.a. 63.8
- Administrative expenses to noninterest expenses: 18.0 19.5 30.7 19.2 n.a. 33.7
- Net interest margin (in percent of total assets): 5.3 5.6 4.8 3.9 n.a. 0.6
- Interest rate spreads (percentage points, end-of-period):
  - Loans/deposits in local currency: 13.1 10.1 6.5 4.0 2.2 1.7
  - Loans/deposits in foreign currency: 7.9 8.2 6.9 5.5 5.1 5.2
  - Loans in local currency/deposits in foreign currency: 39.6 30.5 18.3 11.7 5.8 3.8
  - Loans in foreign currency/deposits in local currency: -18.6 -12.2 -4.9 -2.2 1.5 3.1

V. Market risk:
- Net open positions in foreign currency (in percent of regulatory capital): n.a. -7.2 -3.6 -5.2 -14.5 -4.6
- Share of private securities in total assets: 0.6 1.1 0.8 0.7 0.5 0.4

Memorandum items:
- Number of banks: 25.0 28.0 31.0 32.0 30.0 30.0
  - Private: 20.0 24.0 27.0 27.0 25.0 25.0
  - Domestic: 11.0 12.0 10.0 8.0 7.0 7.0
  - Foreign: 9.0 12.0 17.0 19.0 18.0 18.0
  - Public: 5.0 4.0 4.0 5.0 5.0 5.0
- Concentration:
  - Assets in private banks (percent of total assets): 46.8 38.1 38.4 29.8 24.8 24.7
  - Assets in public banks (percent of total assets): 53.2 61.9 61.6 70.2 75.2 75.3
  - Assets in largest 6 banks (percent of total assets) 6/: 86.1 85.0 85.3 86.1 87.5 87.4
  - Share of loans to state-owned enterprises in total loans 7/: 42.2 45.3 35.7 31.7 26.3 26.7

Notes:
- 1/ As of 01.03.2006.
- 2/ Sectors with no access to fx are: households, agriculture, and constructions.
- 3/ Definition of liquid assets broadened from 1/1/2004 to include assets with remaining maturity < 1 month.
- 4/ Assets and liabilities with remaining maturity < 1 month.
- 5/ Assets and liabilities with remaining maturity > 1 year.
- 6/ These are all public banks.
- 7/ State-owned enterprises are defined as enterprises with 100 percent state ownership.

### IMF Relations and Technical Assistance (Appendix I)
Membership and quota:
- Status: Joined July 10, 1992; Article VIII
- Quota: 386.40 (SDR million) — 100.00 percent
- Fund holdings of currency: 386.40 — 100.00 percent
- Reserve position in Fund: 0.02 — 0.01 percent

Outstanding arrangements and purchases:
- Outstanding Purchases and Loans: None
- Stand-by: Approval Date 09/12/1995; Expiration Date 09/11/1996; Amount Approved (SDR million): 196.28; Amount Drawn (SDR million): 50.00

Safeguards assessment:
- No arrangement in place; NBB requested voluntary 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 to address some issues.

Exchange arrangements (selected details):
- As of August 20, 1994, the rubel (Br) became unit of account; conversion rate 10 Belarusian rubles = 1 rubel. Three zeroes dropped as of January 1, 2000.
- Exchange rate for the U.S. dollar was Br 2149 on April 18, 2006.
- In mid-September 2000 the official exchange rate was unified with market-determined rate from daily auctions. Authorities adopted a crawling band vis-à-vis the Russian ruble in January 2001 with monthly devaluation rates revised quarterly and a band of currently 5 percentage points around central parity.
- On November 5, 2001, Belarus accepted obligations of Article VIII, Sections 2, 3, and 4 of the IMF’s Articles of Agreement. NBB suspended all ad hoc exemptions from the 30 percent surrender requirement in the same month.

Article IV consultations and FSAP/ROSC:
- Belarus is on a 12-month consultation cycle. The 12th Article IV consultation was concluded on June 17, 2005.
- Recent staff visits included: Staff visit September 13–21, 2005; 2006 Article IV consultation mission May 17–30, 2006.
- Fiscal ROSC and data ROSC references and FSAP missions in 2004; FSSA report and detailed FSAPs disseminated in May 2006 for Basel Core Principles, Transparency of Monetary Policy and Banking Supervision, and Technical Note - Deposit Insurance.

Technical assistance (2000–05) — mission highlights (department, subject, timing):
- MFD Banking Supervision: February 6–10, 2006
- MFD Monetary Policy Transmission Mechanism: December 12–16, 2005
- MFD International Accounting Standards: October 24–28, 2005
- STA Monetary and Financial Statistics: October 19–November 1, 2005
- MFD Improving Monetary Policy: June 20–July 10, 2005
- FAD Government Finance Statistics: April 28, May 12, 2005
- MFD Banking Supervision Issues: April 11–20, 2005
- MFD Monetary Policy and Monetary Operations: February 26–March 10, 2005
- FAD/MFD Improving debt management: October 6–20, 2004
- FAD Budget code and public expenditure management: March 1–12, 2004
- FAD Tax policy: March 19–April 1, 2003
- Additional missions and resident advisor engagements listed for 2000–2004 covering treasury development, FSAP, AML/CFT legislative issues, safeguards assessment, national accounts, balance of payments, money and banking statistics, and multisector statistics.

*Source: _cr06314 - 5. Financing (cash) 3/ — Ministry of Finance, SPF, National Bank of the Republic of Belarus, and IMF Fund staff estimates.*

### 1. According to the recent Country Assistance Strategy for Belarus the World Bank

### _cr06314 - 1. According to the recent Country Assistance Strategy for Belarus the World Bank

### IMF-World Bank collaboration in specific areas
- The Bank and Fund teams work closely in Belarus and maintain an extremely good relationship.
- The IMF plays a key role at the macro level, while the World Bank focuses on the structural agenda, social and environmental issues.
- Joint activities on key fiscal and structural issues include:
  - Public Expenditure Review (PER)
  - Financial Sector Assessment Program (FSAP)
  - Country Economic Memorandum (CEM)

### Areas in which the World Bank leads

#### Social sphere
- World Bank technical engagement generated significant analysis relevant to poverty and living conditions.
- IDF grant: 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).
  - The Grant was implemented successfully during 2000-2003 and completed in June 2003.
- 2004 study: “Poverty Assessment. Can Poverty Reduction and Access to Services Be Sustained?” — offered improvements to methodology for measuring poverty and living conditions and provided in-depth analysis of multiple dimensions of poverty.
- Pension reform:
  - Driven by demographic and socio-economic factors, Belarus faces a need for deep pension system reform.
  - World Bank team conducted a Pension Policy Dialogue with the Government during FY 2004.

#### Energy sector
- Social Infrastructure Retrofitting Project (US$22.6 million):
  - Aims to assist in rehabilitation of heating system, thermal insulation, and lighting in over 450 public buildings.
  - Targets schools, hospitals, orphanages, and community homes for the elderly and the disabled.
  - Includes measures to increase energy efficiency.
- Energy Sector Management Assistance Program (ESMAP) grant (US$50.0 thousand, completed in 2005):
  - Helped the Committee on Energy Efficiency explore market mechanisms via Energy Servicing Companies (ESCOs) and learn from neighboring countries’ experience with multi-fold energy price increases.
- Private-Public Infrastructure Advisory Facility project (US$350.0 thousand, approved in 2005):
  - Will help advance transition to market principles and encourage private sector involvement in the Belarus energy sector by providing regulatory, institutional and other support to create an environment conducive to private investment.
  - Government has considered reform scenarios drawing on neighboring countries’ experience and is seeking technical assistance for evaluation and implementation.

#### Environment
- Post-Chernobyl Recovery Project (approved on April 18, 2006):
  - Designed to revitalize selected regions affected by the Chernobyl accident by improving local living conditions, reinforcing energy efficiency and environmental safeguards.
  - Based on recommendations of the Chernobyl Review (2002) and intended to spearhead greater international support to affected regions.
- PHRD Climate Change Pilot Project (US$1.0 million, approved in 2003):
  - Aimed at demonstrating greenhouse gas (GHG) emission abatement opportunities through energy efficiency and renewable energy in heat and hot water supply to social sector buildings.
  - Aims to assist government with development and implementation of emission standards for biomass-fired boilers to remove institutional barriers to biomass fuel adoption.
- GEF POPs Enabling Activity Project (US$499,300):
  - Following dialogue and preparation with UNEP, Belarus ratified the Stockholm Convention on Persistent Organic Pollutants (POPs) and selected the World Bank as GEF Implementing Agency.
  - Objective: develop a National Implementation Plan (NIP) for POPs to reduce and ultimately eliminate POPs stockpiles, consistent with protection of human health and the environment.
  - Preparation of a follow-up GEF investment project is under consideration.

### Areas of shared responsibility

#### Economic development
- Bank cooperated closely with IMF on preparation of the Country Economic Memorandum (CEM); one chapter, “Macroeconomic policies and risks,” was prepared jointly.
- Joint chapter reviews macroeconomic developments since 1996, sources and structure of growth, role of macroeconomic policies in growth performance, and risks associated with Belarus’s macroeconomic position.
- Special attention to addressing risks through adjustments in monetary policy, fiscal policy, and debt management.

#### Private sector development
- Most challenging reform agenda: structural reforms and private business development.
- Bank Group seeks to improve environment for private business via technical assistance, policy dialogue and ESW.
- Bank and IFC conducted studies including 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 encouraging private sector development; provides technical assistance to improve taxation, banking regulations and banking supervision.

#### Public expenditure management
- CAS emphasizes greater effectiveness, transparency, and accountability in use of public resources.
- In 2003 the 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 Ministry of Finance for Budget Code preparation.
- FY2005: Focus on intergovernmental fiscal relations—clarifying revenue and expenditure assignments and developing formula for intergovernmental fiscal transfers.
- FY2006: Assistance provided for preparation of budget programs’ description and documents required for introduction of performance-based budgeting (PBB).

#### Financial sector
- FSAP for Belarus (2005) centered on assessments of banking system, including deposit insurance, securities markets, insurance industry, payment system and transparency in conducting monetary policy.
- Review also covered regulations, oversight and governance arrangements.
- Bank and IMF jointly provide assistance in prevention of money laundering and combating financing of terrorism.
- CIS Payments and Securities Settlement Initiative (CISPI):
  - World Bank-led mission visited Minsk in spring 2006 to review payment and securities settlement systems.
  - CISPI objective: describe and assess CIS countries’ payment systems to identify possible improvement measures in safety, efficiency and integrity.

#### Statistical capacity-building
- IMF and World Bank provide technical assistance in statistics to Ministry of Statistics and Analysis, National Bank and Ministry of Finance.
- Trust Fund for Statistical Capacity Building (TFSCB) grant (US$108.0 thousand, 2005):
  - Designed to assist GOB in design of National Strategy for the Development of Statistics (NSDS) to strengthen statistical capacity across national statistical system.

### Areas in which the IMF leads
- IMF actively engaged with authorities on macroeconomic program, providing technical assistance on economic and financial statistics, tax policy, monetary operations and fiscal transparency.
- IMF leads dialogue on objectives for monetary and exchange rate policies, public debt management, overall budget envelope and tax policy.
- IMF analysis provides input to Bank policy advice; Bank staff participate in IMF Article IV Consultation missions to ensure consistency of policy recommendations.

### The World Bank Group Strategy
- Belarus joined World Bank in July 1992.
- Under 1999 CAS, liberalization of the exchange rate was set as trigger for moving to low case lending (one project per year). Unification of the exchange rate in September 2000 allowed preparation of US$22.6 million Social Infrastructure Retrofitting Project, approved June 5, 2001.
- 2002-04 CAS: low case focused on government priorities and Bank mandate—global public goods and interventions with high social content; triggers specified for broader assistance if government advanced public expenditure reform and business environment.
- Country Assistance Review (2004) recommended completing key elements of latest CAS before new strategy initiation: completion of ESW (CEM and FSAP), continuation of environment initiatives, finalization of Chernobyl Project.
- Next CAS for Belarus to be prepared in the first half of FY07.
- Commitments to date: total of US$240.6 million committed, US$15.0 million provided as grants.
- IBRD Belarus active portfolio: one ongoing operation—Social Sector Energy Retrofitting Project totaling US$22.6 million.
- Post-Chernobyl Recovery Project (US$50.0 million) approved by Executive Board on April 18, 2006.
- Non-lending analytical work includes:
  - Belarus: Chernobyl Review (2002)
  - Belarus: Strengthening Public Resource Management (2003) — Public Expenditure and Institutional Review
  - Belarus Poverty Assessment: Preparing for the Future (2004) — Poverty Assessment Update
  - Belarus: Window of Opportunity to Enhance Competitiveness and Sustain Economic Growth (2005) — Country Economic Memorandum
  - Financial Sector Assessment Program (2005)
- IFC activities:
  - Advisory work since 1993 beginning with privatization of small businesses.
  - Current focus: small and medium enterprise development and improvement of business environment.
  - December 2004: Business Enabling Environment Project launched with SIDA—two-year technical assistance to reduce regulatory burden on SMEs and improve access to information and business support services.
  - Investment activities: total investment of US$71 million in four projects in financial and manufacturing sectors, including credit lines to Priorbank and Belgazprombank and loan and equity for Dednovo brewery refurbishment, modernization and expansion.
  - IFC continues to seek investment opportunities despite difficult investment environment.

### Appendix III. BELARUS: Statistical issues

#### General
- Quality and timeliness of statistical data are broadly adequate for surveillance, although macroeconomic analysis is encumbered in some areas.
- Ministry of Statistics and Analysis (Minstat) publishes large amounts of data with a predetermined publication schedule; provision of data over the last year generally adequate for regular analysis.
- IFS page published since November 1996 and updated regularly on a monthly basis.
- Statistics Law signed February 1997.
- Multisector statistical advisor sponsored by the Fund: August 1996 to August 2000.
- Data ROSC mission (early 2004) found statistical agencies face challenge of increasing users’ confidence in accuracy and reliability of official statistics.
- Authorities subscribed to IMF’s Special Data Dissemination Standard (SDDS) on December 22, 2004.

#### National Accounts
- National accounts compiled in accordance with System of National Accounts of 1993 (SNA 1993).
- GDP compiled by production, expenditure and income approaches; covers entire economic territory of Republic of Belarus.
- GDP data disseminated quarterly (in national currency) in current and constant market prices (2000=100) expressed as absolute values.
- Measurement issues:
  - GDP figures likely distorted by underreporting of newly emerging sectors (in particular services) and an active informal sector.
  - Systematic upward bias in measuring industrial output has led to significant inaccuracies in GDP estimates.
  - Problems in calculating holding gains from inventories, measuring capital stock and consumption of fixed capital.
  - Estimates of GDP by expenditure categories remain uncertain.
- Authorities prepared an alternative series on industrial output that corrects some problems; these data and requisite GDP revisions published from January 1, 2006.

#### Prices
- Consumer Price Index (CPI) and Producer Price Index (PPI) reported monthly to the Fund on a timely basis.
- Both indices developed with substantial Fund technical assistance.
- PPI: January 1995 adoption of Laspeyres formula recommended by Fund.
- Since January 2001, PPI compiled using 1999 weights; beginning with 2003 data, with 2001 production weights.
- Other recommended improvements (inclusion of exports, item specification, better selection of representative products and prices) have been adopted or are in process.

#### Government Finance Statistics
- Since 2004 data ROSC mission, MOF made progress in collection, compilation and dissemination of fiscal data:
  - Extended coverage of general government by including innovation funds.
  - Included Social Protection Fund’s operations in the budget.
  - Increased number of officials in GFS compilation work.
  - Established close coordination with NBRB for reconciliation of fiscal and monetary datasets.
  - Increased provision of detailed budgetary metadata and methodological descriptions on MOF website.
  - Prepared new budget classification codes for revenue, expenditure and financing data to align with GFSM 2001 analytical framework.
- GFS technical assistance mission (end of April 2005) found sound basis for migrating to GFSM 2001 but identified areas needing further work; collaborated with authorities to prepare a migration plan for gradual implementation.
- Authorities reported GFS for 2003 and 2004 under GFSM 2001 for publication in GFS Yearbook and started disseminating fiscal data according to IMF SDDS through MOF website.

#### Monetary Statistics
- NBRB balance sheet and monetary survey usually provided with lag no more than two weeks; bank monthly balance sheet available on or about the fifth of the month following reference period.
- Monetary data for publication in IFS reported with a lag of about six weeks.
- Interest rate data on bank deposits and credits, and data on NBRB credit auctions and placement of NBRB and government securities, provided with a one-month lag.
- Exchange rate data readily available on NBRB web site and periodically reported to the Fund in electronic file.
- Following October 2005 TA mission, NBRB compiled and submitted a pilot set of monetary data for December 2004 – November 2005 using new Standardized Report Forms (SRF).
  - STA review validated resulting monetary aggregates and authorities initiated regular reporting of current monetary data in SRF framework to EUR and STA.
  - Authorities and STA working on converting historic monetary database beginning from December 2001 into SRF format for inclusion in STA database and publication in forthcoming IFS Supplement.

*Source: _cr06314 - 1. According to the recent Country Assistance Strategy for Belarus the World Bank*

### 14.      The overall quality and timeliness of external sector data is satisfactory. The

### _cr06314 - 14.      The overall quality and timeliness of external sector data is satisfactory.

### External sector data quality and reporting practices
- The overall quality and timeliness of external sector data is satisfactory.
- The International Transactions Reporting System employed by the NBRB has been broadened to permit a more accurate classification of external transactions.
- Coverage and reporting forms for enterprise surveys were improved.
- The NBRB publishes quarterly balance of payments and international investment position statements in the BPM5 format on a timely basis.
- Scheduled interest and amortization payments on public sector debt are tracked by the MoF and reported to the Fund, and timely information is available on arrears on government and government-guaranteed debt.

### Dissemination of reserves and time series
- Belarus has started to disseminate historical data on the reserves template on the IMF's website: http://www.imf.org/external/np/sta/ir/colist.htm.
- Monthly time series start with November 2004 data.

### Key macroeconomic indicators and data-frequency notes (selected entries)
- Exchange Rates: Date of latest observation 7/12/06; Date received 7/12/06; 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 07/01/06; Date received 7/07/06; Frequency of Data W; Frequency of Reporting W; Frequency of Publication W.
- Reserve/Base Money: Date of latest observation 06/2006; Date received 7/14/06; Frequency of Data M; Frequency of Reporting M; Frequency of Publication M; Data Quality – Methodological soundness O, O, LO, LO; Data Quality – Accuracy and reliability O, O, O, O, O.
- Interest Rates: Date of latest observation 7/13/06; Date received 7/14/06; Frequency of Data D; Frequency of Reporting M; Frequency of Publication M.
- Consumer Price Index: Date of latest observation 6/2006; Date received 7/12/06; Frequency of Data M; Frequency of Reporting M; Frequency of Publication M; Data Quality – Methodological soundness O, LO, O, LO; Data Quality – Accuracy and reliability O, O, LO, LO, O.
- Revenue, Expenditure, Balance and Composition of Financing – General Government: Date of latest observation 3/2006; Date received 6/23/06; Frequency of Data M; Frequency of Reporting M; Frequency of Publication M; Data Quality – Methodological soundness LO, LNO, O, O; Data Quality – Accuracy and reliability O, O, O, O, NO.
- External Current Account Balance: Date of latest observation 3/2006; Date received 06/16/06; Frequency of Data Q; Frequency of Reporting Q; Frequency of Publication Q; Data Quality – Methodological soundness O, O, LO, LO; Data Quality – Accuracy and reliability LO, O, O, O, O.
- GDP/GNP: Date of latest observation 03/2006; Date received 6/21/06; Frequency of Data Q; Frequency of Reporting Q; Frequency of Publication Q; Data Quality – Methodological soundness O, O, LO, O; Data Quality – Accuracy and reliability LO, LNO, LO, O, LO.
- Gross External Debt: Date of latest observation 03/06; Date received 6/23/06; Frequency of Data Q; Frequency of Reporting Q; Frequency of Publication Q.

### Macroeconomic context and selected findings from the Article IV Public Information Notice (PIN No. 06/101, August 25, 2006)
- GDP growth averaged 8.2 percent in 2002–05.
- Current account: surplus of 1.6 percent of GDP in 2005.
- Twelve-month inflation declined to 6.9 percent in May 2006.
- The 2005 budget recorded a deficit of 0.7 percent of GDP.
- The 2005 deficit excluding oil-related revenues was around 6 percent of GDP.
- The 2006 budget recorded a largely seasonal 3.1 percent of GDP surplus through May against a budgeted full-year deficit of 1½ percent of GDP.
- Refinance rate reductions: reduced by 600 basis points in 2005 and by a further 50 in June 2006.
- Reserve requirement reductions: lowered twice in 2005 and 2006, by one percentage point each time.
- Budgetary recapitalizations for state banks: 1.1 percent of GDP.
- NBRB credit to the nonfinancial nongovernment sector reached ½ percent of GDP in April.

### Assessment notes and caveats
- Extensive state controls over the economy—notably on prices—complicate the assessment of economic developments and of the impact of policy actions.
- Macroeconomic data may not tell the whole story despite generally good statistical quality.

*Source: Excerpt from the provided IMF PDF content.*

### 2006. As a result, credit to the economy has continued growing, while the share of

### Republic of Belarus: 2006 Article IV Consultation — Executive Board Assessment and Authorities' Statement

### Macroeconomic performance and outlook
- Growth has been rapid since 2003; real GDP growth reported as:
  - 2002: 5.0 percent
  - 2003: 7.0 percent
  - 2004: 11.4 percent
  - 2005 (preliminary): 9.3 percent
- Inflation (CPI, average):
  - 2002: 42.6
  - 2003: 28.1
  - 2004: 18.1
  - 2005: 10.3
- Real average monthly wage (1996=100):
  - 2002: 231.9
  - 2003: 238.7
  - 2004: 279.0
  - 2005: 338.6
- Average monthly wage (in U.S. dollars):
  - 2002: 107.3
  - 2003: 123.3
  - 2004: 162.0
  - 2005: 217.4
- Executive Directors noted the recent strong macroeconomic performance reflected broadly the authorities’ pursuit of prudent fiscal and monetary policies, strong growth in partner countries, and contribution of price controls to declining inflation.
- Directors warned the outlook is less favorable than recent trends due to:
  - reliance on energy imports from Russia at markedly below-market prices;
  - large and increasing terms-of-trade gains that financed wage increases, budgetary support to enterprises, and large-scale investment projects;
  - declining market share in the CIS;
  - large and growing non-oil current account deficit;
  - low level of international reserves;
  - diminishing output gap.
- Staff projection for 2006 growth: 7 percent; authorities report real growth in 2005 was 9.2 percent (2.1 percent above staff projection) and first half of 2006 annualized growth in excess of 10 percent.

### External sector and reserves
- Selected balance of payments and external debt indicators:
  - Current account balance (US$ millions): 2002: -311; 2003: -424; 2004: -1,206; 2005: 469
  - Current account as percent of GDP: 2002: -2.1; 2003: -2.4; 2004: -5.2; 2005: 1.6
  - Gross international reserves (US$ millions): 2002: 477.8; 2003: 499.0; 2004: 770.2; 2005: 1,297
  - Reserves in months of future imports of goods and services: 2002: 0.6; 2003: 0.3; 2004: 0.5; 2005: 0.8
  - Medium- and long-term debt (as percent of GDP): 2002: 9.9; 2003: 8.1; 2004: 4.8; 2005: 4.2
  - Short-term debt (as percent of GDP): 2002: 17.0; 2003: 15.6; 2004: 16.7; 2005: 13.8
- Exchange rates (rubels per U.S. dollar):
  - Average: 2002: 1,784; 2003: 2,052; 2004: 2,160; 2005: 2,154
  - End-of-period: 2002: 1,920; 2003: 2,156; 2004: 2,170; 2005: 2,152

### Fiscal policy and public finances
- General government finances (percent of GDP, consolidates state government and Social Protection Fund budgets):
  - Revenue: 2002: 44.5; 2003: 45.9; 2004: 46.0; 2005: 48.4
  - Expenditure (cash): 2002: 46.6; 2003: 47.7; 2004: 46.0; 2005: 49.1
  - Expenditure (commitment): 2002: 46.7; 2003: 46.9; 2004: 45.6; 2005: 49.0
  - Balance (cash): 2002: -2.1; 2003: -1.7; 2004: 0.0; 2005: -0.7
  - Balance (commitment): 2002: -2.2; 2003: -1.0; 2004: 0.4; 2005: -0.6
- Authorities reported disciplined fiscal policy: budget deficit of 0.7 percent of GDP in 2005 and a budget surplus of 3.1 percent of GDP during the first 5 months of 2006.
- Integration of extra budget pension fund (2004) and innovation fund (2005) increased the overall budget by 12.6 percent of GDP.
- Directors recommended an up-front fiscal tightening starting in 2006 to cope with stabilization of terms of trade and to avoid inflationary pressures and loss of competitiveness.
- Suggested fiscal savings focus:
  - expenditure retrenchment;
  - phasing out subsidies and transfers to loss-making enterprises;
  - discontinuing bank recapitalizations associated with directed lending;
  - phasing out earmarking to reduce budget rigidities.
- Directors cautioned against using privatization proceeds or increased foreign borrowing to sustain an unaltered state-dominated economic structure.

### Monetary policy and exchange rate
- Monetary indicators:
  - Reserve money (annual change): 2002: 32.0; 2003: 69.7; 2004: 41.9; 2005: 73.7
  - Rubel broad money (annual change): 2002: 59.6; 2003: 71.0; 2004: 58.1; 2005: 59.6
  - Banking system net domestic credit (annual change): 2002: 53.7; 2003: 68.9; 2004: 39.1; 2005: 34.8
  - Refinance rate (percent per annum, end-of-period): 2002: 38.0; 2003: 28.0; 2004: 17.0; 2005: 11.0
- Directors recommended the NBRB clarify that controlling inflation is its primary objective and accept more exchange rate flexibility if inconsistent with inflation targets.
- Further policy interest rate cuts should be contingent on clear signs of lasting declines in inflationary pressures.
- To enhance credibility of the inflation objective, Directors recommended:
  - strengthening NBRB operational independence;
  - pruning the number of quantitative targets;
  - discontinuing NBRB direct lending to the economy;
  - eliminating interest rate caps.

### Financial sector, banking, and supervision
- Banks have improved provisioning, covering about 90 percent of the requirement as of May 2006.
- Non-performing loans:
  - fell from 14.4 percent at end-2001 to below 2 percent at end-2005 in Executive Board text; authorities report ratio of non-performing loans fell to 1.5 percent in May 2006.
- Directors urged:
  - rapid phasing out of directed bank lending;
  - bringing remaining state support to enterprises on-budget;
  - vigilance by the NBRB in enforcing all prudential requirements amid rapid credit growth;
  - transparent and competitive privatization procedures to attract strategic foreign investors to the banking system;
  - improvement of anti-money laundering legislation to meet international best practices.
- Authorities noted progress: nine banks fully owned by foreigners; “Golden Share” no longer applies to banks and currently applies in only 14 enterprises for a limited period of 1 to 5 years, with golden share lapsing in eight enterprises this year leaving six enterprises with the golden share.

### Structural reforms and business climate
- Progress with structural reforms described as limited by the Executive Board; remaining significant state role and administrative restrictions hamper market flexibility and private investment.
- Directors emphasized need for fundamental change of course in structural and fiscal policies, including:
  - early liberalization of prices and wages;
  - broader structural reforms implemented without delay while the economy is still strong;
  - improving institutional framework and governance;
  - building social consensus for reforms.
- Authorities’reported structural and business climate actions and outcomes:
  - exports in U.S. dollar terms doubled in the last four years; exports to non-CIS countries reached 52 percent of total exports.
  - exports of finalized goods (such as trucks) grew at 66 percent in the first quarter of 2006, while fertilizer exports dropped dramatically.
  - IFC study: average number of inspections of SMEs dropped from 10 in 2004 to 7 in 2006; average time to issue a license dropped from 45 days to 27 days.
  - New business registration regulation reduces required documents from 13 to 4 and estimated registration costs reduced by 21 percent; formalities limited to no more than 30 days.
  - “Belarus SME Toolkit” portal launched in May 2006 to improve SME access to information.
  - Utility cost recovery ratios increased from 21.7 percent in 2001 to 50.7 percent in 2006.
  - Less than 20 percent of enterprises were loss making in April 2006 compared to 26.2 percent one year earlier.
  - Wage increases are no longer mandatory economy-wide; enterprises set wage policy according to financial affordability.
- Directors welcomed authorities’ intentions to implement fiscal and structural measures by 2010 to curb budgetary transfers and subsidies, reduce tax burden, strengthen the financial system, moderate real wage increases, and attract foreign investors, but urged faster withdrawal of state intervention.

### Statistical system and data
- Directors noted the quality of the statistical system and the timeliness of data are broadly adequate.
- Authorities cited the Fund’s technical assistance report on national accounts (finalized April 2005) concluding methods and procedures are in accordance with international standards and GDP data are consistent with source data, while noting a possible upward bias in recorded growth rates in the order of 1 percentage point due to methodological shortcomings.

### Recommendations and policy priorities (Executive Board)
- Fiscal:
  - implement up-front fiscal tightening starting in 2006;
  - focus expenditure cuts on phasing out subsidies/transfers to loss-making enterprises and ending bank recapitalizations tied to directed lending;
  - bring all state support to enterprises on-budget;
  - reduce budget rigidities by phasing out earmarking.
- Structural and governance:
  - early liberalization of prices and wages;
  - rapid withdrawal of state intervention and curtailing the golden share rule to a handful of preannounced strategic enterprises;
  - improve institutional framework and governance;
  - build social consensus for reforms.
- Monetary and financial:
  - confirm inflation control as NBRB primary objective;
  - accept more exchange rate flexibility when needed;
  - strengthen NBRB operational independence;
  - discontinue central bank direct lending to the economy and eliminate interest rate caps;
  - enforce prudential requirements vigilantly amid rapid credit growth;
  - improve anti-money laundering legislation.
- Privatization and investment:
  - avoid using privatization proceeds or increased foreign borrowing to sustain a state-dominated structure;
  - ensure transparent and competitive privatization procedures to attract strategic foreign investors.

### Authorities’ views (Statement by Executive Director Willy Kiekens and Advisor Mikhail V. Nikitsenka)
- Cooperation with IMF staff constructive; authorities share staff’s general assessment on growth sources and medium-term policy goals (structural reforms, reducing budget size, strengthening financial system, facilitating SME development, wage moderation, improving business climate).
- Authorities attribute favorable growth to policies directed at high savings and investments, upscaling industrial potential, and improving energy efficiency; compare favorably with Russia and Ukraine.
- On data, authorities disputed characterization of difficulties in assessing economic developments and cited the April 2005 national accounts TA report validating methodology while acknowledging possible upward bias of about 1 percentage point.
- Monetary policy: central bank agrees low inflation should be principal policy objective; crawling band exchange rate regime viewed by authorities as instrumental in reducing inflation, increasing reserves, and reducing dollarization.
- Financial sector: authorities acknowledge banking system underdeveloped despite improvements; reported non-performing loans ratio at 1.5 percent in May 2006.
- Fiscal policy: authorities reported budget deficit of 0.7 percent of GDP in 2005 and a 3.1 percent of GDP surplus during the first 5 months of 2006; noted integration of extra budget funds increased overall budget by 12.6 percent of GDP.
- Structural reforms: authorities highlighted improvements (SME inspections and licensing, business registration simplification, SME portal, reduction in loss-making enterprises, utility tariff recovery gains) and signaled intent to continue reforms and seek further IMF capacity-building assistance.

*Prepared from the IMF staff report and Executive Board discussion material for the 2006 Article IV Consultation with the Republic of Belarus included in the provided content.*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2006/_cr06314.pdf_