## _cr11277

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### Executive Summary — background, authorities’ views, and staff recommendations
- Background:
  - Belarus in an economic crisis caused by significant policy loosening after completion of a $3½ billion SBA in March 2010.
  - Pressure on reserves from an unsustainable current account deficit intensified sharply in late 2010 and early 2011.
  - NBRB ceased foreign exchange interventions in late March 2011; as the authorities were not prepared to float the rubel, foreign exchange markets fragmented.
  - A multiple exchange rate system emerged with a heavily depreciated parallel market exchange rate, placing Belarus at risk of an inflation-depreciation spiral.
- Authorities’ strategy and views:
  - Initial crisis responses relied mostly on administrative tools.
  - Authorities developed a package of measures within a $3 billion loan agreement with the Eurasian Economic Community’s Anti-Crisis Fund (ACF).
  - Current approach described as gradual: gradual monetary tightening and exchange rate unification aimed at avoiding further shocks to people and enterprises.
- Staff’s views and recommendations:
  - The ACF package is an important step but falls short of what is needed and has not been consistently implemented.
  - Staff recommends developing, announcing, and vigorously implementing a comprehensive adjustment package including:
    - tighter fiscal policies,
    - tighter monetary policies,
    - wage restraint,
    - floating the exchange rate,
    - strong and consistent commitment to structural reforms.

### Financing Requirements (Baseline Scenario), 2010–16 (Billions of U.S. dollars)
- Financing needs: -13.1 (2010 Prel.), -15.3 (2011), -13.4 (2012), -14.1 (2013), -14.9 (2014), -17.0 (2015), -17.0 (2016)
- Current account balance: -8.5 (2010 Prel.), -8.4 (2011), -6.5 (2012), -6.9 (2013), -7.1 (2014), -7.7 (2015), -8.2 (2016)
- Amortization of debt securities: 0.0 (2010), 0.0 (2011), -0.2 (2012), 0.0 (2013), 0.0 (2014), -1.0 (2015), 0.0 (2016)
- Amortization of medium- and long-term debt: -1.0 (2010), -1.5 (2011), -1.8 (2012), -2.4 (2013), -3.0 (2014), -3.5 (2015), -4.0 (2016)
- Amortization of short-term debt: -3.6 (2010), -5.3 (2011), -4.9 (2012), -4.8 (2013), -4.8 (2014), -4.8 (2015), -4.8 (2016)
- Financing sources total: 12.6 (2010), 7.7 (2011), 8.3 (2012), 8.7 (2013), 10.0 (2014), 11.4 (2015), 11.2 (2016)
  - FDI (net): 1.3 (2010), 1.8 (2011), 2.0 (2012), 2.4 (2013), 2.6 (2014), 2.8 (2015), 3.2 (2016)
  - Portfolio investment inflows: 1.2 (2010), 0.8 (2011), 0.2 (2012), 0.0 (2013), 0.0 (2014), 1.0 (2015), 0.0 (2016)
  - Trade credits (net): 1.1 (2010), 0.3 (2011), 0.4 (2012), 0.4 (2013), 0.4 (2014), 0.4 (2015), 0.4 (2016)
  - Medium- and long-term debt financing: 2.8 (2010), 2.5 (2011), 3.9 (2012), 4.7 (2013), 5.2 (2014), 4.4 (2015), 4.8 (2016)
  - Short-term financing: 5.3 (2010), 4.9 (2011), 4.8 (2012), 4.8 (2013), 4.8 (2014), 4.8 (2015), 4.8 (2016)
  - Other 1/: -0.5 (2010), -2.3 (2011), -0.5 (2012), 0.8 (2013), 1.5 (2014), 0.1 (2015), 0.0 (2016)
  - Targeted increase in reserves: 0.8 (2010), -1.5 (2011), -3.0 (2012), -3.5 (2013), -3.0 (2014), -2.0 (2015), -2.0 (2016)
  - Exceptional financing: 0.5 (2010), 1.2 (2011), 0.5 (2012), -0.8 (2013), -1.4 (2014), -0.1 (2015), 0.0 (2016)
    - of which ACF: 0.0 (2010), 1.2 (2011), 0.9 (2012), 0.9 (2013), 0.0 (2014), 0.0 (2015), 0.0 (2016)
    - of which Fund (net): 0.7 (2010), 0.0 (2011), -0.4 (2012), -1.7 (2013), -1.4 (2014), -0.1 (2015), 0.0 (2016)
- Residual financing gap: 0.0 (2010), 6.3 (2011), 4.7 (2012), 6.2 (2013), 5.3 (2014), 5.6 (2015), 5.8 (2016)
- Note: 1/ includes assets (portfolio and other investment), capital account, errors and omissions and valuation effects.

### Recent economic developments and the foreign exchange market crisis
- Pre-crisis developments:
  - After the 2009 SBA expired, policies loosened; budget sector wages increased by 30 percent in November 2010.
  - 12-month credit growth accelerated to nearly 40 percent by end-2010.
  - NBRB avoided a loss of gross FX reserves by borrowing from domestic commercial banks in late 2010, increasing financial sector vulnerabilities.
- Selected indicators, Mar-10 to Mar-11:
  - Credit to the economy at constant exchange rates, y-o-y percent change: 29.6 (Mar-10), 48.7 (Mar-11)
  - First-grade budget sector wage 1/, y-o-y percent change: 5.2 (Mar-10), 45.7 (Mar-11)
  - Real overnight interbank rate: 7.5 (Mar-10), -0.2 (Mar-11)
  - Net international reserves, y-o-y change (billions of U.S. dollars): -1.1 (Mar-10), -7.0 (Mar-11)
  - Nominal exchange rate depreciation against the basket of currencies: 9.7 (Mar-10), 5.0 (Mar-11)
- Foreign Exchange Market Crisis (summary):
  - March 2011: NBRB allowed rubel to depreciate to bottom of the band; rubel depreciated by 5 percent to the lower boundary by mid-March.
  - Gross reserves fell by about a quarter to 3½ billion (less than one month of imports).
  - Administrative measures failed; NBRB ceased interventions on March 22.
  - FX shortages caused market collapse and black market emergence; cash market largely frozen; a "street" cash market emerged where the rubel traded some 45–50 percent depreciated relative to the official exchange rate.
  - May 12: exchange rate band widened to 12 percent around central parity.
  - May 24: NBRB devalued the official exchange rate by 35 percent and reintroduced exchange rate restrictions; devaluation failed to unify the exchange rate. The current "street" cash market exchange rate is some 15–20 percent below the official rate.

### Banking sector soundness, vulnerabilities, and risks
- Deposit and credit developments:
  - Household foreign currency deposits fell by 15 percent in the first five months of the year; rubel deposits decreased by 6 percent.
  - Reported NPL ratio around 3 percent but likely to increase as FX borrowers face repayment difficulties.
- Key banking indicators (selected series as reported):
  - Regulatory capital (percent of risk-weighted assets): 24.4 (2006), 19.3 (2007), 21.8 (2008), 19.8 (2009), 19.7 (2010), 19.8 (2011 Mar), 19.0 (2011 Jun), 19.0 (2011 Sep), 19.0 (2011 Dec), 19.0 (2011 Mar)
  - NPLs (percent of total loans): 2.8 (2006), 1.9 (2007), 1.7 (2008), 4.2 (2009), 5.0 (2010), 4.9 (2011 Mar), 4.0 (2011 Jun), 3.5 (2011 Sep), 2.8 (2011 Dec)
  - Foreign currency loans (percent of total loans): 33.8 (2006), 37.6 (2007), 30.9 (2008), 29.6 (2009), 28.7 (2010), 27.2 (2011 Mar), 26.4 (2011 Jun), 21.7 (2011 Sep), 22.9 (2011 Dec)
  - Instant liquidity ratio 1/: 28.8 (2006), 104.1 (2007), 108.8 (2008), 237.9 (2009), 443.7 (2010), 424.6 (2011 Mar), 438.0 (2011 Jun), 450.1 (2011 Sep), 473.6 (2011 Dec)
  - Loans to deposits: 135.0 (2006), 144.3 (2007), 170.8 (2008), 189.2 (2009), 206.6 (2010), 206.4 (2011 Mar), 207.5 (2011 Jun), 206.4 (2011 Sep), 224.4 (2011 Dec)
- Staff note: increased financial sector vulnerabilities due to NBRB borrowing from domestic banks in late 2010.
- Banking sector risks (summary):
  - Foreign currency liquidity risk: household FX deposits dropped by 26 percent in the four months to July 1.
  - External debt roll-over risk: scheduled repayments falling due in Q2-Q4 2011 amounted to $3.9 billion (as of April 1, Q2–Q4 2011).
  - Short-term external debt of banks (original maturity basis): $3.6 billion, or 53 percent of their overall external debt of $6.8 billion at end-March 2011.
  - Possible recapitalization need for SOBs currently estimated to be 3–9 trillion rubels (about 1 to 3 percent of GDP), subject to uncertainty.

### Authorities’ Anti-Crisis Fund (ACF) loan and policy package
- ACF loan terms and schedule:
  - EurAsEC ACF approved a $3 billion loan to Belarus on June 4, 2011.
  - Reserve targets: 1.5 months of imports by February 2012 and 2 months of imports by October 2013.
  - Loan disbursed in six tranches: first $800 million released on June 21 and remaining tranches of $440 million each in late 2011–13.
  - Loan maturity: 10-year maturity, including a three-year grace period; interest rate is a three-month adjustable rate benchmarked to the cost of Russia’s sovereign debt (capped).
- Major elements of the policy package:
  - Monetary policy tightening:
    - raise interest rates to positive real levels and restrain credit growth;
    - NBRB to adjust policy interest rates monthly to keep them above the three-month inflation projection;
    - NBRB to stop borrowing foreign exchange from commercial banks and divest non-core assets.
  - Fiscal policy tightening:
    - bring general government deficit down to 1.5 percent of GDP (from 3 percent of GDP in the budget);
    - savings in 2011 via limiting increase in budget sector wages (refraining from increases in the first grade wage tariff, allowing automatic partial indexation stipulated by law) and spending cuts, including reduction of subsidies for transportation and household utilities;
    - increase export duties for potash fertilizers, tax rates for extraction of mineral resources, and excise tax rates for alcohol and tobacco.
  - Exchange rate policy:
    - exchange rate unification with all trade conducted at a market-clearing rate.
  - Lending under government programs (LGP):
    - cap LGP financing at 4 percent of GDP in 2011, 3 percent of GDP in 2012 and 1 percent of GDP in 2013;
    - from July 1, LGP financed with deposits of the Ministry of Finance, not subsidized lending from the NBRB; government to assume existing NBRB claims on commercial banks by issuing government bonds;
    - from 2012, LGP managed by a Development Bank (DB) which would take over existing LGP and engage in new lending; banks’ participation voluntary and on commercial terms.
  - Structural reforms:
    - privatization to generate $7.5 billion in proceeds in 2011–13.

### Staff assessment of authorities’ measures and recommended stabilization package
- Assessment:
  - Announced measures are steps in the right direction but appear insufficient to end the crisis.
  - Commitment to implementation is not yet clear.
  - Much of the fiscal improvement stems from higher revenues driven by higher inflation and exchange rate depreciation rather than substantive real demand containment.
- Staff recommended stabilization package objectives:
  - (i) close the financing gaps in the short term;
  - (ii) increase reserves to a safe level;
  - (iii) put external debt firmly on a sustainable path.
  - Targets: reduce the current account deficit sharply over the next three years; contain inflation at 50 percent this year and reduce it to 10 percent next year; achieve reserve cover of 3 months of imports by end-2014.
  - Note: sustainable current account deficit estimated at about 3.5 percent of GDP in 2011 Article IV discussions.
- Fiscal measures recommended:
  - Supplementary budget to reduce the fiscal deficit more than currently planned; staff recommended balancing the budget this year to contain domestic demand.
  - Budget sector wage freeze until the end of the year.
  - Maintain wage bill at 2011 level as share of GDP in medium term.
  - Reduce interest rate subsidies and reconsider their structure so policy rate increases are reflected in lending rates.
- Monetary and credit policy measures recommended:
  - Restrain LGP financing as outlined in ACF package; refrain from NBRB lending at below-market terms.
  - Policy interest rates should be increased to levels strongly positive in real terms.
  - Based on inflation projections in adjustment scenario:
    - Increase overnight rate to about 40 percent.
    - Increase refinancing rate to about 30 percent.
- Exchange rate and market liberalization:
  - Staff recommended foreign exchange be freely traded on interbank and cash markets and quick unification of exchange rates across market segments.
  - Expectation of initial further depreciation and a period of uncertainty, but stabilization at a market-clearing level thereafter.
  - Move toward inflation targeting via a "lite" version while building blocks for full-fledged inflation targeting are developed.
- Contingency and bank support:
  - Authorities should be ready to intervene to support banks if necessary; run rigorous stress tests; require recapitalization of weak private banks.
  - Assess banking sector vulnerability conservatively; exclude NBRB’s non-market liquidity support from positive assessments.

### Macroeconomic outlook, scenarios, and risks
- Staff baseline assumptions and risks:
  - Policies follow ACF commitments with some slippages (interest rates remain negative in real terms and LGP overshoots its annual limit).
  - Projections assume FX intervention to support the current official rate resumes as exceptional financing becomes available; interventions reduce inflation but greatly increase financing needs.
- Projection outcomes under baseline with interventions:
  - Output growth could reach about 5½ percent in 2011 (high growth in first half followed by a recession in the second half).
  - Inflation will exceed 55 percent.
  - Projections point to sizeable current account deficits and large financing gaps over the medium term.
- Alternative: authorities refrain from intervention:
  - Reserves would be preserved.
  - Risks: inflation-depreciation spiral, disruptions in production due to import shortages, erosion of competitiveness from wage increases, continued multiple exchange rate system.
- Additional risks from absence of clear adjustment strategy:
  - Banking sector systemic crisis if uncertainty persists.
  - Short-term external debt excluding trade credit: about $6 billion, or 11 percent of GDP.
  - Large financing gaps in baseline must be filled by external borrowing or asset sales.
  - Repurchases to the Fund will peak in 2013; external debt-to-GDP ratio projected to increase to over 70 percent of GDP this year under the proposed package, falling to 55 percent of GDP in 2016 under the medium-term path.

### Recent macroeconomic developments and monetary/fx policy (mid-2011 details)
- LGP reached 2.2 percent of GDP in first 4 months of 2011.
- 12-month credit growth rate about 48 percent at end-June.
- NBRB policy interest rates:
  - Refinancing rate increased from 10.5 percent at beginning of year to 20 percent in mid-July.
  - Overnight rate raised from 16 to 30 percent.
  - These rates are below past inflation: 12-month inflation rate reached 43.8 percent in June; real interest rates implied are negative.
- Exchange rate and trade:
  - Authorities devalued the official exchange rate by 35 percent bringing cumulative depreciation in the 5 months of the year to 43 percent.
  - Footnote: the 43 percent is calculated as change of the index showing purchasing power of the rubel in terms of the basket (euro, Russian ruble, U.S. dollar with equal weights); exchange rate measured in rubels per one unit of the basket changed by 75 percent in the 5 months of the year.
  - Exports in January-May grew by 61percent in dollar terms relative to same period of 2010; export growth in Q1 2011 was 43 percent relative to Q1 2010. Import growth slowed from 66 percent in Q1 to 57 percent in the five months.

### Progress with structural reforms and privatization
- Developments and institutional changes:
  - Decree establishing Development Bank (DB) approved on June 21.
  - NIPA head appointed; NIPA to develop transparent and competitive privatization process.
  - Authorities agreed with World Bank on list of companies for NIPA privatization.
  - Abolishing mandatory nature of wage grading system (WGS) — commercial entities may opt out.
- Remaining concerns on DB:
  - Decree does not address accountability and governance of DB; scope of DB and banks’ participation in future LGP; how DB’s lending will be treated relative to limits on new LGP.
  - Staff view: DB’s net lending should be treated in the budget above the line; NBRB should not be involved in any future LGP.
- Privatization timeline:
  - NIPA operational at end-June.
  - A list of 10 enterprises agreed with World Bank; NIPA to prepare five companies for privatization and offer them at open competitive tender by end-2011 or early 2012.
- Price liberalization:
  - Staff recommended lifting recently introduced price controls and continuing price liberalization once FX market stabilized and inflation under control; develop clear timeline in consultation with World Bank.

### Social safety net, labor market implications, and recommended social policies
- Expected social impacts:
  - Economic activity expected to most likely slow down considerably; some SOEs will need to be restructured and downsized, leading to increases in unemployment and poverty rates.
  - In absence of a modern unemployment program and targeted social benefits, social tensions could heighten.
- Assistance and reforms:
  - Ministry of the Economy requested technical assistance on social safety net; a mission tentatively scheduled to visit Minsk in October.
  - Over medium term, a revision of the pension system, including an increase in retirement age, should be considered.
- Staff emphasis:
  - Put in place an efficient social safety net and targeted social assistance as part of adjustment.

### Capacity to repay, external financing risks, and debt dynamics
- Baseline scenario: capacity to repay would remain sufficient but a large increase in external debt indicates significant risks.
- Short-term debt and rollover risk:
  - Short-term debt excluding trade credit: about $6 billion, or 11 percent of GDP.
  - As of April 1, scheduled repayments due in Q2–Q4 2011 amounted to $3.9 billion.
- External debt projections and public gross external debt path (selected projections):
  - Gross external debt (percent of GDP): 25.0, 44.8, 52.1, 68.3, 72.5, 75.2, 81.6, 84.1, 85.6 (series presented in source).
  - Public gross external debt (percent of GDP): 6.8, 18.1, 22.1, 35.6, 41.2, 45.1, 50.9, 53.8, 55.9.
- Financing gaps:
  - Financing gap (billions of U.S. dollars): 6.3, 4.7, 6.2, 6.3, 5.6, 5.8 (projections).
  - Table 2 financing gap (millions of U.S. dollars): 6,296; 4,653; 6,181; 6,258; 5,625; 5,847 (projection series).

### Debt management, IMF/World Bank engagement, and planned technical assistance
- Debt management findings and planned support:
  - First Debt Management Performance Assessment (DeMPA) in Belarus in FY11.
  - Bank plans further assistance on development of medium-term debt strategy and capacity building of debt management staff.
- Financial sector and IMF roles:
  - 2008 FSAP Update provided insights on vulnerabilities; Bank conducts financial sector monitoring jointly with IMF.
  - IMF leads dialogue on objectives for monetary and exchange rate policies and overall budget envelope; provides TA on economic & financial statistics, tax policy, monetary operations, and fiscal transparency.
- Planned activities and timing (selected):
  - Bank TA items: Debt Management Performance Assessment — May 2011; Strengthening Medium-term Fiscal Planning TA — June 2011; other items ongoing through June 2012.
  - Fund TA items: TA on social safety net — October 2011; TA on banking supervision — July 2011; August 2011.

### Statistical issues, data adequacy, and key macro indicators
- Data adequacy for surveillance:
  - Data provision has some shortcomings, but is broadly adequate; most affected area is external debt data.
- National accounts and price statistics:
  - NSC compiles quarterly and annual GDP following 1993 SNA; CPI based on weights from 2009; PPI weight detail not published.
- Government finance and monetary statistics:
  - GFS compiled in broad compliance with GFSM 2001; monetary statistics broadly follow MFSM methodology with noted problems.
- External sector statistics:
  - NBRB publishes quarterly BOP and IIP in BPM5 and transitioning to BPM6; gaps in external debt data noted.
- Key recent indicators (as reported subsequently):
  - Real GDP growth: 9.8 percent in January-July; GDP growth reached 12.5 percent in first five months of year.
  - Inflation: 12-month CPI at 48.4 percent in July; producer prices reached 72.9 percent year-on-year in July; 12-month rate 43 percent in June and expected to accelerate to over 50 percent by year-end.
  - Official reserves: $4.2 billion at end-July.
  - Exchange rate: rubel offered at 7,900 rubels to a dollar on parallel market on August 15.
  - Fiscal position: general government recorded a surplus of 4.4 trillion rubels (3.5 percent of GDP) in January-July; authorities aim for budget deficit of less than 1 percent of GDP in 2011 (versus 1.5 percent agreed with ACF).
  - Monetary tightening: refinancing and overnight rates increased by 200 basis points to 22 percent and 32 percent, respectively, from August 17.
  - Ratings: Moody’s downgraded Belarus from B2 to B3 on July 21; Eurobond yields rose to 12.5 percent and to 13.7 percent in mid-August.

### Key quantitative projections and fiscal/macro datapoints (selected table highlights)
- Real GDP growth (annual percentage change): 10.2, 0.2, 7.6, 5.5, 1.4, 4.2, 4.6, 4.9, 5.0 (series as in source).
- Consumer prices end of period (percent): 13.3, 10.1, 9.9, 57.2, 19.0, 11.0, 8.5, 7.0, 5.5.
- Average consumer inflation (percent): 14.8, 13.0, 7.7, 38.0, 31.0, 14.5, 9.6, 7.7, 6.2.
- General government balance (percent of GDP): 1.3, -0.7, -1.8, -1.5, -1.3, -1.0, -1.2, -1.4, -1.5.
- Augmented general government balance (percent of GDP): -3.5, -0.7, -4.3, -3.3, -3.1, -2.8, -3.0, -3.2, -3.3.
- Revenue (percent of GDP): 50.6, 45.7, 42.0, 38.5, 37.9, 37.5, 37.1, 36.9, 36.5.
- Expenditure (percent of GDP): 54.1, 46.4, 46.3, 41.8, 41.0, 40.2, 40.1, 40.1, 39.8.
- Gross public debt (percent of GDP): 13.4, 21.7, 26.5, 46.0, 44.8, 49.0, 55.4, 55.3, 59.2.
- Official devaluation: devalued by 35 percent in May 2011.
- Official reserves (billions of U.S. dollars) series (as presented): 3.1, 5.7, 5.0, 6.5, 9.5, 13.0, 16.0, 18.0, 20.0.
- Months of imports of goods and services series: 1.2, 1.8, 1.2, 1.4, 1.8, 2.5, 2.9, 3.0, 3.1.
- Current account (percent of GDP): -8.6, -13.0, -15.5, -14.7, -10.1, -9.4, -9.2, -9.2, -9.1.
- Trade balance (goods) (percent of GDP): -10.3, -14.1, -16.7, -11.8, -7.8, -7.7, -7.5, -7.5, -7.4.
- Exports (percent of GDP): 54.0, 43.4, 46.3, 72.9, 72.8, 70.5, 68.1, 66.6, 65.0.
- Imports (percent of GDP): -64.3, -57.5, -63.0, -84.7, -80.7, -78.1, -75.6, -74.0, -72.4.

*Source: IMF staff calculations and Executive Summary (IMF Country Report _cr11277 - Executive Summary) and IMF staff report excerpts as provided in the supplied content.*

### Executive Summary

### Executive Summary

### Background
- Belarus is in an economic crisis caused by significant policy loosening after completion of a $3½ billion SBA in March 2010.
- Pressure on reserves stemming from an unsustainable current account deficit intensified sharply in late 2010 and early 2011.
- The NBRB ceased foreign exchange interventions in late March 2011; as the authorities were not prepared to float the rubel, foreign exchange markets fragmented.
- A multiple exchange rate system has emerged with a heavily depreciated parallel market exchange rate, placing Belarus at risk of an inflation-depreciation spiral.

### Authorities’ strategy and views
- Initial crisis responses relied mostly on administrative tools.
- Authorities developed a package of measures within a $3 billion loan agreement with the Eurasian Economic Community’s Anti-Crisis Fund (ACF).
- Authorities are assessing whether measures already taken will produce the required adjustment or whether radical reform and further adjustment will be needed.
- Current approach is gradual: gradual monetary tightening and exchange rate unification aimed at avoiding further shocks to people and enterprises.

### Staff’s views and recommendations
- The ACF package is an important step but falls short of what is needed and has not been consistently implemented.
- Staff recommends developing, announcing, and vigorously implementing a comprehensive adjustment package designed to restore macroeconomic stability, including:
  - tighter fiscal policies,
  - tighter monetary policies,
  - wage restraint,
  - floating the exchange rate,
  - strong and consistent commitment to structural reforms.

### Context (key points)
- Policy loosening in 2010–early 2011 (ahead of December 2010 presidential elections) increased the current account deficit and reserve pressure.
- After a significant loss of reserves in early 2011, confidence in the rubel fell, sparking a foreign exchange crisis and a black market.
- External debt stock remains manageable, but capacity to service external liabilities depends on policy strength and implementation of reforms.
- Short-term debt is substantial, creating rollover risk; external debt continues to increase in the medium term in the baseline scenario.
- Belarus faces a difficult amortization schedule including repayments to commercial banks, external creditors, and repurchases to the Fund.

### Financing Requirements (Baseline Scenario), 2010–16 (Billions of U.S. dollars)
- Financing needs: -13.1 (2010 Prel.), -15.3 (2011), -13.4 (2012), -14.1 (2013), -14.9 (2014), -17.0 (2015), -17.0 (2016)
- Current account balance: -8.5 (2010 Prel.), -8.4 (2011), -6.5 (2012), -6.9 (2013), -7.1 (2014), -7.7 (2015), -8.2 (2016)
- Amortization of debt securities: 0.0 (2010), 0.0 (2011), -0.2 (2012), 0.0 (2013), 0.0 (2014), -1.0 (2015), 0.0 (2016)
- Amortization of medium- and long-term debt: -1.0 (2010), -1.5 (2011), -1.8 (2012), -2.4 (2013), -3.0 (2014), -3.5 (2015), -4.0 (2016)
- Amortization of short-term debt: -3.6 (2010), -5.3 (2011), -4.9 (2012), -4.8 (2013), -4.8 (2014), -4.8 (2015), -4.8 (2016)
- Financing sources total: 12.6 (2010), 7.7 (2011), 8.3 (2012), 8.7 (2013), 10.0 (2014), 11.4 (2015), 11.2 (2016)
  - FDI (net): 1.3 (2010), 1.8 (2011), 2.0 (2012), 2.4 (2013), 2.6 (2014), 2.8 (2015), 3.2 (2016)
  - Portfolio investment inflows: 1.2 (2010), 0.8 (2011), 0.2 (2012), 0.0 (2013), 0.0 (2014), 1.0 (2015), 0.0 (2016)
  - Trade credits (net): 1.1 (2010), 0.3 (2011), 0.4 (2012), 0.4 (2013), 0.4 (2014), 0.4 (2015), 0.4 (2016)
  - Medium- and long-term debt financing: 2.8 (2010), 2.5 (2011), 3.9 (2012), 4.7 (2013), 5.2 (2014), 4.4 (2015), 4.8 (2016)
  - Short-term financing: 5.3 (2010), 4.9 (2011), 4.8 (2012), 4.8 (2013), 4.8 (2014), 4.8 (2015), 4.8 (2016)
  - Other 1/: -0.5 (2010), -2.3 (2011), -0.5 (2012), 0.8 (2013), 1.5 (2014), 0.1 (2015), 0.0 (2016)
  - Targeted increase in reserves: 0.8 (2010), -1.5 (2011), -3.0 (2012), -3.5 (2013), -3.0 (2014), -2.0 (2015), -2.0 (2016)
  - Exceptional financing: 0.5 (2010), 1.2 (2011), 0.5 (2012), -0.8 (2013), -1.4 (2014), -0.1 (2015), 0.0 (2016)
    - of which ACF: 0.0 (2010), 1.2 (2011), 0.9 (2012), 0.9 (2013), 0.0 (2014), 0.0 (2015), 0.0 (2016)
    - of which Fund (net): 0.7 (2010), 0.0 (2011), -0.4 (2012), -1.7 (2013), -1.4 (2014), -0.1 (2015), 0.0 (2016)
- Residual financing gap: 0.0 (2010), 6.3 (2011), 4.7 (2012), 6.2 (2013), 5.3 (2014), 5.6 (2015), 5.8 (2016)

(Note: 1/ includes assets (portfolio and other investment), capital account, errors and omissions and valuation effects.)

### Recent economic developments
- After the 2009 SBA expired, policies were loosened considerably and macroeconomic imbalances intensified.
- Budget sector wages increased by 30 percent in November 2010.
- 12-month credit growth accelerated to nearly 40 percent by end-2010.
- Until March 2011 the exchange rate with the U.S. dollar was supported in a narrow band by significant intervention.
- The NBRB avoided a loss of gross foreign exchange reserves by borrowing from domestic commercial banks in late 2010, increasing financial sector vulnerabilities.

Selected indicators, Mar-10 to Mar-11:
- Credit to the economy at constant exchange rates, y-o-y percent change: 29.6 (Mar-10), 48.7 (Mar-11)
- First-grade budget sector wage 1/, y-o-y percent change: 5.2 (Mar-10), 45.7 (Mar-11)
- Real overnight interbank rate: 7.5 (Mar-10), -0.2 (Mar-11)
- Net international reserves, y-o-y change (billions of U.S. dollars): -1.1 (Mar-10), -7.0 (Mar-11)
- Nominal exchange rate depreciation against the basket of currencies: 9.7 (Mar-10), 5.0 (Mar-11)

(1/ The first-grade budget sector wage refers to the first level in the budget sector pay grade system. All other wages are multiples of the first-grade wage.)

### Foreign Exchange Market Crisis (summary)
- March 2011: NBRB allowed the rubel to depreciate to the bottom of the band; rubel depreciated by 5 percent to the lower boundary by mid-March.
- Gross reserves fell by about a quarter to 3½ billion (less than one month of imports).
- Administrative measures (restrictions on advance import payments, bans on FX for certain imports over 50 thousand Euros, 2-percent surcharge on BCSE trades, 30-day moratorium on BCSE FX purchases) failed; NBRB ceased interventions on March 22.
- FX shortages caused market collapse and black market emergence; FX rationing channeled export surrender proceeds to medicine, energy items and debt service.
- Interbank market liberalized on April 20; after an initial sharp depreciation (as much as 65 percent relative to the official rate) market transaction rates stabilized and later appreciated before restrictions reintroduced.
- Cash market largely frozen; a "street" cash market emerged where the rubel traded some 45–50 percent depreciated relative to the official exchange rate.
- May 12: exchange rate band widened to 12 percent around central parity, but interbank and street rates remained much more depreciated.
- May 24: NBRB devalued the official exchange rate by 35 percent and reintroduced exchange rate restrictions; devaluation failed to unify the exchange rate. The current "street" cash market exchange rate is some 15–20 percent below the official rate.

### Banking sector soundness and risks
- Household foreign currency deposits fell by 15 percent in the first five months of the year; rubel deposits decreased by 6 percent.
- Reported NPL ratio around 3 percent but likely to increase as FX borrowers face repayment difficulties.
- Key banking indicators (selected):
  - Regulatory capital (percent of risk-weighted assets): 24.4 (2006), 19.3 (2007), 21.8 (2008), 19.8 (2009), 19.7 (2010), 19.8 (2011 Mar), 19.0 (2011 Jun), 19.0 (2011 Sep), 19.0 (2011 Dec), 19.0 (2011 Mar)
  - NPLs (percent of total loans): 2.8 (2006), 1.9 (2007), 1.7 (2008), 4.2 (2009), 5.0 (2010), 4.9 (2011 Mar), 4.0 (2011 Jun), 3.5 (2011 Sep), 2.8 (2011 Dec), (2011 Mar value repeated in table)
  - Foreign currency loans (percent of total loans): 33.8 (2006), 37.6 (2007), 30.9 (2008), 29.6 (2009), 28.7 (2010), 27.2 (2011 Mar), 26.4 (2011 Jun), 21.7 (2011 Sep), 22.9 (2011 Dec)
  - Instant liquidity ratio 1/: 28.8 (2006), 104.1 (2007), 108.8 (2008), 237.9 (2009), 443.7 (2010), 424.6 (2011 Mar), 438.0 (2011 Jun), 450.1 (2011 Sep), 473.6 (2011 Dec)
  - Loans to deposits: 135.0 (2006), 144.3 (2007), 170.8 (2008), 189.2 (2009), 206.6 (2010), 206.4 (2011 Mar), 207.5 (2011 Jun), 206.4 (2011 Sep), 224.4 (2011 Dec)
- Staff notes increased financial sector vulnerabilities due to the NBRB borrowing from domestic banks in late 2010.

### Authorities’ anti-crisis package (ACF loan summary and main elements)
- The EurAsEC Anti-Crisis Fund (ACF) approved a $3 billion loan to Belarus on June 4, 2011 to support the balance of payments and augment foreign exchange reserves.
- Reserve targets: 1.5 months of imports by February 2012 and 2 months of imports by October 2013.
- Loan would be disbursed in six tranches: first $800 million released on June 21 and remaining tranches of $440 million each in late 2011–13.
- Loan maturity: 10-year maturity, including a three-year grace period; interest rate is a three-month adjustable rate benchmarked to the cost of Russia’s sovereign debt (capped).

Major elements of the policy package:
- Monetary policy tightening:
  - raise interest rates to positive levels in real terms and restrain credit growth;
  - NBRB to adjust policy interest rates monthly to keep them above the three-month inflation projection;
  - NBRB would no longer borrow foreign exchange from commercial banks and would divest non-core assets.
- Fiscal policy tightening:
  - bring general government deficit down to 1.5 percent of GDP (from 3 percent of GDP in the budget);
  - savings in 2011 via limiting the increase in budget sector wages (refraining from increases in the first grade wage tariff, but allowing automatic partial indexation stipulated by law) and spending cuts, including reduction of subsidies for transportation and household utilities;
  - increase in export duties for potash fertilizers, tax rates for extraction of mineral resources, and excise tax rates for alcohol and tobacco to enhance revenues.
- Exchange rate policy:
  - exchange rate unification with all trade conducted at a market-clearing rate.
- Lending under government programs (LGP):
  - cap LGP financing at 4 percent of GDP in 2011, 3 percent of GDP in 2012 and 1 percent of GDP in 2013;
  - from July 1, LGP financed with deposits of the Ministry of Finance, not subsidized lending from the NBRB; government to assume existing NBRB claims on commercial banks by issuing government bonds;
  - from 2012, LGP managed by a Development Bank which would take over existing LGP and engage in new lending; banks’ participation voluntary and on commercial terms.
- Structural reforms:
  - privatization to generate $7.5 billion in proceeds in 2011–13.

### Assessment of authorities’ measures
- Announced measures are steps in the right direction but appear insufficient to end the crisis.
- Authorities’ commitment to implementation is not yet clear.
- The general government budget deficit for the year is being revised downward from 3 to 1.5 percent of GDP; much of the improvement stems from higher revenues driven by higher inflation and exchange rate depreciation rather than substantive real demand containment.
- Revised budget foresees a substantial increase in nominal expenditures (including partial indexation of budget sector wages), contributing only marginally to containing real domestic demand.

*Source: IMF staff calculations and Executive Summary (IMF Country Report _cr11277 - Executive Summary).*

### 4.9 percent. Each disbursement is conditional on implementation of measures stipulated in

### _cr11277 - 4.9 percent. Each disbursement is conditional on implementation of measures stipulated in

### Recent macroeconomic developments and monetary/fx policy
- Lending under government programs (LGP) reached 2.2 percent of GDP in the first 4 months of 2011.
- The 12-month credit growth rate was about 48 percent at the end of June.
- NBRB policy interest rates:
  - Refinancing rate increased from 10.5 percent at the beginning of the year to 20 percent in mid-July.
  - Overnight rate raised from 16 to 30 percent.
  - These rates are currently below past inflation: the 12-month inflation rate reached 43.8 percent in June.
  - Real interest rates implied are negative.
- Exchange rate and trade:
  - Authorities devalued the official exchange rate of the rubel by 35 percent against the basket of currencies, bringing cumulative depreciation in the 5 months of the year to 43 percent.
  - Export and import adjustment: exports accelerated and imports slowed producing a much lower deficit in May than in previous months.
  - Black market for cash FX persisted, posting about a 15–20 percent spread over the official rate in June.
- Footnotes/details preserved:
  - The depreciation of 43 percent is calculated as a change of the index showing the purchasing power of the rubel in terms of the basket of currencies (the basket is composed of the euro, the Russian ruble, and the U.S. dollar with equal weights). The exchange rate measured in rubels per one unit of the basket changed by 75 percent in the 5 months of the year.
  - Exports in January-May grew by 61percent in dollar terms relative to the same period of 2010. For comparison, export growth in Q1 2011 was 43 percent relative to Q1 2010. Import growth slowed down from 66 percent in Q1 to 57 percent in the five months of the year.

### Progress with structural reforms
- Developments and institutional changes:
  - Decree on establishing a Development Bank (DB) approved by the President on June 21.
  - National Investment and Privatization Agency (NIPA) head appointed; NIPA to develop transparent and competitive privatization process.
  - Authorities agreed with the World Bank on list of companies which could be offered for privatization by the NIPA.
  - Abolishing the mandatory nature of the wage grading system (WGS) — commercial entities may opt out.
- Policy reversals and cautions:
  - Authorities expanded the list of socially important goods by 13 basic food items and reintroduced controls over trade margins for socially important goods; authorities asserted this measure is temporary.
- Remaining questions on DB:
  - Decree does not address accountability and governance of the DB; scope of DB and banks’ participation in future LGP; how DB’s lending will be treated relative to limits on new LGP.
  - Staff view: DB’s net lending should be treated in the budget above the line; NBRB should not be involved in any future LGP.
- Privatization timeline for NIPA:
  - NIPA became operational at end-June.
  - A list of 10 enterprises agreed with the World Bank; NIPA to prepare five companies for privatization and offer them at open competitive tender by the end of 2011 or in early 2012.

### Macroeconomic outlook and risks (baseline and scenarios)
- Staff baseline assumptions and risks:
  - Policies follow commitments outlined in the ACF package with some slippages (especially monetary policy: interest rates remain negative in real terms and LGP overshoots its annual limit).
  - Projections assume FX intervention to support the current official rate resumes as exceptional financing becomes available.
  - Interventions reduce inflation but greatly increase financing needs.
- Projection outcomes under baseline with interventions:
  - Output growth could reach about 5½ percent in 2011 (high growth in the first half followed by a recession in the second half).
  - Inflation will exceed 55 percent.
  - Projections point to sizeable current account deficits and large financing gaps over the medium term.
  - Scenario depends on substantial external financing being available; without it reserves would be depleted and authorities would need to abandon the exchange rate again, risking an inflation-depreciation spiral.
- Alternative: authorities refrain from intervention
  - Reserves would be preserved.
  - Risks: inflation-depreciation spiral, disruptions in production due to import shortages, erosion of competitiveness from wage increases, continued multiple exchange rate system.
- Additional risks from absence of clear adjustment strategy:
  - Banking sector systemic crisis if economic uncertainty persists.
  - Deposit withdrawals manageable so far but further losses may create funding difficulties, especially at state owned banks (SOBs).
  - Banking sector external debt roll-over risk: short-term debt comprises more than a half of banking system’s external liabilities; decline in foreign creditors’ willingness to refinance would reduce FX liquidity in banks.
  - Rising social tensions and administrative price controls risk production distortions, shortages, and black markets.

### Banking sector risks (summary of Box 3)
- Key risks identified:
  - Foreign currency liquidity risk: household FX deposits dropped by 26 percent in the four months to July 1.
  - External debt roll-over risk: as of April 1, scheduled repayments falling due in Q2-Q4 2011 amounted to $3.9 billion.
  - Credit risk from borrowers unable to repay FX loans because foreign exchange is unavailable; FX loans comprise 22 percent of total loans (more prominent at some foreign banks).
  - Aggregate net open FX position of banks is closed, but banks’ claims on the NBRB are larger than gross foreign exchange reserves.
- Measures and tradeoffs:
  - A comprehensive adjustment package would reduce many risks and stabilize the banking sector but could increase budget burden and risk of higher NPLs.
  - Raising rubel interest rates could attract deposits back to rubel, reducing deposit leakage.
  - Costs: increased budget expenditures via interest compensation on loans under government programs; risk of increased NPLs in non-subsidized lending due to higher interest rates; possible deeper servicing costs if exchange rate further depreciates after floating.
  - Unification and floating of exchange rate could spark additional withdrawals of rubel deposits to buy newly available foreign exchange, highlighting the need for tight monetary policy.
- Staff recommendations for NBRB and authorities:
  - Closely monitor banking sector developments and stay in close communication with large market players.
  - Put in place a mechanism for monitoring bank liabilities in real time; prepare response under different scenarios; ensure availability of emergency liquidity assistance to banks under stress.
  - Run rigorous stress tests to assess true positions of banks and require recapitalization of weak private banks.
  - For state-owned banks (SOBs), authorities need to be ready to recapitalize to bring capital back to safe levels.
  - Possible recapitalization need for SOBs currently estimated to be 3–9 trillion rubels (about 1 to 3 percent of GDP); could be higher if stabilization period is longer or fall in economic activity is deeper than expected.
- Preserved details:
  - Short-term external debt of banks (original maturity basis) amounted to $3.6 billion, or 53 percent of their overall external debt of $6.8 billion at the end of March 2011.
  - The estimated recapitalization range was discussed with the NBRB, but it is subject to significant uncertainty and could be revised as more data become available.

### Stabilization policy package recommended by staff
- Broad objectives of the package:
  - (i) closing the financing gaps in the short term;
  - (ii) increasing reserves to a safe level;
  - (iii) putting external debt firmly on a sustainable path.
  - Need to increase reserves quickly, especially to provide cover for foreign exchange liabilities to domestic commercial banks.
  - Package targets: reduce the current account deficit sharply over the next three years; contain the rate of inflation at 50 percent this year and reduce it to 10 percent next year; achieve reserve cover of 3 months of imports by the end of 2014.
  - Note: The sustainable current account deficit (current account norm) was estimated to be about 3.5 percent of GDP in the 2011 Article IV discussions.
- Fiscal measures:
  - A supplementary budget needed to reduce the fiscal deficit by more than currently planned.
  - Staff recommended the budget be balanced this year to contain domestic demand.
  - Means: increase expenditures less than inflation (revenues tend to grow in line with nominal GDP).
  - Recommend a budget sector wage freeze until the end of the year as an anchor for wage policies in SOEs and the broader economy.
  - In the medium term the wage bill would be maintained at its 2011 level as a share of GDP.
  - Interest rate subsidies should be reduced and their structure reconsidered so policy rate increases are reflected in lending rates.
  - Authorities introducing a series of tax increases as part of the ACF agreement; planning a reduction in the profit tax rate next year from 24 to 20 percent.
  - Mission supported planned measures but stressed consistency with a balanced budget.
- Monetary and credit policy measures:
  - Restrain LGP financing as outlined in ACF package — including refraining from lending by the NBRB at below-market terms — and the actual net flow of LGP.
  - Policy interest rates should be increased to levels strongly positive in real terms.
  - Based on inflation projections in the adjustment scenario:
    - Increase overnight rate (at which NBRB lends to banks) to about 40 percent.
    - Increase refinancing rate to about 30 percent.
- Exchange rate and market liberalization:
  - Staff recommended foreign exchange be freely traded on interbank and cash markets and quick unification of exchange rates across market segments.
  - Expectation: initial further depreciation and a period of uncertainty, but stabilization at a market-clearing level and gains in competitiveness.
  - Staff view: with strong policies to contain inflation and clear communication, instability should be short (weeks, not months).
  - After stabilization, NBRB could resume modest interventions to smooth short-run fluctuations.
  - Move toward inflation targeting via a "lite" version while building blocks for full-fledged inflation targeting are developed.
- Contingency and bank support:
  - Authorities should be ready to intervene to support banks if necessary.
  - Stay in close communication with market players, prepare contingency plans.
  - Assess banking sector vulnerability conservatively (more conservative assessment of restructured loans, exclude NBRB’s non-market liquidity support).
  - NBRB should run rigorous stress tests and require recapitalization of weak banks as needed.
  - Authorities agreed on importance of close monitoring including through Fund technical assistance on risk-based supervision.

### Policies to foster conditions for sustainable economic growth
- Diagnosis:
  - Efficient allocation of resources and productivity growth critical for adjustment and sustainable growth.
  - Economy dominated by state-owned enterprises (SOEs) facing soft budget constraints and lacking market incentives; losing competitiveness due to resource misallocation and low productivity growth.
  - Recent exchange rate depreciation and expected relative price changes provide an opportunity to improve enterprise incentives.
- Priority structural measures:
  - Phase out LGP to ensure banking system soundness; use DB to increase transparency and move LGP away from banks.
  - Strengthen NBRB independence: dispose of non-core assets; publish audited IFRS financial statements; strengthen risk-based supervision; renew efforts to privatize state-owned banks.
  - NBRB should have right to decide timing and scope of on-site bank examinations as it deems necessary.
  - Develop market incentives and indicative targets for enterprises consistent with profit maximization in consultation with the World Bank; replace quantitative targeting with indicative targeting.
  - New bankruptcy law being worked on with the World Bank, could be finalized by the end of this year.
  - Authorities initiated an assessment of financial viability of individual companies as background for enterprise restructuring strategy.
- Price liberalization:
  - Staff recommended lifting recently introduced price controls and continuing price liberalization once FX market stabilized and inflation brought under control.
  - A clear timeline for completing price liberalization should be developed in consultation with the World Bank.

*IMF staff report content as provided in the source PDF*

### 24.      Belarus needs to set up a modern social safety net to support the poor and

### 24.      Belarus needs to set up a modern social safety net to support the poor and facilitate enterprise restructuring

### Social safety net and labor market implications
- Economic activity is expected to "most likely slow down considerably" and "some SOEs will need to be restructured and downsized," leading to increases in "unemployment and poverty rates."
- In the absence of "a modern unemployment program and targeted social benefits," social tensions "could heighten."
- The Ministry of the Economy has requested technical assistance on the social safety net; "a mission is tentatively scheduled to visit Minsk in October."
- Over the medium term, "a revision of the pension system, including an increase in retirement age, should also be considered."

### Capacity to repay and external financing risks (Section IV)
- Baseline scenario: Belarus’ capacity to repay "would remain sufficient," but "a large increase in external debt indicates the presence of significant risks."
- Repurchases to the Fund "will peak in 2013" and there are "extensive debt service requirements to other creditors."
- Under the proposed policy package: the "external debt-to-GDP ratio would increase to over 70 percent of GDP this year, but would be on the downward path over the medium term (falling to 55 percent of GDP in 2016)."
- "Large financing gaps in the baseline scenario will have to be filled by either external borrowing or asset sales."
- "Financing gaps in 2012–14 projected in the adjustment scenario could be filled by a combination of asset sales and bilateral and multilateral financial support, potentially including the Fund."
- External/domestic risks highlighted:
  - Terms of trade shock from changes in the energy trade with Russia, though "contained by the process of economic integration within the Common Economic Area."
  - A refusal by external creditors to fully roll over short-term external debt owed by banks and corporates could "significantly widen the financing gap." Short-term debt excluding trade credit is "about $6 billion, or 11 percent of GDP."
  - The most serious domestic risk: "slipping into a hyperinflation spiral" if authorities attempt to mitigate the crisis by policy loosening.
- Containment condition: "These risks can be contained only if the authorities implement a strong stabilization package."

### Staff appraisal and policy recommendations (Section V)
- Summary judgment: "The story of the crisis in Belarus is one of missed opportunities."
  - After the Fund-supported program ended in March 2010, authorities "unleashed a flood of new credit, raised government wages by a cumulative 50 percent during 2010, and maintained a de facto exchange rate peg against the U.S. dollar."
  - After the crisis, authorities could have tightened macroeconomic policies and floated the exchange rate; instead "monetary policy has been timid" and exchange rate liberalization was abandoned.
  - "Interest rates are now significantly negative in real terms, and multiple exchange rates exist."
- Implementation gaps: authorities have agreed to reduce the fiscal deficit, raise interest rates, limit LGP and unify the exchange rate, but "these measures ... are not being consistently implemented." The staff's analysis "suggests that more adjustment would be needed to secure a sustainable current account deficit."
- Recommended adjustment strategy:
  - "Stronger fiscal measures."
  - "More significant monetary tightening."
  - Wage restraint, especially in large state enterprises.
  - Floating the exchange rate: "floating is the only viable solution. The NBRB lacks the credibility or the reserves to defend a fixed rate. The staff recommends that the NBRB allow the official exchange rate to be set by market forces and allowing free trade in both the interbank market and the cash market."
  - For monetary policy: "policy interest rates should be increased to at least the level of the expected rate of inflation."
  - Find "an effective mechanism for containing both overall credit and LGP."
- Structural reform priorities:
  - Make the Development Bank and the NIPA "fully operational" and "draw on the advice of the Fund and the World Bank on how they should operate."
  - Continue price liberalization: "it may seem counterintuitive to liberalize prices during a period of high inflation, but it is actually the best time to do so."
  - "Begin a process of serious enterprise reform" to expose enterprises to hard budget constraints and align managers’ incentives with commercial realities.
- Risks if adjustment is not implemented:
  - "Price and wage increases will erode the competitiveness of enterprises and create a vicious spiral of inflation and depreciation."
  - The banking system is "extremely vulnerable": at current interest rates "holding rubel deposits is unattractive"; household confidence in foreign currency deposits is low without a clear plan for unwinding deposit exchanges.
  - Risk of "bad policy ideas—price and exchange controls, import and export bans—filling the vacuum."
- Financial support conditionality: "Financial support from the Fund would require strong and demonstrated commitments by the authorities." Currently "there is not sufficient consensus on key issues of monetary and exchange rate policy for agreement on a program to be reached." A "clear commitment—including at the highest level—to deep structural reform, would be essential for a new, longer-term program."

### Key quantitative datapoints and projections (selected figures and table highlights)
- Exchange rate and reserves:
  - Official devaluation: "devalued by 35 percent in May 2011."
  - "Gross reserves have declined by a quarter since end-2010 and net reserves are negative."
  - Official reserves (billions of U.S. dollars) in Table 1: "3.1", "5.7", "5.0", "6.5", "9.5", "13.0", "16.0", "18.0", "20.0."
  - Months of imports of goods and services: "1.2", "1.8", "1.2", "1.4", "1.8", "2.5", "2.9", "3.0", "3.1."
- External debt and financing:
  - Short-term debt excluding trade credit: "about $6 billion, or 11 percent of GDP."
  - Gross external debt (percent of GDP) projected path in Table 1: "25.0", "44.8", "52.1", "68.3", "72.5", "75.2", "81.6", "84.1", "85.6."
  - Public gross external debt (percent of GDP): "6.8", "18.1", "22.1", "35.6", "41.2", "45.1", "50.9", "53.8", "55.9."
  - Private (mostly state-owned-enterprises) external debt (percent of GDP): "18.1", "26.7", "30.0", "32.7", "31.2", "30.1", "30.7", "30.4", "29.6."
- Fiscal and macro projections (selected Table 1 entries):
  - Real GDP growth (annual percentage change) series: "10.2", "0.2", "7.6", "5.5", "1.4", "4.2", "4.6", "4.9", "5.0."
  - Consumer prices end of period (percent): "13.3", "10.1", "9.9", "57.2", "19.0", "11.0", "8.5", "7.0", "5.5."
  - Average consumer inflation (percent): "14.8", "13.0", "7.7", "38.0", "31.0", "14.5", "9.6", "7.7", "6.2."
  - General government balance (percent of GDP): "1.3", "-0.7", "-1.8", "-1.5", "-1.3", "-1.0", "-1.2", "-1.4", "-1.5."
  - Augmented general government balance (percent of GDP): "-3.5", "-0.7", "-4.3", "-3.3", "-3.1", "-2.8", "-3.0", "-3.2", "-3.3."
  - Revenue (percent of GDP): "50.6", "45.7", "42.0", "38.5", "37.9", "37.5", "37.1", "36.9", "36.5."
  - Expenditure (percent of GDP): "54.1", "46.4", "46.3", "41.8", "41.0", "40.2", "40.1", "40.1", "39.8."
  - Gross public debt (percent of GDP): "13.4", "21.7", "26.5", "46.0", "44.8", "49.0", "55.4", "55.3", "59.2."
- Balance of payments (selected Table 2 highlights, percent of GDP unless otherwise specified):
  - Current account (percent of GDP): "-8.6", "-13.0", "-15.5", "-14.7", "-10.1", "-9.4", "-9.2", "-9.2", "-9.1."
  - Trade balance (goods) (percent of GDP): "-10.3", "-14.1", "-16.7", "-11.8", "-7.8", "-7.7", "-7.5", "-7.5", "-7.4."
  - Exports (percent of GDP): "54.0", "43.4", "46.3", "72.9", "72.8", "70.5", "68.1", "66.6", "65.0."
  - Imports (percent of GDP): "-64.3", "-57.5", "-63.0", "-84.7", "-80.7", "-78.1", "-75.6", "-74.0", "-72.4."
  - Overall FDI (percent of GDP): "2.1", "1.8", "1.3", "0.6", "1.8", "2.0", "2.4", "2.6", "3.2."
- Financing gaps (Table 1 and Table 2):
  - Table 1 memorandum: "Financing gap (billions of U.S. dollars)" for projections: "6.3", "4.7", "6.2", "6.3", "5.6", "5.8."
  - Table 2 (millions of U.S. dollars) shows an overall "Financing gap" series in projections: "6,296", "4,653", "6,181", "6,258", "5,625", "5,847."

*Italic: IMF staff report excerpt as provided in the supplied content.*

### 2. Social protection fund

### 2. Social protection fund

### Key fiscal aggregates (first series in source)
- Revenue: 14.7 16.1 19.7 26.6 35.5 41.6 46.7 52.0 56.8
- Expenditure: 13.0 14.7 18.4 24.6 33.8 40.3 46.5 53.0 59.7
- Balance (cash): 1.7 1.4 1.3 2.0 1.8 1.3 0.2 -1.0 -2.8
- Balance of the general government: 1.7 -1.0 -2.9 -3.6 -4.1 -3.8 -5.4 -7.1 -8.3
- Augmented balance of the general government: -4.6 -1.0 -7.1 -7.9 -9.9 -10.7 -13.3 -16.0 -18.1
- Statistical discrepancy: 0.0 -0.3 0.4 0.0 0.0 0.0 0.0 0.0 0.0

### Financing (cash) — first series
- Total financing (cash): 2/4.6 1.3 6.7 7.9 9.9 10.7 13.3 16.0 18.1
- Privatization: 1.3 1.9 1.1 4.6 4.6 5.9 6.8 7.6 8.9
- Foreign financing, net 3/: 3.0 3.6 2.6 36.7 33.7 43.2 43.5 33.9 35.7
- Domestic financing, net: 0.3 -4.2 3.0 -33.4 -28.4 -38.4 -37.0 -25.5 -26.5
  - Banking system: -1.6 -3.9 2.8 -34.5 -28.3 -38.2 -36.9 -25.5 -26.5
  - Central bank: 0.2 -3.5 3.2 -23.7 -17.1 -33.4 -32.3 -21.8 -24.0
  - Deposit money banks (including SPF): -1.8 -2.2 -1.0 -9.5 -11.3 -4.8 -4.7 -3.7 -2.4
  - Revaluation effect: ... 1.8 0.6 -1.3 . . . . . .
  - Nonbank 4/: 1.9 -0.3 0.2 1.1 0.0 -0.2 -0.1 -0.1 0.0

### Memorandum items (first series)
- Fiscal deficit including lending under government programs: ...... 16.6 27.4 19.4 14.5 17.8 20.7 23.4
- Of which: lending under government programs: ...... 9.6 19.5 9.5 3.8 4.5 4.7 5.3

---

### Key fiscal aggregates (Table 3 series)
- Revenue: 11.3 11.7 12.1 11.0 10.9 10.8 10.6 10.5 10.4
- Expenditure: 10.0 10.7 11.3 10.2 10.4 10.4 10.6 10.7 10.9
- Balance (cash): 1.3 1.1 0.8 0.8 0.5 0.3 0.0 -0.2 -0.5
- Balance of the general government: 1.3 -0.7 -1.8 -1.5 -1.3 -1.0 -1.2 -1.4 -1.5
- Augmented balance of the general government: -3.5 -0.7 -4.3 -3.3 -3.1 -2.8 -3.0 -3.2 -3.3
- Statistical discrepancy: 0.0 -0.2 0.2 0.0 0.0 0.0 0.0 0.0 0.0

### Financing (cash) — Table 3 series
- Total financing (cash): 2/3.5 1.0 4.1 3.3 3.1 2.8 3.0 3.2 3.3
- Privatization: 1.0 1.4 0.6 1.9 1.4 1.5 1.6 1.5 1.6
- Foreign financing, net 3/: 2.3 2.6 1.6 15.2 10.4 11.2 9.9 6.9 6.5
- Domestic financing, net: 0.2 -3.0 1.8 -13.8 -8.7 -9.9 -8.4 -5.2 -4.8
  - Banking system: -1.2 -2.8 1.7 -14.3 -8.7 -9.9 -8.4 -5.2 -4.8
  - Central bank: 0.1 -2.5 2.0 -9.8 -5.2 -8.6 -7.3 -4.4 -4.4
  - Deposit money banks (including SPF): -1.3 -1.6 -0.6 -3.9 -3.5 -1.2 -1.1 -0.7 -0.4
  - Revaluation effect: ... 1.3 0.3 -0.5 . . . . . .
  - Nonbank 4/: 1.5 -0.2 0.1 0.4 0.0 0.0 0.0 0.0 0.0

### Memorandum items (Table 3 series)
- Fiscal deficit including lending under government programs: ...... 10.2 11.3 6.0 3.7 4.0 4.2 4.3
- Of which: lending under government programs: ...... 5.9 8.0 2.9 1.0 1.0 1.0 1.0
- Gross public debt 5/: 13.4 21.7 26.5 46.0 44.8 49.0 55.4 55.3 59.2
- GDP (trillions of Belarusian rubels): 129.8 137.4 163.0 242.0 325.7 386.8 440.2 494.6 549.0

Sources: Ministry of Finance; SPF; and IMF staff estimates.

*Italic: Source document — _cr11277 - 2. Social protection fund (PDF), IMF staff tables and projections as provided in the source content.*

### Appendix I. Table 2. Belarus: Public Sector Debt Sustainability Framework, 2006–16

### Appendix I. Table 2. Belarus: Public Sector Debt Sustainability Framework, 2006–16

### Overview
- Coverage: Public Sector Debt Sustainability Framework, 2006–16 (Percent of GDP, unless otherwise indicated).
- Projections and scenario analysis presented (including bound tests of baseline scenario).
- Key historical and baseline debt ratios shown: Historical: 31; Baseline: 59.

### Debt-stabilizing primary balance
- Formula (as presented): Derived as [(r - p(1+g) - g + ae(1+r)]/(1+g+p+gp)) times previous period debt ratio, with r = interest rate; p = growth rate of GDP deflator; g = real GDP growth rate; a = share of foreign-currency denominated debt; and e = nominal exchange rate depreciation (measured by increase in local currency value of U.S. dollar).

### Bound tests — scenarios and key numeric outcomes
- Notes on shocks:
  - 1/ Shaded areas represent actual data. Individual shocks are permanent one-half standard deviation shocks. Figures in the boxes represent average projections for the respective variables in the baseline and scenario being presented. Ten-year historical average for the variable is also shown.
  - 2/ Permanent 1/4 standard deviation shocks applied to real interest rate, growth rate, and primary balance.
  - 3/ One-time real depreciation of 30 percent and 10 percent of GDP shock to contingent liabilities occur in 2011, with real depreciation defined as nominal depreciation (measured by percentage fall in dollar value of local currency) minus domestic inflation (based on GDP deflator).

- Baseline and Historical Scenarios:
  - Historical: 31
  - Baseline: 59

- Gross financing need under baseline (right scale): (figure label only; no numeric series provided in text)

- Interest Rate Shock:
  - Labelled values in figure: 87, 59

- Growth Shock:
  - Labelled values in figure: 74, 59

- Primary Balance Shock (percent of GDP) and no policy change scenario:
  - Labelled values in figure: 63, 59, 85

- No policy change scenario vs. Baseline:
  - Labelled values in figure: Baseline; No policy change; Combined shock: 77, 59

- Combined Shock (see footnote 2/):
  - Labelled values in figure: Baseline; Combined shock: 77, 59

- Real Depreciation and Contingent Liabilities Shocks (footnote 3/):
  - Labelled values in figure: Baseline: 82, 59; Contingent liabilities shock: 68

- Additional numeric labels shown in figure footer (averages presented):
  - Baseline:-0.6
  - Scenario: -1.5
  - Historical:-0.8
  - Baseline:-8.0
  - Scenario: 2.8
  - Historical:-19.9
  - Baseline:4.0
  - Scenario: 2.3
  - Historical:7.4

### Figure and presentation notes
- Figure title: Appendix I. Figure 2. Belarus: Public Debt Sustainability: Bound Tests of Baseline Scenario 1/ (Public debt in percent of GDP).
- Source indicated: IMF staff estimates.

*Source: Appendix I. Table 2 and Appendix I. Figure 2, Belarus: Public Sector Debt Sustainability Framework, 2006–16 (from the provided IMF document).*

### 12. Debt management. Debt management is an area of priority reform for Belarus. The

### 12. Debt management. Debt management is an area of priority reform for Belarus.

### Debt management findings and planned support
- The Bank conducted the first Debt Management Performance Assessment (DeMPA) in Belarus in FY11.
- The DeMPA work was built on the findings of past WB and IMF TAs in debt management and in access to capital markets.
- The Bank plans to provide further assistance to Belarus in:
  - the development of medium-term debt strategy, and
  - capacity building of the debt management staff.

### Financial sector findings and support
- The 2008 FSAP Update, prepared jointly by the Bank and the Fund, provided valuable insights on the key vulnerabilities in the financial sector and reforms needed and formed the basis of the follow-up dialogue.
- The Bank conducts financial sector monitoring jointly with the IMF.
- The Bank also provides a TA on Securities market Regulatory Reform.

### Areas in which the IMF leads
- The IMF is actively engaged with the authorities in discussing the macroeconomic program, providing technical assistance and related support, including support on:
  - economic and financial statistics,
  - tax policy,
  - monetary operations, and
  - fiscal transparency.
- The IMF is leading the dialogue on:
  - setting the objectives for monetary and exchange rate policies, and
  - the overall budget envelope.
- The IMF analysis in these areas serves as an input to the Bank policy advice.
- The Bank and the IMF teams have regular consultations, and the Bank staff takes part in the IMF Article IV Consultations. This helps to ensure consistency of policy recommendations by the two institutions.

### Contact points
- Connie Luff (Country Program Coordinator, ECCU2), 202-458-4068
- Gallina A.Vincelette (Senior Economist, ECSPE), 202-473-0288
- Marina Bakanova (Senior Country Economist, ECSPE), 375-17-2265284

### Bank and Fund planned activities (selected items and timing)
- Bank Work Program (AAA) items and provisional timing of missions / expected delivery date:
  - Debt Management Performance Assessment — May 2011
  - Strengthening Medium-term Fiscal Planning TA — June 2011
  - TA on social policies — Ongoing
  - Financial Sector Monitoring TA — Ongoing
  - Post FSAP Support for Securities Market Development TA — Ongoing
  - Privatization TA — Ongoing
  - TA in environmental policies and institutions (grants) — Ongoing
  - Belarus Country Economic Memorandum — Ongoing
  - Programmatic Public Expenditure Review (PER-1) - phase 1 — Ongoing
  - Programmatic Public Expenditure Review (PER-2) - phase 2 — Ongoing
  - (Other Bank items listed as Through June 2012 and specific dates: November 2011; July 2011; June 2012; August 2011; Through June 2012)
- Fund Work Program items and timing:
  - TA on social safety net — October 2011; TA report to government in November 2011
  - TA on banking supervision — July 2011; August 2011

*IMF/World Bank staff note as presented in the source document.*

### ANNEX III. BELARUS—STATISTICAL ISSUES

### ANNEX III. BELARUS—STATISTICAL ISSUES

### I. Assessment of Data Adequacy for Surveillance
- General:
  - "Data provision has some shortcomings, but is broadly adequate for surveillance."
  - "The most affected area is external debt data."
- National Accounts:
  - NSC compiles and disseminates quarterly and annual GDP estimates at current and constant prices following the 1993 System of National Accounts.
  - Monthly GDP is compiled 15 days after the end of the reference month.
  - NSC compiles annually a full set of accounts (up to the financial accounts), institutional sector accounts, and input-output tables.
  - Experimental regional GDP estimates (current and constant prices)—monthly, quarterly and annual—have been started.
  - "The accuracy of the source data is good, and the statistical techniques used are sound."
  - National accounts estimates are internally consistent and consistent with other macroeconomic statistics.
  - "All other real sector data are disseminated in accordance with the SDDS requirements."
- Price Statistics:
  - CPI covers 31 towns; PPI covers 1,467 industrial organizations; both published monthly.
  - NSC publishes CPI subindices for foodstuffs, non-food goods, and services.
  - "The CPI is based on weights from 2009."
  - "Detailed PPI weight data are not published."
- Government Finance Statistics:
  - Compiled in broad compliance with GFSM 2001.
  - Areas needing improvement:
    - Classification of some expenses (e.g., subsidies to corporations, social benefits to households, capital transfers to corporations).
    - Inconsistency between GFS and monetary data.
    - Valuation of assets and liabilities (at nominal or market value).
    - Compilation for public corporations.
- Monetary Statistics:
  - Monetary and Financial Statistics compiled by NBRB broadly following MFSM methodology.
  - Problems noted: treatment of IMF accounts, compilation of the monetary base, classification of some institutional units.
- External Sector Statistics:
  - NBRB publishes quarterly balance of payments and international investment position in BPM5 and is transitioning to BPM6.
  - "Overall the timeliness and serviceability of external sector data is satisfactory, although there are gaps in external debt data."

### II. Data Standards and Quality
- "Belarus subscribed to the Special Data Dissemination System (SDDS) on December 22, 2004."
- "A data ROSC report was published on February 1, 2005."
- Table of Common Indicators (as of July 11, 2011): entries indicate frequency, timeliness, and ROSC quality assessments for numerous macroeconomic datasets (exchange rates, reserves, reserve/base money, broad money, central bank and consolidated bank balance sheets, interest rates, CPI, government fiscal data, external sector balances, GDP, gross external debt, international investment position). (Table entries preserved in source.)

### Key Recent Economic Developments and Indicators (as reported subsequently)
- Growth and inflation:
  - "Economic growth has been slowing down, although the year-on-year GDP growth remained high at 9.8 percent in January-July, reflecting rapid economic growth in the first five months of the year when GDP growth reached 12.5 percent."
  - "Inflation remained high, with 12-month CPI at 48.4 percent in July."
  - Following a 35 percent devaluation in May, producer prices "reached 72.9 percent year-on-year in July."
  - For June, 12-month rate of inflation was "43 percent" and "is expected to accelerate to over 50 percent by the end of the year."
- External sector and reserves:
  - Trade in goods and services recorded a deficit in June (surplus in May), influenced by seasonal effects and higher-than-usual imports of cars ahead of July 1 tariff increase.
  - Possible underreporting of exports noted due to multiple exchange rates.
  - "Official reserves amounted to $4.2 billion at end-July."
  - The National Bank of the Republic of Belarus has refrained from interventions on the foreign exchange market.
- Exchange rate and parallel market:
  - "Exchange rate pressures intensified."
  - Rubel depreciated on the parallel market; "The rubel was offered at 7,900 rubels to a dollar on the parallel market on August 15."
- Fiscal and monetary policy actions:
  - General government recorded a surplus of "4.4 trillion rubels (3.5 percent of GDP) in January-July," reflecting strong revenues and the 35 percent devaluation.
  - Authorities project deterioration of the budget position in July-December due to weakening revenues and higher expenditures from inflationary pressures and higher cost of debt service after devaluation.
  - Authorities aim for a budget deficit of "less than 1 percent of GDP in 2011," compared with "1.5 percent of GDP agreed with the Eurasian Economic Community’s Anti-Crisis Fund."
  - NBRB increased rates: "the refinancing and the overnight rates were increased by 200 basis points to 22 percent and 32 percent, respectively, from August 17."
- Access to financial markets and banking sector:
  - Moody’s downgraded Belarus’ sovereign rating from "B2 to B3 on July 21."
  - Ratings of five Belarusian banks were downgraded with a negative outlook.
  - Eurobond yields rose to "12.5 percent" following the downgrade and further to "13.7 percent in mid-August."
  - Authorities acknowledged that foreign borrowing by banks has been gradually declining.
  - Bank deposits stabilized in July with some early growth signs in August.
  - Authorities report that reported non-performing loan levels "has not increased during the last several months."
- IMF macro outlook and projections (from PIN and staff report):
  - "GDP growth is expected to slow down from 11 percent in the first half of the year to 5½ percent in 2011 and further to 1½ percent in 2012."
  - The slowdown is expected to operate "mainly via a sharp slowdown and a subsequent contraction of domestic demand."
- Executive Board recommendations and assessment:
  - Directors regretted that weak macroeconomic policies led to a sharp deterioration, widening the external current account deficit and causing a foreign exchange market crisis.
  - Directors welcomed authorities’ commitments under the ACF loan agreement and agreed that plans to reduce the fiscal deficit, raise interest rates, limit lending under government programs, and unify multiple exchange rates are steps in the right direction, but stressed the importance of firm and consistent implementation.
  - Directors urged further fiscal and monetary tightening to restore external stability, supported floating the rubel to unify exchange rates and allow needed external adjustment, while some Directors considered a substantial reserve buffer necessary before such a move.
  - Directors emphasized public wage restraint to help contain exchange rate and price pressures and recommended putting in place an efficient social safety net.
  - Directors noted low reported nonperforming loan levels and capital adequacy ratios above prudential norms, but expressed concern over elevated liquidity, credit, and rollover risks—urging close monitoring and increased role for market mechanisms and elimination of distortions.
  - Directors called on authorities to demonstrate consistent commitment to structural reforms: step up price liberalization; make the Development Bank and the National Investment and Privatization Agency fully operational; embark on enterprise reform to facilitate corporate sector adjustment and strengthen competitiveness.
  - "Financial support from the Fund will require demonstrated commitment to strong policies and structural reforms."

### Fiscal Indicators and Projections (selected items preserved from Table 3 and Selected Economic Indicators)
- From Table 3 (percent of annual GDP unless otherwise indicated) — selected historical and projected entries:
  - Revenue series (2008–2016): "50.6 45.7 42.0 37.9 37.5 37.1 36.9 36.5"
  - Taxes series (2008–2016): "33.2 28.3 25.8 24.5 24.3 24.2 24.1 24.1 24.0"
  - Expenditure series (2008–2016): "48.8 46.1 45.1 41.1 40.3 39.6 39.5 39.5 39.2"
  - Net lending (+) / borrowing (–): "1.8 -0.4 -3.1 -2.6 -2.4 -2.1 -2.4 -2.6 -2.7"
  - Memorandum items: General government balance series "1.3 -0.7 -1.8 -1.5 -1.3 -1.0 -1.2 -1.4 -1.5"; Augmented general government balance series "-3.5 -0.7 -4.3 -3.3 -3.0 -2.8 -3.0 -3.2 -3.3"
  - Domestic and foreign liabilities of general government and other line items are presented in the table (as in source).
- Selected Economic Indicators (2007–11):
  - Real GDP (annual change): "2007 8.6; 2008 10.2; 2009 0.2; 2010 7.6; 2011 Prel. 5.5"
  - Consumer prices, end of period: "2007 12.1; 2008 13.3; 2009 10.1; 2010 9.9; 2011 57.2"
  - Broad money growth (rubel): "2007 35.0; 2008 22.5; 2009 0.9; 2010 27.4; 2011 60.0"
  - Current account (percent of GDP): "2007 -6.7; 2008 -8.6; 2009 -13.0; 2010 -15.5; 2011 -14.7"
  - Gross external debt (percent of GDP): "2007 26.5; 2008 25.0; 2009 44.8; 2010 52.1; 2011 68.3"
  - Gross public debt (percent of GDP): "2007 11.4; 2008 13.4; 2009 21.7; 2010 26.5; 2011 46.0"
  - Official reserves (billions of U.S. dollars): "2007 4.2; 2008 3.1; 2009 5.7; 2010 5.0; 2011 6.5"
  - Nominal GDP (billions of U.S. dollars): "2007 45.3; 2008 60.8; 2009 49.2; 2010 54.7; 2011 ..."

*Source: _cr11277 - ANNEX III. BELARUS—STATISTICAL ISSUES (As of July 11, 2011).*

### 73.5 percent since the beginning of the year. However, the risks associated with step

### _cr11277 - 73.5 percent since the beginning of the year. However, the risks associated with step

### Exchange rate adjustment and immediate effects
- Step devaluation materialized after earlier authorities’ concerns.
- Competitiveness improved sharply following devaluation.
- Devaluation resulted in:
  - high inflation,
  - increased dollarization,
  - higher demand for foreign exchange when no resources were available to cushion these effects.
- Temporary administrative measures were taken to prevent uncontrollable movements in the exchange market.

### External financing and balance of payments
- External financing of US$ 3 billion was agreed under a stabilization program with the Eurasian Economic Community Anti-Crisis Fund.
  - US$ 800 million was disbursed in June.
- Staff describes the program as “insufficient”; authorities argue it is consistent with the Fund’s proposed policies and contains a comprehensive set of policies and key performance indicators.
- Balance of payments indicators (first half of 2011):
  - Trade deficit reached US$ 3 billion, or 10.8 percent of GDP.
  - Current account deficit reached US$ 5.4 billion or 19.3 percent of GDP.
- Adjustment early results:
  - In May, the trade balance showed a small surplus.
  - In the first six months export growth outpaced import growth by almost 5 percentage points.
  - Trend expected to further improve with export growth outpacing import growth by 14 percentage points by the end of 2011.

### Financial system stability and banking sector metrics
- Share of non-performing loans in total assets at risk:
  - 3.5 percent in 2010,
  - decreased to 3.2 percent as of August 1, 2011.
- Capital adequacy of the banking sector:
  - 20.5 percent in 2010 (regulatory minimum is 8 percent),
  - declined marginally to 20.0 percent since January 2011.
- Staff noted recapitalization of some banks may be needed.
- No commercial bank has defaulted or sought restructuring of its liabilities.
- Deposit flows and confidence:
  - Initial outflow of deposits by 15.6 percent in January-May.
  - Since July, household deposits increased by 8.3 percent for the domestic currency and by 1.8 percent for foreign exchange.
- Central bank measures:
  - No new contracts under the central bank’s “deposit exchange” schemes have been concluded.
  - Authorities are repaying foreign exchange to banks, which reduces money supply and tightens monetary conditions.
- Outlook for external borrowings: It appears there will not be substantial problems with rollovers of banks’ external borrowings.

### Fiscal policy stance and social safeguards
- Fiscal policy will continue to be very disciplined.
- Budget expenditures will be tightly managed to ensure core items and social obligations are covered.
- Authorities believe the fiscal surplus of 3.5 percent of GDP in January-July will allow accommodating the legislatively mandated indexation of wages.
- Wages in the real sector will solely depend on productivity.
- Authorities will consider recapitalization of state-owned banks with due regard to local governments’ actual ability to honor their guarantees and transfer lending under government programs to the Development Bank.
- Policy priority: Elimination of cross-subsidization and switching to a fully operational system of targeted social assistance.
- Authorities rely on forthcoming Fund technical assistance on social assistance issues.

### Exchange rate unification, floating, and risks
- Appropriate solutions to unifying the exchange rate are expected in early September.
- Authorities expect higher proceeds from exports and sale of certain state assets to solidify a stable exchange rate environment in the near future.
- Post-unification objectives:
  - Avoid expansionary support of economic growth,
  - Ensure exchange rate regime has sufficient flexibility,
  - Maintain prudent fiscal and monetary policies.
- Staff suggestion to immediately float the exchange rate without central bank interventions is recognized as problematic:
  - Floating would entail a further depreciation.
  - Significant deferred demand for foreign exchange makes reasonable projections of depreciation scope difficult.
  - Under a completely free floating exchange rate without sufficient resources to absorb sharp fluctuations, the risks of disruption of production caused by an inflation-depreciation spiral may be not less than the disruption predicted by the staff under the present exchange rate regime.

### Structural reforms, liberalization, and privatization
- Authorities remain committed to economic liberalization, structural reform and promoting private initiative.
- Regulatory and institutional arrangements are being put in place to improve the business environment and conditions for private sector development.
- Preliminary information indicates five more economic liberalization reforms implemented in 2010 and 2011 (most notably in taxation) have been recorded in the upcoming World Bank’s Doing Business Report 2012, supporting expectations of further improvement in Belarus’ ranking.
- Price controls addressing devaluation aftershock have been lifted.
- Utilities and transportation tariffs are being steadily increased.
- Privatization progress:
  - Capacity building for the investment and privatization agency took longer than expected, but institutional foundation and staffing are being established.
  - Auctions have been held almost every week since June offering medium size enterprises owned by the central government to local and foreign investors in a transparent procedure.
  - Investors’ demand remains extremely weak; several benchmark deals completed predominantly with local entrepreneurs.
  - Larger state-owned enterprises, largely corporatized, are attempting to tap international capital markets.
  - An initial IPO by Belarus’ largest pharmaceutical company fell short of expectations; management plans a repeat issue in the fall.

### Engagement with international partners and outlook
- Belarusian authorities reiterate appreciation of the Fund’s assistance and look forward to further dialogue with the Fund, the World Bank and other development partners across the reform agenda.
- Further talks on a possible Fund-assisted program are expected to resume at the time of the Annual Meetings.

*Source: IMF staff report content as provided in the supplied PDF excerpt.*

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