## _cr12113

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---

### Real Effective Exchange Rate (REER) assessment and recent crises
- Belarus experienced two crises in four years: the 2008–09 external-financing/export shock and a self-inflicted 2011 crisis following reversal of macro-stabilization policies from the 2009–10 SBA.
- External debt rose to 61.4 percent of GDP in 2011.
- 2011 crisis features:
  - Expansionary credit and wage policies widened the current account deficit.
  - Attempts to maintain a fixed exchange rate pressured official reserves, led to loss of exchange rate control, and triggered sharp inflation acceleration (12-month inflation accelerated to 109 percent in late 2011).
- Exchange rate and REER:
  - Exchange rate unification on October 20, 2011 moved to a flexible exchange rate system.
  - As of Q1 2012 REER was broadly in line with fundamentals (IMF staff calculations).
  - Macroeconomic balance approach: underlying current account deficit falls within range of estimated norms; does not suggest misalignment.
  - External sustainability (ES) approach: sustaining end-2011 NEAP of 52 percent of GDP could be consistent with a somewhat larger current account deficit; ES does not necessarily imply undervaluation.

### Stabilization after the 2011 crisis: policy actions and initial effects
- Key H2 2011 policy actions (consistent with Fund advice):
  - NBRB discontinued non-standard liquidity support from June 2011 and restrained standard liquidity support.
  - Policy interest rates substantially raised later in 2011 (refinancing rate from 18 to 45 percent; overnight rate from 22 to 70 percent in H2 2011).
  - Exchange rate unification in October 2011 and adoption of flexible exchange rate regime.
  - Expenditure restraint produced a fiscal surplus of 3.1 percent of GDP for 2011.
  - Commitments for 2012: tight limit on financing of lending under government programs (LGP) and a balanced budget.
- Early 2012 outcomes (to Q1/Q2 2012):
  - Monthly inflation fell from an average 9.7 percent in August–November to less than 2 percent in December–March.
  - Households and corporates increased rubel deposits; households and corporates sold dollars.
  - Official reserves rose to $7.9 billion; later reported foreign exchange reserves increased to more than 8 billion dollars in early 2012 with underlying net reserve position improved.
  - NBRB intervened by purchasing FX to avoid rubel appreciation.
  - Gas price reduction from November 2011 agreement with Russia reduced price by nearly a half from the level paid in Q4 2011; at last year’s gas import volumes this reduction is equivalent to about 5 percent of GDP.
- Reserve increases included:
  - $2.5 billion from sale of a 50 percent stake of Beltransgas (privatization proceeds).
  - $1.24 billion from two tranches of the EurAsEC’s Anti-Crisis Fund (ACF) loan.
  - $1 billion loan from Sberbank.
- ACF loan details:
  - $3 billion loan approved June 2011; balance disbursed in four equal disbursements of $440 million in 2012 and 2013.
  - Loan maturity: 10 years with a three-year grace period.
  - Interest: variable referenced to cost of sovereign borrowing by Russia and Kazakhstan.
  - ACF conditions included raising interest rates to positive real levels; exchange rate unification; fiscal discipline; reduction of LGP to 4 percent of GDP in 2011, 3 percent of GDP in 2012 and 1 percent of GDP in 2013; and privatization generating $2.5 billion in proceeds a year from 2011 to 2013.

### The 2011 crisis — salient facts (Box 1)
- Gross reserves fell to around 3½ billion US dollars by end-Q1 2011 (less than one month of imports).
- NBRB stopped intervening on the FX market in March 2011; a parallel market emerged.
- Official exchange rate devalued from about 3000 to 5000 rubels per US dollar; parallel rate depreciated to about 9000 rubels per US dollar.
- Inflation accelerated to over 100 percent in late 2011 due to pass-through.
- Stabilizing measures in H2 2011: stop below-market liquidity provision (from June 2011), large policy rate increases, exchange rate unification (October 20, 2011), flexible exchange rate with limited intervention, tight budget policy; monthly inflation began subsiding in December 2011.
- Early 2012: consumer prices up 3.5 percent in first two months; rubel appreciated; foreign exchange reserves increased to more than 8 billion dollars. However, inflation and devaluation expectations remained volatile and risk of renewed pressures was substantial if stabilizing policies changed.

### REER quantitative excerpt (Box 2)
- Exact reproduced quantitative lines from source:
  - I. CGER pooled estimation model-2.2-2.8-0.7-0.381.7
  - II. CGER hybrid pooled estimation model 1/-4.2-2.81.4-0.38-3.6
  - I. CGER Pooled estimation model-2.2-6.0-3.8-0.3810.1
  - II. CGER hybrid poolded estimation model 1/-4.2-6.0-1.8-0.384.8
  - NEAP (percent of GDP), Real growth (percent, 2017), Inflation (percent, 2017), NEAP-stabilizing CAB (percent of GDP), Underlying CAB (percent of GDP), Gap (percent of GDP), REER elasticity, Misalign. (percent) table entries include:
    - Stabilizing the current level of NEAP 1/-525.06.0-5.3-2.82.4-0.38-6.4
    - No adjustment of the underlying CA-285.06.0-2.8-2.80.0-0.380
  - Note: 1/ NEAP at the end-2011.
- Projections/scenarios:
  - Baseline scenario: projected REER appreciation in remainder of 2012 because projected inflation > projected depreciation; underlying current account deficit increases to 6 percent of GDP and reintroduces misalignment of 5–10 percent by end-2012.
  - Adjustment scenario: sharp reduction in inflation and absence of FX intervention would limit REER appreciation, maintain competitiveness, and support current account adjustment.
- Caution: high uncertainty about exchange rate adjustment effectiveness in an economy with strong central planning features (70 percent of total economy controlled by the state), administrative interference, quantitative targets, soft budget constraints.

### Outlook, policy consistency, and principal downside risks
- Policy inconsistency risks:
  - Authorities’ growth target for the year: 5–5.5 percent—staff view this is inconsistent with objective to reduce inflation to 20 percent this year.
  - Expected real wage growth of 4 percent and statements targeting average wage of $500 per month by mid-2013 signal possible loosening of domestic demand policies.
  - After large rate increases in H2 2011 (refinancing rate +27 percentage points, overnight rate +48 percentage points), NBRB began reducing rates: refinancing rate reduced by 7 percentage points in Q1 2012 and by 2 percentage points so far in Q2 2012.
- Baseline scenario assumptions:
  - Policies remain tight for now but relax later in the year when activity and wages underperform targets.
  - Relaxation assumptions include reduction of policy interest rates leading to acceleration of non-LGP credit, higher-than-planned bank LGPs, continued growth of budget sector and SOE wages.
  - Scheduled debt repayments financed by drawing down reserves, leading to reduction of debt-to-GDP ratio and much lower reserves over the medium term.
- Principal downside risks (selected):
  - Most significant: relaxation of domestic demand policies to hit growth target—could re-ignite inflation-depreciation spiral and erode competitiveness; containment attempts via price controls or large-scale intervention would deepen distortions and deplete reserves.
  - Macroeconomic uncertainty increases financial sector risks: pressure on bank capital and exposure to sudden depositor sentiment shifts.
  - External risks: escalation of euro area crisis could reduce exports demand and lower rollover rates on external borrowing; impact depends on effect on Russia.
  - Terms-of-trade risk: gas prices may not remain low if Russia increases domestic gas price to which Belarus’ contract is linked.

### Banking sector risks and Financial Soundness Indicators (selected exact values)
- System outcomes and risks:
  - All banks continued operations during 2011 despite FX market freeze for half the year.
  - System capital adequacy ratio (CAR) fell from 20.5 percent at the beginning of 2011 to 14.9 percent at end-November 2011.
  - Recapitalization of state-owned banks (SOBs) of 14.5 trillion rubels (5 percent of GDP) increased system CAR to 24.7 percent at end-2011 by local standards.
  - Banks repaid foreign obligations around $6 billion at end-2011 (half short term).
- Asset quality and deposit behavior:
  - Deposits stabilized and resumed growth since October 2011; competition for funds eroded interest margins.
  - System-wide NPLs increased modestly to 4.2 percent at end-2011.
  - Watch loans rose from 3.6 percent of total loans at end-2010 to 10.6 percent at end-2011.
  - Provisions to total non-performing loans improved from 61.9 to 79.0 (percent).
  - FX loans to corporates increased by five percent in first two months of 2012 due to high rubel interest rates; NBRB introducing special provision for loans to borrowers without FX income from July 1, 2012.
  - FX loan exposure to corporates limited because loans primarily to exporters; FX loans to households low due to 2009 ban.
  - Banks hold significant FX claims on NBRB largely via deposit exchanges—could pressure reserves if substantial FX deposit withdrawals occur.
- Financial Soundness Indicators for 2011 (selected exact time series as presented):
  - Capital adequacy ratio: 20.5; 16.5; 14.3; 14.9; 24.7
  - Tier I capital adequacy ratio: 14.9; 11.9; 9.9; 10.3; 18.8
  - Capital to assets: 13.7; 10.2; 8.4; 8.6; 14.1
  - Foreign exchange loans to total loans 1/: 21.7; 29.8; 39.5; 39.0; 39.5
  - Non-performing loans to gross loans: 3.5; 4.2; 4.3; 4.4; 4.2
  - Watch loans: 3.6; 8.4; 8.7; 10.2; 10.6
  - Provisions to total non-performing loans: 61.9; 72.2; 72.2; 75.1; 79.0
  - Source: National Bank of the Republic of Belarus. (1/ The change in the ratio is due primarily to valuation effects.)

### Key staff observations and immediate policy priorities
- REER and competitiveness:
  - Exchange rate unification and H2 2011 tightening re-aligned REER with fundamentals as of Q1 2012, but loosening policies could reintroduce misalignment of 5–10 percent by end-2012 if underlying current account reaches 6 percent of GDP.
  - Adjustment scenario (sharp inflation reduction and absence of FX intervention) would limit REER appreciation and support competitiveness and current account adjustment.
- Large remaining vulnerabilities:
  - Reduced safety margins (higher external debt), dependence on Russian support, fiscal and monetary policy consistency risks, banking sector exposure to domestic slowdown and external shocks.
- Immediate policy priorities:
  - Maintain monetary and fiscal discipline to preserve stabilization gains.
  - Avoid loosening domestic demand policies that would reignite an inflation-depreciation spiral.
  - Limit FX intervention that could deplete reserves and reintroduce distortions.
  - Monitor bank asset quality closely and be prepared for recapitalization needs if NPLs rise with economic slowdown.

### Macroeconomic framework, fiscal policy, and medium-term agenda
- Macroeconomic framework guidance:
  - Make macroeconomic framework and policies consistent with the inflation objective to achieve external and domestic stability.
  - Reducing emphasis on achieving high GDP growth and avoiding setting wage targets in dollar terms would boost confidence that strong policies will continue.
  - Pursuing tight policies would keep a lid on inflation and preserve competitiveness gains from devaluation.
  - A reduction of the trade deficit—and better prospects for the financial account—would allow an increase in reserves to more than 3 months of imports in the medium term.
- Monetary policy guidance for NBRB:
  - Guided by twin goals of restoring domestic and external stability.
  - External stability requires further reserves increases and avoiding significant real appreciation.
  - Domestic stability requires limiting credit growth to about 20 percent, a value implied by the monetary program and consistent with the inflation objective.
  - Staff viewed the reduction of the refinancing rate by 500 basis points in early March as premature because it brought the rate below the March estimate of expected inflation; staff’s annualized 6-month ahead inflation projection in March 2012 was more than 40 percent.
  - Staff recommended addressing appreciation pressures via sterilized intervention and additional exchange rate flexibility rather than interest rate reductions.
- The paradox of fiscal policy:
  - General government recorded a cumulative surplus of about 2 percent of GDP over the last four years, yet total public debt (including the NBRB and guaranteed debt) grew from about 22 percent of GDP in 2008 to above 50 percent in 2011.
  - Below-the-line operations (bank recapitalizations and outlays for government guaranteed debt) amounted to 13.5 percent of GDP in 2008–11, with 6.1 percent of GDP in 2011 alone.
  - Quasi-fiscal activities in the form of LGP amounted to 12 percent of GDP in 2010–11.
- Staff fiscal recommendations and measures:
  - Limit government financing of LGP to 7 trillion rubels (1.4 percent of GDP) in 2012 and balance planned LGP with financing sources.
  - DB should not be allowed to borrow to finance additional LGP (staff recommendation).
  - Authorities approved a balanced budget for 2012, implying a fiscal contraction of about 2 percent of GDP as measured by the change in the primary cyclically adjusted augmented fiscal balance.
  - Budget sector wage guidance: after a 30 percent increase in January, budget sector wages should grow less than 10 percent in nominal terms during the remainder of the year.

### Structural reform, privatization, and growth model recommendations
- Growth model diagnosis:
  - Reliance on high investment supported by subsidized energy inputs from Russia, directed credit and ample foreign financing produced high growth but created vulnerabilities.
  - Market share shrinking even within CIS markets.
- Reform priorities and measures:
  - Price and external trade liberalization, SOE reform and privatization to support stabilization and enhance medium-term sustainable growth.
  - Phase out generalized subsidies to households; raise cost recovery ratio of household utility tariffs to at least 40 percent this year to reduce expenditure by about 0.5 percent of GDP; allocate 0.1–0.2 percent of GDP of savings to augment targeted social assistance.
  - Reduce interest rate subsidies on LGP.
  - Reform civil service to achieve a smaller and better paid workforce.
  - Pension reforms to contain expenditure; President’s proposal to increase pension benefits for workers postponing retirement is directionally positive but financial equilibrium should not be achieved via increases in an already high contribution rate.
  - Develop an inflation targeting framework over the medium term: enhance NBRB operational autonomy; reduce share of regulated prices; impose hard budget constraints on enterprises; remove quasi-fiscal activities from commercial banks; deepen the financial system.
  - Privatization process: NIPA to bring first eight companies selected for privatization with World Bank support to point of sale; expand privatization pipeline by at least 20 companies.
- Wage-productivity imbalance (Box 4 highlights):
  - Real wages grew faster than productivity except in 2003 and 2009.
  - At end-2011, real GDP per worker was 85 percent higher than its 2002 level; real wages were about 140 percent higher.
  - 2010: real wages rose by 33 percent, productivity increased by 7 percent.
  - Wages in US dollar terms increased by 37.6 percent y/y in December 2010.
  - Mismatch between wage and productivity growth was a key factor behind 2011 balance of payments crisis.

### Financial sector reform recommendations (staff) and authorities’ views
- Staff recommendations:
  - Establish a strong Development Bank (DB) and channel all LGP through the DB to free commercial banks for market-based lending; DB to operate within resource envelope consistent with government ceiling on LGP; DB precluded from borrowing to support additional activities in immediate future; DB financing reflected above the line in the budget and DB risks recognized in the budget.
  - Manage existing LGP exposure: phase out remaining LGP stock on SOBs’ balance sheets, possibly using an asset management company.
  - Prepare SOBs for privatization after relieving them of quasi-fiscal legacy functions, with investors receiving major controlling shares.
  - Strengthen supervision: full independence of NBRB supervision staff and use of risk-based supervision.
- Authorities’ stance:
  - Consider the banking system resilient and favor less fundamental changes.
  - Agreed SOBs need to shift toward more commercial lending; plan to sell major SOBs to well-reputed international banks in the medium-term.
  - Open to possibility that all LGP should be done by the DB over the medium term; in 2012 planned to increase opportunities for private banks to participate in LGP relying on banks’ own resources.

### External position, debt projections, and reserve adequacy
- External debt:
  - External debt rose to over 61 percent of GDP by end-2011 from 25 percent at end-2008.
  - Staff projects external debt ratio would decline only gradually, falling to 56 percent of GDP by end-2017 (staff projection excerpt).
- Reserves and repayment risk:
  - Reserves projected to remain at significantly low levels, covering less than 1 month of imports and about 20 percent of short-term debt during 2014–17 under baseline stress paths.
  - Stabilization policies proposed would reduce risks by building up reserves to sufficient levels over the medium term (covering about 3 months of imports and short-term debt).
- Agreement on a new Fund program would require full commitment by the authorities to a consistent strategy based on stabilization and reform; authorities’ request for a new Fund arrangement remains active.

### External Debt Sustainability Framework (Appendix I) — selected stress-test notes and risk assessment
- Shock specifications:
  - Individual shocks: permanent one-half standard deviation shocks (real interest rate, growth rate, current account).
  - Combined shock: permanent 1/4 standard deviation shocks applied to real interest rate, growth rate, and current account balance.
  - Real depreciation shock: one-time real depreciation of 30 percent in 2012.
- Key risk assessment entries (selected):
  - 1. Loosening of macroeconomic policies to achieve growth targets:
    - Overall Level of Concern: High
    - Likelihood of Severe Realization in Next 1-3 Years: High
    - Expected Impact if Realized: High
  - 2. External shock from euro zone crisis intensification:
    - Overall Level of Concern: Medium; Likelihood: Medium; Expected Impact: Medium
  - 3. Substantial reduction in non-official external debt rollover rates:
    - Overall Level of Concern: Low to Medium; Likelihood: Low to Medium; Expected Impact: Medium
  - 4. Weakening bank profitability:
    - Overall Level of Concern: Low to Medium; Likelihood: Low to Medium; Expected Impact: Medium
  - 5. Increase in price of gas and oil imported from Russia:
    - Overall Level of Concern: Low to Medium; Likelihood: Low to Medium; Expected Impact: Medium

### Selected macro and fiscal statistics (baseline highlights, as presented)
- Real GDP (annual percent change): 2008 = 10.2; 2009 = 0.2; 2010 = 7.7; 2011 = 5.3; 2012 prelim. = 3.0; 2013 = 3.4; 2014 = 4.4; 2015 = 4.8; 2016 = 4.9; 2017 = 5.0.
- Consumer prices (end of period, percent): 2008 = 13.3; 2009 = 10.1; 2010 = 9.9; 2011 = 108.7; 2012 prelim. = 38.4; 2013 proj. = 27.5; 2014 proj. = 20.0; 2015 proj. = 13.0; 2016 proj. = 8.0; 2017 proj. = 6.0.
- Current account balance (percent of GDP): 2008 = -8.2; 2009 = -12.6; 2010 = -15.0; 2011 = -10.5; 2012 prelim. = -6.2; 2013 = -6.6; 2014 = -6.4; 2015 = -6.2; 2016 = -6.0; 2017 = -6.0.
- Gross external debt (percent of GDP): 2008 = 25.0; 2009 = 45.6; 2010 = 51.1; 2011 = 61.4; 2012 prelim. = 60.4.
- Stock of reserves (Millions of U.S. dollars): 2008 = 3,061; 2009 = 5,653; 2010 = 5,031; 2011 = 7,916; 2012 prelim. = 5,520.
- Reserves (months of next year's imports of goods and services): 2008 = 1.2; 2009 = 1.8; 2010 = 1.2; 2011 = 1.9; 2012 prelim. = 1.2.
- Gross public debt (percent of GDP): 2008 = 21.7; 2009 = 34.9; 2010 = 41.0; 2011 = 50.6; 2012 prelim. = 37.7.
- Quota (2010): SDR 386.4 million (589.7 million U.S. dollars).

### Social Protection Fund (selected fiscal aggregates, percent of annual GDP)
- Revenue series: 11.3; 11.7; 12.0; 10.8; 10.0; 10.0; 9.9; 9.8; 9.7; 9.6
- Expenditure series: 10.0; 10.7; 11.2; 10.0; 9.8; 10.2; 10.3; 10.4; 10.5; 10.6
- Balance (cash) series: 1.3; 1.1; 0.8; 0.8; 0.2; -0.2; -0.4; -0.6; -0.8; -1.0
- Gross public debt 3/: 21.7; 34.9; 41.0; 50.6; 37.7; 33.6; 29.0; 26.9; 25.8; 24.8
- GDP (trillions of Belarusian rubels): 129.8; 137.4; 164.5; 274.3; 495.2; 685.3; 873.8; 1,052.9; 1,207.0; 1,349.8

### IMF staff appraisal and policy priorities (summary)
- Recent stabilization progress acknowledged: monetary tightening slowed credit growth; expenditure and wage restraint supported stabilization; exchange rate unification restored FX market; ACF loan and privatization proceeds boosted reserves.
- Remaining vulnerabilities: rapidly increasing debt, diminished public confidence, reduced market access, increased dependence on Russia, and inconsistent policy goals (growth and wage targets risk repeating 2011 crisis).
- Policy recommendations (selected):
  - Continue exchange rate flexibility to shield from external shocks.
  - Embed tight monetary policy in short-term monetary targets and pursue inflation targeting over medium term.
  - Maintain balanced budget and sharply reduce LGP; prevent fiscal stance being undermined by exceeding LGP limits and other quasi-fiscal activities.
  - Enforce disciplined wage policy in budgetary sector and SOEs.
  - Restore safety margins by stabilizing and then reducing debt over the medium term; speed up improvement to Targeted Social Assistance and unemployment benefit schemes.
  - Phase out quasi-fiscal operations by making the DB sole provider of new LGP with financing reflected above the line in the budget.
  - Increase reserves urgently via continued exchange rate flexibility and macroeconomic discipline.
  - Advance structural reforms: price liberalization, privatization, and enterprise reform; make the financial sector market-based and relieve SOBs of directed lending after DB operationalization.

*Source: IMF staff report — selected excerpts from _cr12113.*

### 2. Real Effective Exchange Rate Assessment..........................................................................6

### 2. Real Effective Exchange Rate Assessment

### I. Context and recent crises
- Belarus experienced two crises in four years: the 2008–09 external-financing/export shock and a self-inflicted 2011 crisis driven by reversal of macro-stabilization policies from the 2009–10 SBA.
- External debt rose to 61.4 percent of GDP in 2011.
- The 2011 crisis featured:
  - Expansionary credit and wage policies that widened the current account deficit.
  - Attempts to maintain a fixed exchange rate that pressured official reserves, led to loss of exchange rate control, and triggered a sharp acceleration of inflation.
- Policy and geopolitical environment:
  - Belarus became more dependent on Russia (low priced oil and gas imports, new loans, asset purchases).
  - A crackdown after the 2010 presidential elections led the EU and the U.S. to curtail official interactions and tighten sanctions (not expected to affect the economy significantly, per source).

### II. Stabilization after the 2011 crisis: policy actions and initial effects
- Key policy actions in H2 2011 (consistent with Fund advice):
  - NBRB discontinued non-standard liquidity support from June 2011 and restrained standard liquidity support.
  - Policy interest rates were substantially raised later in 2011.
  - Exchange rate unification in October 2011 allowed the FX market to function and shifted to a flexible exchange rate system.
  - Expenditure restraint produced a fiscal surplus of 3.1 percent of GDP for 2011.
  - Commitments for 2012: tight limit on financing of lending under government programs (LGP) and a balanced budget.
- Outcomes by Q1 2012:
  - Monthly inflation fell from an average 9.7 percent in August–November to less than 2 percent in December–March.
  - Households and corporates increased rubel deposits; households and corporates sold dollars.
  - Official reserves rose to $7.9 billion (see external financing list below).
  - NBRB intervened by purchasing FX in the market to avoid rubel appreciation.
  - Initial 2012 data suggest ongoing improvement in the external trade balance.

- External financing and terms-of-trade improvements:
  - Gas price reduction from the November 2011 agreement with Russia reduced price by nearly a half from the level paid in Q4 2011; at last year’s gas import volumes this reduction is equivalent to about 5 percent of GDP.
  - Reserve increases included:
    - $2.5 billion from sale of a 50 percent stake of Beltransgas (privatization proceeds).
    - $1.24 billion from two tranches of the EurAsEC’s Anti-Crisis Fund (ACF) loan.
    - $1 billion loan from Sberbank.
  - Note on ACF loan: a $3 billion loan was approved in June 2011; the balance will be disbursed in four equal disbursements of $440 million in 2012 and 2013. Loan maturity: 10 years with a three-year grace period; interest: variable referenced to cost of sovereign borrowing by Russia and Kazakhstan. ACF policy conditions included raising interest rates to positive real levels; exchange rate unification; fiscal discipline; reduction of LGP to 4 percent of GDP in 2011, 3 percent of GDP in 2012 and 1 percent of GDP in 2013; and privatization generating $2.5 billion in proceeds a year from 2011 to 2013.

### III. Box 1 — The 2011 crisis (summary)
- After the 2009 SBA expired, policy loosening led to a foreign exchange crisis in 2011.
- By end-Q1 2011, gross reserves fell to around 3½ billion US dollars (less than one month of imports).
- NBRB stopped intervening on the FX market in March 2011; parallel market emerged.
- Official exchange rate devalued from about 3000 to 5000 rubels per US dollar; parallel rate depreciated to about 9000 rubels per US dollar.
- Inflation accelerated to over 100 percent in late 2011 due to pass-through.
- Stabilizing measures in H2 2011:
  - NBRB stopped below-market liquidity provision from June 2011 and raised rates: refinancing rate from 18 to 45 percent, overnight rate from 22 to 70 percent in H2 2011.
  - Exchange rates unified on October 20 and a flexible exchange rate regime with limited intervention was adopted.
  - Tight budget policy helped stabilize the exchange rate by year-end; monthly inflation began subsiding in December 2011.
- Early 2012: consumer prices up 3.5 percent in first two months; rubel appreciated; foreign exchange reserves increased to more than 8 billion dollars; underlying net reserve position improved. However, inflation and devaluation expectations remain volatile and risk of resumed pressures is substantial if stabilizing policies change.

### IV. Box 2 — Real Effective Exchange Rate (REER) assessment
- Exchange rate unification in October 2011 corrected misalignment; as of Q1 2012 REER was broadly in line with fundamentals (per IMF staff calculations).
- Macroeconomic balance approach:
  - Underlying current account deficit falls within range of estimated current account norms; does not suggest misalignment.
- External sustainability (ES) approach:
  - Suggests a somewhat larger current account deficit would be consistent with sustaining the end-2011 net external asset position (NEAP) of 52 percent of GDP.
  - ES approach does not necessarily imply undervaluation—stabilizing NEAP at a safer level may be prudent.
- Quantitative results excerpted in source (reproduced exactly as shown):
  - I. CGER pooled estimation model-2.2-2.8-0.7-0.381.7
  - II. CGER hybrid pooled estimation model 1/-4.2-2.81.4-0.38-3.6
  - I. CGER Pooled estimation model-2.2-6.0-3.8-0.3810.1
  - II. CGER hybrid poolded estimation model 1/-4.2-6.0-1.8-0.384.8
  - NEAP (percent of GDP), Real growth (percent, 2017), Inflation (percent, 2017), NEAP-stabilizing CAB (percent of GDP), Underlying CAB (percent of GDP), Gap (percent of GDP), REER elasticity, Misalign. (percent) table entries include:
    - Stabilizing the current level of NEAP 1/-525.06.0-5.3-2.82.4-0.38-6.4
    - No adjustment of the underlying CA-285.06.0-2.8-2.80.0-0.380
  - Note: 1/ NEAP at the end-2011.
- Projections and scenarios:
  - Baseline scenario: projected REER appreciation in remainder of 2012 because projected inflation > projected depreciation; underlying current account deficit increases to 6 percent of GDP and reintroduces misalignment of 5–10 percent by end-2012.
  - Adjustment scenario: sharp reduction in inflation and absence of FX intervention would limit REER appreciation, maintain competitiveness, and support current account adjustment.
- Cautionary note: high uncertainty about exchange rate adjustment effectiveness in an economy with strong central planning features (70 percent of total economy controlled by the state), administrative interference, quantitative targets, soft budget constraints.

### V. Outlook, policy consistency, and downside risks
- Policy inconsistency risks:
  - Authorities’ growth target for the year: 5–5.5 percent—staff view this is inconsistent with objective to reduce inflation to 20 percent this year.
  - Expected real wage growth of 4 percent and statements targeting average wage of $500 per month by mid-2013 signal possible loosening of domestic demand policies.
  - After large rate increases in H2 2011 (refinancing rate +27 percentage points, overnight rate +48 percentage points), NBRB began reducing rates: refinancing rate reduced by 7 percentage points in Q1 2012 and by 2 percentage points so far in Q2 2012.
- Baseline scenario assumptions (per source):
  - Policies remain tight for now but relax later in the year when activity and wages underperform targets.
  - Relaxation assumptions include: reduction of policy interest rates leading to acceleration of non-LGP credit, higher-than-planned bank LGPs, continued growth of budget sector and SOE wages.
  - Scheduled debt repayments financed by drawing down reserves, leading to reduction of debt-to-GDP ratio and much lower reserves over the medium term.
- Principal downside risks (Risk Assessment Matrix referenced in Appendix II):
  - Most significant risk: relaxation of domestic demand policies to hit growth target—could re-ignite inflation-depreciation spiral and erode competitiveness; containment attempts via price controls or large-scale intervention would deepen distortions and deplete reserves.
  - Macroeconomic uncertainty increases financial sector risks: pressure on bank capital and exposure to sudden depositor sentiment shifts.
  - External risks: escalation of euro area crisis could reduce demand for exports and lower rollover rates on external borrowing; magnitude depends on impact on Russia.
  - Terms-of-trade risk: gas prices may not remain low if Russia increases domestic gas price to which Belarus’ contract is linked.

### VI. Banking sector risks and financial soundness indicators
- Banking system outcomes and risks:
  - All banks continued operations during 2011 despite FX market freeze for half the year.
  - System capital adequacy ratio (CAR) fell from 20.5 percent at the beginning of 2011 to 14.9 percent at end-November 2011.
  - Recapitalization of state-owned banks (SOBs) of 14.5 trillion rubels (5 percent of GDP) increased system CAR to 24.7 percent at end-2011 by local standards.
  - Banks repaid foreign obligations around $6 billion at end-2011 (half short term).
  - Russian bank subsidiaries received capital injections/support pledges from parents; direct exposure to euro area banks is limited.
- Asset quality and deposit behavior:
  - Deposits stabilized and resumed growth since October 2011; competition for funds eroded interest margins.
  - System-wide NPLs increased modestly to 4.2 percent at end-2011.
  - Loans in the “watch” category rose from 3.6 percent of total loans at end-2010 to 10.6 percent at end-2011.
  - Provisions to total non-performing loans improved from 61.9 to 79.0 (percent).
  - FX loans to corporates increased by five percent in first two months of 2012 due to high rubel interest rates; NBRB introducing special provision for loans to borrowers without FX income from July 1, 2012.
  - FX loan exposure to corporates limited because loans primarily to exporters; FX loans to households low due to 2009 ban.
  - Banks hold significant FX claims on NBRB largely via deposit exchanges—could pressure reserves if substantial FX deposit withdrawals occur.
- Financial Soundness Indicators for 2011 (selected exact values from source):
  - Capital adequacy ratio: 20.5 (start of 2011), 16.5 (Dec.?), 14.3, 14.9, 24.7 (end-2011)
  - Tier I capital adequacy ratio: 14.9, 11.9, 9.9, 10.3, 18.8
  - Capital to assets: 13.7, 10.2, 8.4, 8.6, 14.1
  - Foreign exchange loans to total loans 1/: 21.7, 29.8, 39.5, 39.0, 39.5
  - Non-performing loans to gross loans: 3.5, 4.2, 4.3, 4.4, 4.2
  - Watch loans: 3.6, 8.4, 8.7, 10.2, 10.6
  - Provisions to total non-performing loans: 61.9, 72.2, 72.2, 75.1, 79.0
  - Source: National Bank of the Republic of Belarus. (1/ The change in the ratio is due primarily to valuation effects.)

### VII. Key staff observations and implications
- Exchange rate unification and H2 2011 tightening have re-aligned REER with fundamentals as of Q1 2012, but:
  - If policies loosen (baseline scenario), REER appreciation and a 6 percent underlying current account deficit would reintroduce misalignment of 5–10 percent by end-2012.
  - The adjustment scenario—sharp inflation reduction and absence of FX intervention—would limit REER appreciation and support competitiveness and current account adjustment.
- Large remaining vulnerabilities: reduced safety margins (higher external debt), dependence on Russian support, fiscal and monetary policy consistency risks, banking sector exposure to domestic slowdown and external shocks.
- Immediate policy priorities implied by the assessment:
  - Maintain monetary and fiscal discipline to preserve stabilization gains.
  - Avoid loosening domestic demand policies that would reignite inflation-depreciation spiral.
  - Limit FX intervention that could deplete reserves and reintroduce distortions.
  - Monitor bank asset quality closely and be prepared for recapitalization needs if NPLs rise with economic slowdown.

*Source: IMF staff report — section "2. Real Effective Exchange Rate Assessment" (excerpts and tables reproduced from the provided content).*

### 9.      In order to achieve external and domestic stability, macroeconomic framework

### _cr12113 - 9.      In order to achieve external and domestic stability, macroeconomic framework and policies should be made consistent with the inflation objective.

### Macroeconomic framework and stability
- Macroeconomic framework and policies should be made consistent with the inflation objective to achieve external and domestic stability.
- Reducing emphasis on achieving high GDP growth and avoiding setting targets for wages in dollar terms would boost confidence that strong policies will continue.
- Pursuing tight policies would keep a lid on inflation and therefore preserve competitiveness gains obtained through devaluation.
- A reduction of the trade deficit—and better prospects for the financial account—would allow an increase in reserves to more than 3 months of imports in the medium term.

### Scenarios and key projections (baseline vs adjustment)
- Graphical scenario indicators referenced for 2011–2017 include:
  - GDP Growth (Year-on-year percent change): baseline and adjustment scenario trajectories plotted for 2011–2017.
  - Domestic Demand Growth (Year-on-year percent change): baseline and adjustment scenario trajectories plotted for 2011–2017.
  - Inflation (End of period, percent): baseline and adjustment scenario trajectories plotted for 2011–2017.
  - Current Account Balance (Percent of GDP): baseline and adjustment scenario trajectories plotted for 2011–2017.
  - External Debt (Percent of GDP): baseline and adjustment scenario trajectories plotted for 2011–2017.
  - Reserves (Billions of U.S. dollars): baseline and adjustment scenario trajectories plotted for 2011–2017.
- Note on external debt in baseline scenario: the decline in the external debt-to-GDP ratio is explained by an assumption that gaps in the balance of payments are financed by drawdown of foreign exchange reserves rather than by external borrowing; thus the decline in the debt ratio is consistent with the decline in the reserves.

### Monetary policy and NBRB guidance
- The NBRB should be guided by twin goals of restoring domestic and external stability.
  - External stability requires further reserves increases and avoiding significant real appreciation.
  - Domestic stability requires limiting credit growth to about 20 percent, a value implied by the monetary program and consistent with the inflation objective.
- Rationale for intermediate target:
  - Choice of credit growth as intermediate target is warranted given the relative importance of the credit channel and since some credit is not sensitive to interest rate changes.
  - Interest rates influence depositor and some borrower behavior; staff urged caution in reducing the refinancing rate.
- Specific staff concerns and observations:
  - Staff viewed the reduction of the refinancing rate by 500 basis points in the beginning of March as premature because it brought the rate of refinancing below the March estimate of the expected rate of inflation.
  - In March 2012, staff’s annualized 6-month ahead inflation projection was more than 40 percent.
  - Staff recommended addressing appreciation pressures via a combination of sterilized intervention and additional exchange rate flexibility rather than interest rate reductions.
- Authorities’ views:
  - Authorities stressed commitment to tight monetary policy and considered the adjustment scenario more accurate than staff’s baseline.
  - The NBRB viewed the current monetary policy as appropriate and defended cuts in policy interest rates as justified by a fall in inflation expectations.
  - Authorities were concerned that high interest rates encouraged rapid conversion of FX-denominated assets into rubel-denominated assets, viewed as speculative and at risk of abrupt reversal.
  - Authorities argued that tight policies would continue given the 2011 experience and viewed systemic bank run risk as low due to state-guarantees of full deposits.

### The paradox of fiscal policy: low deficits, rapidly rising debt
- Fiscal and debt dynamics:
  - Over the last four years the general government balance recorded a cumulative surplus of about 2 percent of GDP.
  - Total public debt (including the NBRB and guaranteed debt) grew from about 22 percent of GDP in 2008 to above 50 percent in 2011.
  - General Government Debt Increased by 28.8 Percent of GDP Between 2008 and 2011 (text heading).
- Drivers of debt dynamics:
  - Below-the-line operations (bank recapitalizations and outlays for government guaranteed debt) amounted to 13.5 percent of GDP in 2008–11, with 6.1 percent of GDP in 2011 alone.
  - Quasi-fiscal activities in the form of LGP amounted to 12 percent of GDP in 2010–11.
  - These operations boosted domestic demand, widened the current account deficit, and created the need for external borrowing to close the external financing gap.
  - Likely government response: because LGP has been extended by commercial banks, the government would likely fill any shortfall in repayments by recapitalizing banks, as occurred in three of the last four years.
- Staff recommendations and policy actions:
  - Staff welcomed authorities’ decision to limit government financing of LGP to 7 trillion rubels (1.4 percent of GDP) in 2012 and to balance planned LGP with financing sources.
  - Staff recommended that the DB should not be allowed to borrow to finance additional LGP.
  - Authorities approved a balanced budget for 2012, implying a fiscal contraction of about 2 percent of GDP as measured by the change in the primary cyclically adjusted augmented fiscal balance.
  - Budget sector wage guidance: after a 30 percent increase in January, budget sector wages should grow less than 10 percent in nominal terms during the remainder of the year, consistent with no change in the real wage in period average terms.
  - Mission advised that public communications should make clear that any wage increases should follow rather than anticipate productivity growth.
- Authorities’ responses:
  - Authorities agreed on tight control of quasi-fiscal operations and that public financing for LGP will be strictly limited, but allowed SOBs to finance LGP using their own resources on a competitive basis.
  - Authorities argued the DB should be allowed to borrow in the market for efficient long-term projects.
  - Authorities reiterated commitment to a balanced 2012 budget but expressed concerns that budget sector wages are significantly below private sector wages and that increases are needed to avoid losing staff; they also noted labor mobility within the Common Economic Area relative to Russia.

### Medium-term agenda: maintaining stability and securing sustainable growth
- Fiscal measures to stabilize debt and rationalize spending:
  - Total government debt needs to be put on a downward path.
  - Phasing out generalized subsidies to households, including by raising the cost recovery ratio of household utility tariffs to at least 40 percent this year, would reduce expenditure by about 0.5 percent of GDP.
    - Of this 0.5 percent of GDP reduction, 0.1–0.2 percent of GDP should be used for augmenting the targeted social assistance program.
  - Interest rate subsidies on LGP should be reduced.
  - Staff supported the government’s intention to reform the civil service to achieve a smaller and better paid workforce.
  - Pension reforms would help contain expenditure and address a rapidly aging population; the President’s proposal to increase pension benefits for workers postponing retirement is directionally positive but financial equilibrium should not be achieved via increases in an already high contribution rate.
- Inflation targeting (IT) framework:
  - Developing an IT framework would strengthen NBRB credibility and shield the economy against external shocks.
  - Steps already taken toward IT: changing the exchange rate regime from a de-facto peg to a managed float in October 2011; setting a low inflation objective; enhancing NBRB independence by divesting the NBRB of non-core assets.
  - Over the medium term, essential elements to develop: enhance operational autonomy of the NBRB; reduce the share of regulated prices; impose hard budget constraints on enterprises; remove quasi-fiscal activities from commercial banks; deepen the financial system.
  - Authorities broadly shared the move to IT but noted implementation difficulties, political and social resistance to reducing subsidies, and that key prerequisites and current “manual control” distort transmission, making a quick transition to IT challenging.

### Structural reform and sustainable growth
- Assessment of the growth model:
  - Belarus’ model relied on high investment supported by subsidized energy inputs from Russia, directed credit and ample foreign financing; this produced high growth but created vulnerabilities due to slow structural reform and dependency on subsidized energy and external support.
  - Even within CIS markets, Belarus’ market share has been shrinking.
- Reform priorities and expected effects:
  - Structural reforms could support macro stabilization and enhance medium-term sustainable growth prospects: price and external trade liberalization, SOE reform and privatization.
  - Adjustment costs from reform will be minimized with strong institutions and an adequate social safety net.
  - Pursuing reforms integral to WTO accession would raise medium-term growth prospects.
- Specific reform measures recommended:
  - Price liberalization:
    - Price controls expanded in 2011 to cover 25 to 30 percent of the consumer price basket; price liberalization would impose market discipline and strengthen competition.
    - Targeted social assistance should mitigate price liberalization effects on the poor.
  - SOE reform:
    - Transform SOEs into commercially-run corporations with greater managerial autonomy and hard budget constraints.
    - Reduce government interference, streamline and make state support transparent.
    - Strengthen corporate governance by transitioning SOEs to IFRS accounting.
    - Introduce performance-based contracts for managers and performance-based bonuses for workers.
    - Remove quantitative employment targets to reduce labor hoarding.
  - Privatization:
    - A privatization process consistent with best international practices would facilitate modernization; evidence suggests privatized enterprises are more innovative and productive.
    - National Investment and Privatization Agency (NIPA): demonstrate capacity by bringing first eight companies selected for privatization with World Bank support to point of sale; NIPA should be vested with full authority and success fees for financial advisors should be permitted.
    - Expand the list of enterprises to be privatized by the NIPA by at least 20 companies to provide a pipeline.
- Wage and productivity imbalances (Box 4 highlights):
  - Real wages have persistently grown faster than productivity except in 2003 and 2009.
  - At end-2011, real GDP per worker was 85 percent higher than its 2002 level, while real wages were about 140 percent higher.
  - 2010: real wages rose by 33 percent, productivity increased by 7 percent.
  - Wages in US dollar terms increased by 37.6 percent y/y in December 2010.
  - The mismatch between wage and productivity growth was a key factor behind the 2011 balance of payments crisis; depreciation during the crisis brought dollar wages back to their 2008 level.
  - Authorities recognize importance of keeping real wage growth in line with productivity, but declaring wage targets in dollar terms and resulting wage pressures in SOEs could lead to a repeat crisis.

*Source: _cr12113 - 9.      In order to achieve external and domestic stability, macroeconomic framework and policies should be made consistent with the inflation objective (PDF).*

### 28.      The authorities agreed that structural reform is needed. They are implementing

### _cr12113 - 28.      The authorities agreed that structural reform is needed. They are implementing

### Structural reform: authorities' position and priorities
- Authorities implementing President’s Directive #4 “On the Development of Entrepreneurship and Business Activity in the Republic of Belarus” as a blueprint of economic liberalization.
- Authorities are working toward gaining a higher rating in the World Bank’s “Doing Business” survey.
- Authorities’ stated priorities: strengthening competition; removing red tape; improving the tax system; and moving to international accounting standards.
- Authorities’ caution on scope and pace:
  - Structural reforms should not incur excessive social costs and should be implemented only after macroeconomic stabilization takes hold.
  - Not prepared to embark on enterprise reform due to possible labor dislocation; argued reform could start only after targeted social assistance and unemployment benefit schemes were strengthened.
  - Price liberalization should be resumed only when inflation expectations were firmly under control.
  - Not convinced privatization would improve economic efficiency; preferred improving management of SOEs.

### Financial system diagnosis and risks
- The financial system is inefficient and creates a growing contingent liability for the government.
- State-owned banks (SOBs) dominate, holding about two thirds of all assets.
- SOB activities:
  - Primarily engaged in LGP with government guarantees or subsidies on interest rates and in lending to SOEs.
  - With little emphasis on analyzing borrowers’ credit, many loans are being rolled over, causing consistent liquidity shortfalls at major SOBs.
- Recapitalization history:
  - Annual recapitalizations of SOBs averaged 1 percent of GDP during 2007–10, but were up at 5.3 percent of GDP in 2011.
  - A major part of the 2011 recapitalization compensated for deterioration in capital adequacy ratios due to a depreciation (rubel value of FX-denominated risk-weighted assets increased and capital is held in rubels), and also indicated increasing asset quality deterioration.
- Market distortion: other banks compete for a small pool of private businesses, resulting in distorted incentives for SOBs and undermining private sector development.

### Financial sector reforms recommended by staff
- Establish a strong Development Bank (DB) and give it responsibility for LGP to free commercial banks to make market-based loans.
  - All LGP should be done via the DB to make it transparent.
  - DB should operate within the resource envelope consistent with the government’s ceiling on LGP.
  - DB should be precluded from borrowing to support additional activities in the immediate future to contain the risk of losing control over LGP.
  - Budget financing of the DB should be reflected in a government document integrated in the budget process and approved alongside the budget; DB risks should be recognized in the budget.
  - DB should regularly report to the public and financial supervisor.
  - Banks could competitively bid to become on-lending agents for LGP for commission fees, but the DB should bear the credit risk.
- Manage existing LGP exposure:
  - Remaining LGP stock on SOBs’ balance sheets should be gradually phased out, possibly using an asset management company.
- Prepare SOBs for privatization after relieving them of quasi-fiscal legacy functions, with investors receiving major controlling shares to create a level playing field and improve resource allocation.
- Strengthen supervision:
  - Full independence of NBRB supervision staff and use of risk-based supervision to make the financial system more robust.
- Residual risks: even with these measures, credit growth may not be adequately contained.

### Authorities’ views on financial sector reforms
- Authorities consider the banking system resilient and favor less fundamental changes.
- Agreed SOBs need to shift toward more commercial lending; plan to sell major SOBs to well-reputed international banks in the medium-term.
- Will continue improving supervision, including with Fund technical assistance.
- Noted that large SOB recapitalization in 2011 brought capital ratios far above prudential requirements and that banks are increasing provision levels, providing better buffers against shocks in 2012.
- Expected that tightened liquidity provision to SOBs since end-2011 would improve liquidity management practices.
- Open to the possibility that all LGP should be done by the DB over the medium term; in 2012 planned to increase opportunities for private banks to participate in LGP relying on banks’ own resources.

### External position, capacity to repay, and projections
- External debt dynamics:
  - External debt rose to over 61 percent of GDP by the end of 2011 from 25 percent at the end of 2008.
  - Staff projects external debt ratio would decline only gradually (falling to 56 percent of GDP by the end of 2017).
- Reserves and repayment risk:
  - Reserves projected to remain at significantly low levels, covering only less than 1 month of imports and about 20 percent of short-term debt during 2014–17, indicating significant repayment risks.
  - Proposed stabilization policies would reduce risks by building up reserves to sufficient levels over the medium term (covering about 3 months of imports and short-term debt), enhancing external creditors’ confidence.
- Agreement on a new Fund program would require full commitment by the authorities to a consistent strategy based on stabilization and reform; the authorities’ request for a new Fund arrangement remains active.

### Staff appraisal: stabilization, risks, and policy priorities
- Recent stabilization progress:
  - Monetary tightening slowed credit growth, demand pressures subsided, and inflation began slowing down.
  - Expenditure and wage restraint supported stabilization.
  - Exchange rate unification and move toward a flexible exchange rate regime restored the foreign exchange market and reduced the current account deficit.
  - Loan agreement with the ACF supplied discipline (especially in encouraging limits on LGP) and external finance; sale of assets to Gazprom and new loans by Russian banks boosted reserves.
- Remaining vulnerabilities:
  - Economy weakened by crises of 2008–09 and 2011: rapidly increasing debt, diminished public confidence, reduced market access and increased dependence on Russia.
  - Inconsistent policy goals could jeopardize stability: growth target and repeated promises to raise dollar wages risk repeating policies that led to the 2011 crisis.
- Policy recommendations:
  - Continue allowing the exchange rate to move flexibly to shield the economy from external shocks.
  - Embed tight monetary policy in monetary targets in the short term and inflation targeting over the medium term.
  - Maintain a balanced budget and sharp reduction in LGP; prevent fiscal stance being undermined by exceeding LGP limits and other quasi-fiscal activities.
  - Enforce a consistent and disciplined wage policy in the budgetary sector and SOEs in a still uncertain macroeconomic environment.
  - Restore safety margins by stabilizing and then reducing debt over the medium term; speed up improvement to the Targeted Social Assistance program and the unemployment benefit scheme.
  - Phase out quasi-fiscal operations by making the DB the sole provider of new LGP, with LGP financing reflected above the line in the budget.
  - Increase reserves urgently via continued exchange rate flexibility and macroeconomic discipline.
- Structural reform for medium-term growth:
  - Main source of medium-term growth is improvements in productivity, requiring structural and financial sector reforms.
  - Authorities need to reduce direct government control through price liberalization, privatization and enterprise reform to improve resource allocation and market incentives.
  - Financial sector should become market-based; relieving SOBs of directed lending after the DB becomes operational—and ensuring the DB is run on prudent and transparent principles—is crucial.
- Preconditions for new program negotiations:
  - Consensus among authorities on a strong and consistent stabilization and reform strategy is required.
  - A new program must be sufficiently strong and credible to garner IMF membership support; unequivocal commitment by all leading policymakers to strong program objectives is essential.

*Source: _cr12113*

### 41.      It is recommended that the next Article IV consultation with Belarus be held on

### It is recommended that the next Article IV consultation with Belarus be held on the standard 12-month cycle.

### Economic activity and sector developments
- Real GDP growth: Quarterly series show sharp contraction in Q3 2011; industrial sector contraction was less pronounced.
- Contributions to GDP growth (yoy, percent): consumption, investment, net exports, inventories and discrepancy, Real GDP growth (series depicted).
- Inventories: Inventories-to-production ratio started to decrease in recent months; change in inventories / industrial production shown.
- Real GDP, SA (Quarter-on-quarter growth): negative turn in 2011Q3.

### Inflation developments (2009–12)
- CPI and PPI: Consumer and producer price inflation has been slowing down in the recent months.
- Average nominal economy-wide wages and real wages: Accelerating inflation caused a marked reduction in real wages; average monthly wage indices (SA, 2008 = 100) show nominal and real (right scale) series with rapid recovery of real wages.
- Selected components of PPI inflation (yoy percent change): Electricity, gas, and water; Chemicals; Machinery and equipment — energy prices declining while equipment price growth remained substantial.
- Components of CPI inflation (monthly percent change): Food; Non food goods; Services — declines evident in all CPI components.
- Inflation levels: End of period and average series reported in Table 1 (e.g., End of period 2010 = 19.9; 2011 = 108.7; 2012 prelim. = 38.4; Average 2010 = 7.7; 2011 = 53.2; 2012 prelim. = 66.0).

### External developments (2010–12)
- Exchange rate: Official exchange rate was devalued in May 2011; a much more depreciated parallel market exchange rate developed over the summer, giving rise to a multiple exchange rate system.
- Exchange rate unification: The exchange rate was unified and the official band was abandoned following the exchange rate unification in October 2011.
- Belarusian Rubel per U.S. Dollar: Official and parallel market series plotted (parallel market series noted as IMF staff estimates based on http://prokopovi.ch/random 1/).
- Eurobond yields: Annual yields on Euro bonds (percent) subsided; ratings changes and Emerging Europe composite referenced.
- Trade volumes (yoy percent change): Exchange rate adjustment in 2011 boosted export volume growth rates and reduced import volume growth rates; export volume and import volume series shown.

### Monetary developments (2010–12)
- NBRB policy interest rates: After a gradual increase of its policy rates, the NBRB reduced the rate of refinancing; series include refinancing rate, overnight credit from the NBRB to banks, and NBRB deposit rate.
- Overnight interbank rate (percent): Fell significantly on account of increased rubel liquidity.
- Credit to the economy: Credit has been slowing down in H2 2011; credit at constant exchange rates (yoy growth rate) with growth contributions from non-LGP and LGP shown.
- NBRB credit to banks (Trillions of Belarusian rubels): NBRB's credit to banks leveled off (noted 1/ December values show a large reduction on account of a transfer of claims on banks to the Development Bank).
- Household deposits: Growth of term household rubel deposits resumed after a fall earlier in the year; series for total and term rubel deposits (Trillions of Belarusian rubels). Household FX deposits resumed growth as well (Billions of U.S. dollars).

### Performance among peers (2002–11)
- Real GDP growth: Belarus outperformed peers' growth in recent years (Comparison with CEE median and CIS median; min (5th percentile) and max (95th percentile) shown).
- Inflation: After a period of high inflation, inflation stabilized close to peer levels.
- General government balance (percent of GDP): Belarus refrained from running high budget deficits relative to peers.
- Total credit growth (percent): Credit growth in Belarus has been among the highest compared with peers.
- Current account balance (percent of GDP): Contrary to peers, Belarus' current account deficit has continued to widen.
- External debt (percent of GDP): External debt has been catching up with peer levels.

### EBRD Transition Indicators (2010)
- Indicators shown for multiple dimensions (e.g., Large Scale Privatization; Enterprise Restructuring; Price Liberalization; Trade and FX System; Competition Policy; Banking Reform and Interest Rate Liberalization).
- Note: Higher indicators correspond to greater transition.

### Selected Economic Indicators (Baseline Scenario), 2008–17 (highlights from Table 1)
- Real GDP (annual percent change): 2008 = 10.2; 2009 = 0.2; 2010 = 7.7; 2011 = 5.3; 2012 prelim. = 3.0; projections 2013 = 3.4; 2014 = 4.4; 2015 = 4.8; 2016 = 4.9; 2017 = 5.0.
- Total domestic demand (annual percent change): 2008 = 17.8; 2009 = -1.1; 2010 = 11.2; 2011 = 2.9; 2012 prelim. = 3.0.
- Investment (annual percent change): 2008 = 28.2; 2009 = -2.9; 2010 = 18.4; 2011 = 3.0; 2012 prelim. = 1.6.
- Net exports contribution to growth: 2008 = -9.2; 2009 = 1.3; 2010 = -3.7; 2011 = 3.8; 2012 prelim. = -0.3.
- Consumer prices (end of period, percent): 2008 = 13.3; 2009 = 10.1; 2010 = 9.9; 2011 = 108.7; 2012 prelim. = 38.4; 2013 proj. = 27.5; 2014 proj. = 20.0; 2015 proj. = 13.0; 2016 proj. = 8.0; 2017 proj. = 6.0.
- Average consumer prices (percent): 2008 = 14.8; 2009 = 13.0; 2010 = 7.7; 2011 = 53.2; 2012 prelim. = 66.0; 2013 proj. = 35.8; 2014 proj. = 23.6; 2015 proj. = 16.1; 2016 proj. = 10.2; 2017 proj. = 6.9.
- Reserve money (annual percent change): 2008 = 11.7; 2009 = -11.5; 2010 = 49.5; 2011 = 84.1; 2012 prelim. = 34.9.
- Rubel broad money (annual percent change): 2008 = 22.5; 2009 = 0.9; 2010 = 27.4; 2011 = 64.1; 2012 prelim. = 42.8.
- Growth of credit to the economy excluding valuation effect: 2008 = 53.6; 2009 = 30.8; 2010 = 38.8; 2011 = 37.0; 2012 prelim. = 42.7.
- Current account balance (percent of GDP): 2008 = -8.2; 2009 = -12.6; 2010 = -15.0; 2011 = -10.5; 2012 prelim. = -6.2; projections 2013 = -6.6; 2014 = -6.4; 2015 = -6.2; 2016 = -6.0; 2017 = -6.0.
- Gross external debt (percent of GDP): 2008 = 25.0; 2009 = 45.6; 2010 = 51.1; 2011 = 61.4; 2012 prelim. = 60.4.
- Quota (2010): SDR 386.4 million (589.7 million U.S. dollars).

### Balance of Payments (Baseline Scenario), 2008–17 (selected figures, Table 2)
- Current account (Millions of U.S. dollars): 2008 = -4,988; 2009 = -6,178; 2010 = -8,278; 2011 = -5,775; 2012 prelim. = -3,563; projections 2013 = -4,042; 2014 = -4,148; 2015 = -4,249; 2016 = -4,456; 2017 = -4,739.
- Trade balance (goods, Millions of U.S. dollars): 2008 = -6,237; 2009 = -6,957; 2010 = -9,078; 2011 = -3,716; 2012 prelim. = -1,088.
- Exports of goods (Millions of U.S. dollars): 2008 = 32,805; 2009 = 21,361; 2010 = 25,405; 2011 = 41,410; 2012 prelim. = 45,653.
- Imports of goods (Millions of U.S. dollars): 2008 = -39,042; 2009 = -28,318; 2010 = -34,483; 2011 = -45,126; 2012 prelim. = -46,741.
- Energy balance (Millions of U.S. dollars): 2008 = -2,000; 2009 = -3,378; 2010 = -5,131; 2011 = -4,551; 2012 prelim. = -1,072.
- Capital and financial accounts (Millions of U.S. dollars): 2008 = 4,287; 2009 = 5,066; 2010 = 6,444; 2011 = 4,771; 2012 prelim. = 1,671.
- Overall FDI, net (Millions of U.S. dollars): 2008 = 2,150; 2009 = 1,782; 2010 = 1,352; 2011 = 3,928; 2012 prelim. = 2,034.
- Stock of reserves (Millions of U.S. dollars): 2008 = 3,061; 2009 = 5,653; 2010 = 5,031; 2011 = 7,916; 2012 prelim. = 5,520.
- Reserves (months of next year's imports of goods and services): 2008 = 1.2; 2009 = 1.8; 2010 = 1.2; 2011 = 1.9; 2012 prelim. = 1.2.
- Net use of Fund resources and other financing items are reported (including net use of Fund resources 2009 = 2,838; 2010 = 665; 2011 = 0; 2012 prelim. = -384).

### Fiscal indicators and projections (Baseline Scenario), 2008–17 (selected figures, Tables 3 and continuation)
- State (republican and local) budget revenue (percent of GDP): 2008 = 50.9; 2009 = 46.6; 2010 = 48.8; 2011 = 55.6; 2012 prelim. = 44.6.
- Expenditure (economic classification, percent of GDP): 2008 = 50.9; 2009 = 49.0; 2010 = 53.0; 2011 = 79.1; 2012 prelim. = 45.6.
- Wages and salaries (percent of GDP): 2008 = 8.6; 2009 = 9.3; 2010 = 11.5; 2011 = 18.6; 2012 prelim. = 33.1.
- Subsidies and transfers (percent of GDP): 2008 = 14.9; 2009 = 16.0; 2010 = 13.7; 2011 = 21.3; 2012 prelim. = 36.9.
- Capital expenditures (percent of GDP): 2008 = 13.0; 2009 = 11.2; 2010 = 13.6; 2011 = 15.2; 2012 prelim. = 28.0.
- Balance (economic classification, percent of GDP): 2008 = 0.0; 2009 = -2.4; 2010 = -4.2; 2011 = 6.5; 2012 prelim. = -1.0.
- Augmented balance (percent of GDP): 2008 = -6.3; 2009 = -2.4; 2010 = -8.4; 2011 = -10.3; 2012 prelim. = -12.4; projections show widening fiscal pressures thereafter.
- Financing (cash, percent of GDP): 2008 = 4.6; 2009 = 1.3; 2010 = 6.7; 2011 = 8.6; 2012 prelim. = 11.6.
- Privatization (percent of GDP, memorandum): 2008 = 1.3; 2009 = 1.9; 2010 = 1.1; 2011 = 20.3; 2012 prelim. = 7.9.
- Gross public debt (percent of GDP): 2008 = 21.7; 2009 = 34.9; 2010 = 41.0; 2011 = 50.6; 2012 prelim. = 37.7.

*Source: IMF staff report (selected figures and tables for Belarus as presented in the referenced PDF).*

### 2. Social Protection Fund

### 2. Social Protection Fund

### Key SPF fiscal aggregates (percent of annual GDP)
- Revenue: 11.3 11.7 12.0 10.8 10.0 10.0 9.9 9.8 9.7 9.6
- Expenditure: 10.0 10.7 11.2 10.0 9.8 10.2 10.3 10.4 10.5 10.6
- Balance (cash): 1.3 1.1 0.8 0.8 0.2 -0.2 -0.4 -0.6 -0.8 -1.0
- Balance of the general government: 1.3 -0.7 -1.8 3.1 0.0 -0.4 -0.9 -1.3 -1.3 -1.5
- Augmented balance of the general government: -3.5 -0.7 -4.3 -3.0 -2.3 -2.7 -3.3 -3.6 -3.6 -3.8
- Statistical discrepancy: 0.0 -0.3 0.2 -0.2 0.0 0.0 0.0 0.0 0.0 0.0

### Financing (cash) and composition (percent of annual GDP)
- Total financing (cash): 3.5 1.0 4.0 3.1 2.3 2.7 3.3 3.6 3.6 3.8
- Privatization: 1.0 1.4 0.6 7.4 1.6 1.8 1.9 1.9 2.0 1.9
- Foreign financing, net: 2/ 2.3 8.4 2.8 3.3 0.8 3.9 1.0 0.7 1.2 1.1
- Domestic financing, net: 0.2 -8.8 0.6 -7.6 -0.1 -3.0 0.4 1.0 0.5 0.8
  - Banking system: -1.2 -8.5 0.5 -9.9 -0.1 -3.0 0.4 1.0 0.5 0.8
  - Central bank: 0.1 -8.5 0.6 -17.6 1.3 -4.7 1.1 0.4 1.6 0.7
  - Deposit money banks (including SPF): -1.3 -1.6 -0.6 1.8 -3.1 -1.8 -1.4 -1.1 -0.9 -0.7
- R evaluation effect: 1.6 0.5 6.0 ..................
- Nonbank: 1.5 -0.2 0.1 2.3 0.0 0.0 0.0 0.0 0.0 0.0

### Memorandum items (percent of annual GDP unless otherwise indicated)
- Fiscal deficit including lending under government programs: ...... 10.7 8.5 5.3 5.2 5.3 5.1 4.9 4.9 4.8
- Of which: lending under government programs: ...... 6.4 5.5 3.0 2.5 2.0 1.5 1.3 1.0
- Gross public debt 3/: 21.7 34.9 41.0 50.6 37.7 33.6 29.0 26.9 25.8 24.8
- GDP (trillions of Belarusian rubels): 129.8 137.4 164.5 274.3 495.2 685.3 873.8 1,052.9 1,207.0 1,349.8

### Social protection roles within general government fiscal structure (selected rows from GFSM 2001 format)
- Social contributions: 11.3 11.7 12.0 10.8 10.0 10.0 9.9 9.8 9.7 9.6
- Social benefits: 10.0 10.7 11.2 10.0 9.8 10.2 10.3 10.4 10.5 10.6

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

*Document: _cr12113 - 2. Social Protection Fund*

### Appendix I. Table 1. Belarus: External Debt Sustainability Framework, 2007–17

### Appendix I. Table 1. Belarus: External Debt Sustainability Framework, 2007–17

### External debt projections and scenarios
- Appendix I. Figure 1 presents external debt in percent of GDP under the baseline and stress scenarios; shaded areas represent actual data. Individual shocks are permanent one-half standard deviation shocks. Projections are shown at the official exchange rate.
- Shock specifications:
  - Individual shocks: permanent one-half standard deviation shocks (real interest rate, growth rate, current account).
  - Combined shock: permanent 1/4 standard deviation shocks applied to real interest rate, growth rate, and current account balance.
  - Real depreciation shock: One-time real depreciation of 30 percent occurs in 2012.
- Selected figure labels and indicators as shown:
  - Historical
  - Baseline
  - Gross financing need under baseline (right scale)
  - Interest rate shock (Percent)
  - Growth shock (Percent per year)
  - Current account shock (Percent of GDP)
  - Combined shock 2/
  - Real depreciation shock 3/

### Baseline public sector debt and identified debt-creating flows
- Baseline: public sector debt 1/
  - 18.321.734.941.050.637.733.629.026.925.824.80.3
- Of which: foreign-currency denominated
  - 6.56.818.921.627.825.124.521.920.920.720.2
- Change in public sector debt
  - 10.13.413.16.6.19.5-12.8-4.1-4.6-2.1-1.0-1.0
- Identified debt-creating flows (4+7+12)
  - -13.9-14.70.2-0.93.7-22.6-10.4-6.7-4.0-2.6-1.6
- Primary deficit
  - -11.0-14.5-0.11.1-4.3-2.1-1.4-1.0-0.6-0.30.0
- Revenue and grants
  - 49.550.645.741.642.039.239.238.938.538.438.1
- Primary (noninterest) expenditure
  - 38.536.145.642.737.737.137.737.937.938.038.1
- Automatic debt dynamics 2/
  - -1.0-4.11.7-3.99.3-20.4-8.6-5.4-3.1-1.8-1.3
  - Contribution from interest rate/growth differential 3/
    - -1.0-4.0-0.4-5.1-15.2-20.4-8.6-5.4-3.1-1.8-1.3
    - Of which: contribution from real interest rate
      - -0.5-2.6-0.4-2.8-13.9-19.6-7.7-4.2-1.9-0.6-0.1
    - Of which: contribution from real GDP growth
      - -0.6-1.40.0-2.3-1.3-0.8-0.9-1.2-1.2-1.2-1.2
  - Contribution from exchange rate depreciation 4/
    - 0.00.02.11.224.6..................
- Other identified debt-creating flows
  - -1.93.9-1.41.9-1.3-0.1-0.3-0.4-0.4-0.5-0.4
  - Privatization receipts (negative)
    - -2.6-1.0-1.4-0.6-7.4-1.6-1.8-1.9-1.9-2.0-1.9
  - Recognition of implicit or contingent liabilities
    - 0.00.00.00.00.00.00.00.00.00.00.0
  - Other (specify, e.g. bank recapitalization)
    - 0.74.90.02.56.11.51.51.51.51.51.5
- Residual, including asset changes (2-3) 5/
  - 24.018.012.97.05.89.86.32.01.91.60.6
- Public sector debt-to-revenue ratio 1/
  - 37.142.976.498.6120.496.285.974.669.767.465.2
- Gross financing need 6/
  - -0.80.31.15.05.18.57.07.27.25.35.4
  - Billions of U.S. dollars
    - -0.40.20.52.72.84.94.34.65.03.94.3

### Scenarios presented
- Scenario with key variables at their historical averages 7/
  - 37.730.723.618.615.211.1-0.2
- Scenario with no policy change (constant primary balance) in 2011–16
  - 37.728.725.019.818.113.3-0.6

### Key macroeconomic and fiscal assumptions underlying baseline
- Real GDP growth (percent)
  - 8.610.20.27.75.33.03.44.44.84.95.0
- Average nominal interest rate on public debt (percent) 8/
  - 7.24.23.82.34.97.66.77.27.87.16.2
- Average real interest rate (nominal rate minus change in GDP deflator, percent)
  - -5.6-17.0-1.9-8.8-53.4-67.7-27.1-14.9-7.1-2.2-0.3
- Nominal appreciation (increase in U.S. dollar value of local currency, percent)
  - 0.30.5-23.5-6.9-64.1..................
- Inflation rate (GDP deflator, percent)
  - 12.821.25.711.158.375.333.922.114.99.26.5
- Growth of real primary spending (deflated by GDP deflator, percent)
  - 6.93.726.51.0-6.91.65.24.94.95.25.3
- Primary deficit
  - -11.0-14.5-0.11.1-4.3-2.1-1.4-1.0-0.6-0.30.0

### Stress-test results and selected baseline statistics shown in figures
- Appendix I. Figure 1 and Figure 2 present bound tests for external and public debt respectively, showing baseline and alternative shock paths.
- Figure annotations include baseline, historical averages, and scenario averages for respective variables.
- Public-debt-specific figure notes:
  - Shocks: permanent one-half standard deviation (individual); permanent 1/4 standard deviation (combined) applied to real interest rate, growth rate, and primary balance.
  - One-time real depreciation of 30 percent and 10 percent of GDP shock to contingent liabilities occur in 2012 in the public-debt stress tests.

### Risk assessment (selected threats and implications extracted from the annex)
- 1. Loosening of macroeconomic policies to achieve growth targets.
  - Overall Level of Concern: High
  - Likelihood of Severe Realization in Next 1-3 Years: High
  - Expected Impact if Realized: High — loosening domestic demand policies will lead to significant pressures on the exchange rate and result in either loss of reserves (if authorities resist depreciation) or resurgence of inflation (if they allow flexible exchange rate).
- 2. An external shock in case of intensification of the euro zone crisis.
  - Overall Level of Concern: Medium
  - Likelihood: Medium
  - Expected Impact: Medium — Belarus lacks sufficient buffers; low reserves and high gross financing need mean spillovers via trade and financial channels could be damaging; effect depends on extent Russia is affected.
- 3. Substantial reduction in non-official external debt rollover rates.
  - Overall Level of Concern: Low to Medium
  - Likelihood: Low to Medium
  - Expected Impact: Medium — about half of banks’ external debt is short-term (residual maturity basis); low reserves imply reduction in rollover rates would exert strong pressures on the exchange rate.
- 4. Weakening bank profitability.
  - Overall Level of Concern: Low to Medium
  - Likelihood: Low to Medium
  - Expected Impact: Medium — slowdown could increase NPLs and require bank recapitalization; past recapitalization costs ranged between 1 and 5 percent of GDP.
- 5. Increase in price of gas and oil imported from Russia.
  - Overall Level of Concern: Low to Medium
  - Likelihood: Low to Medium
  - Expected Impact: Medium — substantial increase of gas prices would increase gross financing needs; magnitude depends on pace of gas price increases.

*Source: IMF staff estimates; Appendix I. Table 1, Belarus: External Debt Sustainability Framework, 2007–17 (from _cr12113 - Appendix I. Table 1. Belarus: External Debt Sustainability Framework, 2007–17).*

### 1.      The World Bank Group Country Assistance Strategy provides for a selective presence

### 1.      The World Bank Group Country Assistance Strategy provides for a selective presence 

### World Bank presence and financing
- World Bank analytic and advisory work comprises a core element of the program.
- Belarus is currently receiving World Bank financing for 5 infrastructure projects.
- Bank lending commitments in Belarus to date total US$865 million, with US$22.8 million provided as grants.
- Active and approved Bank financing and support:
  - Additional Financing Loan for the Post Chernobyl Recovery Project: US$30 million.
  - Energy Efficiency Project (EEP): US$125 million.
  - Road Upgrading and Modernization project: US$150 million (approved by the Board on November 11, 2010; became effective in January 2011).
  - Water Supply and Sanitation Project: US$60 million.
  - Solid Waste Management Project: US$42.5 million.
  - GEF Grant Project for Persistent Organic Pollutant (POPs) Stockpile Management and Technical/Institutional Capacity Upgrading: US$5 million.
  - Trust Fund for Privatization: US$5 million (technical advice for privatization approach).

### IFC strategy and investments
- IFC provides advisory services and investment operations to foster private sector development.
- Advisory programs:
  - Belarus Regulatory Simplification and Investment Generation Program (August 2010–March 2013): focuses on regulatory simplification related to business operations and building government capacity for investment promotion.
  - Belarus Food Safety Improvement advisory project: aims to increase competitiveness of Belarusian food producers by improving food safety practices and facilitating wider implementation of best international food safety management practices.
- IFC investment commitments in Belarus to date total approximately US$300 million, divided almost equally between financial markets and the real sector.
- Future IFC investment focus: financial markets, general manufacturing, climate change and agribusiness.

### IMF–World Bank collaboration: roles and coordination
- The Bank and the Fund teams work closely in planning and delivering assistance.
- IMF role: key role regarding macro-economic policy, including setting objectives for monetary and exchange rate policies, overall budget envelope, and tax policy.
- World Bank role: focuses on structural agenda, macro-fiscal, energy efficiency, social and environmental issues.
- The IMF analysis serves as input to Bank policy advice; Bank staff take part in IMF Article IV Consultations to ensure consistency of policy recommendations.

### Areas in which the World Bank leads
- Structural reforms and private business development:
  - Delivery of a new Country Economic Memorandum (CEM) in FY2012 to understand sources of growth, needed economic and structural rebalancing, and untapped medium-term potential.
  - Trust Fund for Privatization (US$ 5 million) to prepare and test a new approach to privatization for improved governance, productivity, and competitiveness of privatized companies.
  - IFC delivers advisory program on private sector challenges and international “best practices” for regulatory improvement.
- Increasing efficiency of public spending and social issues:
  - Programmatic Public Expenditure Review (PER-1) presented in FY2011 (focus: pensions, social assistance, housing and communal services, subsidies in agriculture).
  - PER-2 to be delivered in FY13: will identify options to achieve efficiency gains in intergovernmental fiscal relations, education, and health spending; consolidate fiscal reform options, quantify fiscal and where possible social impact, and integrate into a consistent macro-economic framework.
  - Belarus Health and Education Sectors TA and TA on Strengthening Medium-term Fiscal Planning Process (SAFE TF) ongoing as part of this agenda.
- Energy sector and transport infrastructure development:
  - Two energy efficiency lending operations implemented: Additional Financing Loan for the Post Chernobyl Recovery Project (US$30 million) and the Energy Efficiency Project (US$125 million).
  - TA project under implementation on renewable energy legislation, biomass for heat production, energy efficiency, and opportunities for private sector participation in district heating.
  - Road Upgrading and Modernization project: US$150 million (Board approval November 11, 2010; effective January 2011).
- Agriculture and forestry sector:
  - IDF Grant to strengthen institutional capacity for monitoring and evaluation of agricultural policy instruments.
  - EU ENPI-FLEG program (World Bank and IUCN) targeted at improving forestry sector governance and combating illegal logging and associated trade and corruption.
  - Forestry Sector Policy Note under preparation to inform Belarusian forest policy and support development of the Forest Strategic Plan.
- Environment:
  - Support to strengthen environment institutions, address public health challenges, and comply with international commitments.
  - GEF Grant Project for POPs Stockpile Management and Technical/Institutional Capacity Upgrading: US$5 million.
  - Progress under Water Supply and Sanitation Project (US$60 million) and Solid Waste Management Project (US$42.5 million).

### Areas of shared responsibility (Bank and Fund)
- Macroeconomic development:
  - Joint discussion and consultation in preparation of the macroeconomic framework and debt sustainability analysis, and in analytical work on macro-growth issues.
- Public expenditure management:
  - Joint work on rationalizing expenditures and reforming the budget process.
  - Bank provides technical assistance, training and advisory services to strengthen medium-term fiscal planning and support introduction of output-based financing in education and health under the SAFE grant.
- Debt management:
  - Debt Management Performance Assessment (DeMPA) completed in FY11.
  - Reform Plan Report for Belarus building on DeMPA findings prepared in FY12.
  - In FY12–13, Bank and IMF will provide assistance in developing a medium-term debt strategy (MTDS) in Belarus.
- Financial sector:
  - Joint financial sector monitoring and policy dialogue.
  - Under the FIRST grant the Bank provided TA for securities market development in FY11–12.

### Areas in which the IMF leads
- IMF engagement:
  - Active engagement with Belarusian authorities on the macroeconomic framework, technical assistance and support on economic and financial statistics, tax policy, monetary operations, and fiscal transparency.
  - Leading dialogue on monetary and exchange rate policy objectives, overall budget envelope, and tax policy.
- Coordination:
  - IMF analysis inputs to Bank policy advice; regular consultations and Bank participation in IMF Article IV Consultations to ensure policy consistency.

### Contact points
- Connie Luff (Country Program Coordinator, ECCU2): 202-458-4068
- Marina Bakanova (Senior Country Economist, ECSPE): 375-17-2265284

### Planned activities in macro-critical structural reform areas in 2012 (selected items and timing)
- Bank Work Program (AAA) planned products and timing (selected):
  - Belarus Country Economic Memorandum: June 2012.
  - Programmatic Public Expenditure Review (PER) - phase 2: Ongoing; expected delivery September 2012.
  - Belarus Health and Education Sectors TA: Ongoing.
  - TA on Strengthening Medium-term Fiscal Planning Process (SAFE TF): Ongoing.
  - Developing Medium-Term Debt Strategy (MTDS): Ongoing.
  - Securities Market Development TA (FIRST TF): Ongoing; February 2012.
  - Financial Sector Monitoring and Policy TA: Ongoing.
  - Privatization TA (Austrian TF): Ongoing.
  - Belarus Labor Force Survey (TFSCB): Ongoing; March 2012.
  - TA in environmental policies and institutions (grants): Ongoing.
  - TA on Forest Law Enforcement and Governance (FLEG): Ongoing.
  - Forestry Sector Policy Note: Ongoing; December 2012.
  - TA on Strengthening Institutional Capacity for Monitoring and Evaluation of Agricultural Policy Instruments: TA through 2011–2012; July 2012 delivery indicated.
- Fund Work Program (selected missions and timing):
  - Peripatetic advisor on bank supervision: Ongoing.
  - External debt management system TA: September 2012.
  - Inflation targeting TA: October 2012.
  - TA on developing of capacity and instruments: November 2012.
  - Follow-up TA on progress of development bank: December 2012.

*IMF–World Bank: Country Assistance Strategy and collaborative program for Belarus 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:
  - The National Statistics Committee (NSC) compiles and disseminates quarterly and annual GDP estimates at current and constant prices following the 1993 System of National Accounts.
  - Timeliness and periodicity exceed the Special Data Dissemination Standard (SDDS) requirements.
  - A 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 estimates of regional GDP at current and constant prices – monthly, quarterly and annual – have been started.
  - Source data accuracy is good; statistical techniques 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 indices for foodstuffs, non-food goods, and services.
  - CPI weights are from 2008. 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:
  - Compiled by the National Bank of the Republic of Belarus (NBRB), broadly following IMF MFSM methodology.
  - Since the last Article IV consultation, NBRB has implemented most STA recommendations regarding monetary statistics.
- External Sector Statistics:
  - NBRB publishes quarterly balance of payments and international investment position statements in BPM5 format and is transitioning to BPM6.
  - Timeliness and serviceability of external sector data are 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 and met all SDDS requirements at the time of subscription.
- A data ROSC report was published on February 1, 2005.

### III. Executive Board Assessment — Findings and Policy Recommendations
- Findings:
  - The last year was marked by a severe balance of payments crisis; unsustainable policies in late 2010 and Q1 2011 pushed the economy into an inflation-depreciation spiral, with the 12-month inflation rate accelerating to 109 percent.
  - Despite slowdown in H2 2011, growth in 2011 remained robust at 5.3 percent.
  - Since mid-2011, stabilization measures were implemented: NBRB discontinued liquidity provision at non-market terms in June 2011, gradually increased policy interest rates in H2 2011, unified the exchange rate, and introduced a flexible exchange rate regime in October 2011.
  - General government fiscal balance showed a surplus of 3 percent of GDP for 2011.
  - Inflation fell to below 2 percent per month in Q1 2012.
  - Current account deficit improved; terms of trade improved following recently signed oil and gas agreements with Russia.
  - Official reserves rose to a level covering 2 months of imports of goods and services following substantial privatization proceeds, two tranches of a EurAsEC Anti-Crisis Fund loan and a loan from Sberbank.
  - Financial system: banks’ capital replenished with general budget resources; 2011 bank recapitalization expenditure amounted to 5 percent of GDP.
  - System-wide non-performing loans increased modestly to slightly over 4 percent at end-2011 but expected to increase further as the economy slows.
  - Authorities announced intent to reduce inflation, lower the current account deficit, raise reserves, curtail lending under government programs, and adopt a balanced budget for 2012; also announced a 5–5.5 percent GDP growth target and intent to increase dollar wages significantly.
  - Structural reforms have been slow, with occasional reversals; banking sector reform progressing slowly; little progress in hardening SOEs’ budget constraints; price liberalization was partially reversed in 2011.
- Executive Directors’ recommendations and views:
  - Strong encouragement to remain firmly focused on consolidating domestic and external stability and to pursue structural reforms.
  - Importance of ensuring consistency between policy goals; warning that pursuing high growth and wage targets could re-ignite an inflation-depreciation spiral and imperil medium-term fiscal and debt sustainability.
  - Call for continued fiscal restraint and disciplined public-sector wage policy, including in SOEs.
  - Maintain a tight monetary policy stance to keep inflation in check, supported by continued exchange rate flexibility and a strong reserve buffer.
  - Progress toward implementing prerequisites for inflation targeting would boost credibility of monetary and exchange rate policies.
  - Enhance fiscal discipline: limit quasi-fiscal operations, rationalize government spending, accelerate plans to reduce general subsidies, improve targeted social assistance, and implement civil service and pension reforms.
  - Strong and carefully sequenced structural reforms to improve productivity and growth prospects and reduce vulnerabilities: reduce government direct control of the economy; pursue price liberalization, enterprise reform, and privatization to improve resource allocation and market incentives.
  - In the financial sector: increase the role of private banks; relieve state-owned banks of directed lending obligations once the Development Bank becomes fully operational, ensuring it is run on prudent and transparent principles.
  - Further improvements to the business and investment climate are needed.
  - Directors noted authorities’ interest in a Fund-supported arrangement and stressed the need for a firm commitment at the highest level to a strong and consistent stabilization and reform strategy.

### IV. Selected Economic Indicators, 2008–12 (2008  2009  2010  2011  2012 Prel. Proj.)
- National accounts:
  - Real GDP: 10.2  0.2  7.7  5.3  3.0
  - Total domestic demand: 17.8  -1.1  11.2  2.9  3.0
  - Consumption: 12.5  0.0  7.4  2.9  3.9
    - Nongovernment: 16.4  0.0  9.0  3.5  3.8
    - Government: 0.3  -0.1  2.3  1.0  4.0
  - Investment: 28.2  -2.9  18.4  3.0  1.6
    - Of which: fixed: 23.8  5.0  17.5  11.1  1.5
  - Net exports1/: -9.2  1.3  -3.7  3.8  -0.3
- Consumer prices:
  - End of period: 13.3  10.1  9.9  108.7  38.4
  - Average: 14.8  13.0  7.7  53.2  66.0
- Monetary accounts:
  - Rubel broad money: 22.5  0.9  27.4  64.1  42.8
  - Growth of credit to the economy at constant exchange rates: 39.0  17.6  23.7  29.2  42.7
- External debt and balance of payments:
  - Current account: -8.2  -12.6  -15.0  -10.5  -6.2
  - Trade balance: -10.3  -14.1  -16.4  -6.7  -1.9
  - Exports of goods: 54.0  43.4  46.0  75.1  79.6
  - Imports of goods: -64.3  -57.5  -62.4  -81.8  -81.5
  - Gross external debt: 25.0  45.6  51.1  61.4  60.4
    - Public2/: 6.8  18.9  21.6  27.8  25.1
    - Private (mostly state-owned-enterprises): 18.1  26.7  29.5  33.6  35.2
- Savings and investment:
  - Gross domestic investment: 37.6  37.3  41.2  36.3  34.9
  - National saving: 29.4  24.7  26.2  25.8  28.7
- Public sector finance:
  - General government balance: 1.3  -0.7  -1.8  3.1  0.0
  - Augmented general government balance: -3.5  -0.7  -4.3  -3.0  -2.3
  - Revenue: 50.6  45.7  41.6  42.0  39.2
  - Expenditure3/: 54.1  46.4  45.9  45.0  41.5
    - Of which: Wages: 6.6  6.7  7.0  6.8  6.7
    - Subsidies and transfers: 11.5  11.7  8.3  7.8  7.5
    - Investment: 10.0  8.1  8.3  5.5  5.7
  - Gross public debt: 21.7  34.9  41.0  50.6  37.7
- Memorandum items:
  - Nominal GDP (billions of U.S. dollars): 60.8  49.2  55.2  55.1  ...
  - Nominal GDP (trillions of rubels): 129.8  137.4  164.5  274.3  495.2
  - Terms of trade: 8.8  -10.3  0.5  5.9  7.1
  - Real effective exchange rate: 1.6  -4.5  -5.0  -17.8  1.3
  - Official reserves (billions of U.S. dollars): 3.1  5.7  5.0  7.9  5.5
  - Months of imports of goods and services: 1.2  1.8  1.2  1.9  1.2
  - Percent of short-term debt: 40.4  63.2  42.0  56.9  38.9

*Source: ANNEX III. BELARUS— STATISTICAL ISSUES (As of April 18, 2012) and associated IMF Public Information Notice No. 12/50 (May 17, 2012).*

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