Belarus: Staff Concluding Statement of the 2016 Article IV Mission
IMF News, June 30, 2016
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- Published: June 30, 2016
Outlook and Risks
- Recession is expected to continue next year, followed by a slow recovery.
- External shocks cited: recession in Russia and lower commodity prices.
- Real GDP projections:
- 2016: -3.0 percent
- 2017: -0.5 percent
- Medium term: real GDP growth expected to reach just under 2 percent
- Key vulnerabilities: elevated public and external sector debt, high dollarization, low reserve buffers, weakened balance sheets, and other structural impediments.
- Outlook sensitivities: potential external shocks, resistance to stabilization policies and structural reforms, fiscal contingent liabilities, and confidence shifts.
- Demographics: recovery dampened by negative demographics.
Economic Policies — Overall assessment
- Authorities maintained macroeconomic and financial stability during 2015-16 via tight budgetary and monetary policies while pursuing institutional and structural reforms.
- Macroeconomic and financial conditions remain fragile with eroded policy buffers.
- Recommendation: faster and deeper progress on reform agenda, particularly in SOE and financial sectors, to reduce vulnerabilities and aim for higher market-led growth and higher living standards.
Real sector and SOE reforms (recommendations)
- Noted recent steps: (a) further price liberalization; (b) increasing utility cost recovery; (c) SOE reform including moves to replace production targets with efficiency indicators, phased reduction in directed lending, and decision to separate ownership and regulatory functions.
- Recommended actions:
- (i) Implement legislation requiring all SOEs to adopt international accounting standards.
- (ii) Carry out a comprehensive review of fiscal risks emanating from the SOE sector and develop capacity to monitor these risks ongoing.
- (iii) Undertake an in depth inventory of SOEs to determine which carry out commercial as opposed to government functions, and incorporate all commercial enterprises.
- (iv) Strengthen SOE corporate governance, including implementing the policy to separate ownership and regulatory functions through centralizing ownership in a single entity and strengthening independence and capacities of SOE boards.
- (v) Enhance and strengthen the framework for restructuring SOEs, including by developing clear insolvency and privatization procedures.
- (vi) Articulate time-bound policies to achieve full utility tariff cost recovery by 2018.
- (vii) De facto implementation of efficiency objectives.
- (viii) Strengthen the business environment, including reduction of nuisance taxes.
- (ix) Secure WTO membership.
Fiscal policy (findings and recommendations)
- Recent improvements: new debt target and medium-term budget planning; recent parametric pension reform helps preserve fiscal sustainability of the pension system through 2022.
- Recommended fiscal strategy:
- Provide budget resources for:
- (a) well-targeted social safety nets;
- (b) SOE and financial sector reforms;
- (c) realization of contingent liabilities from quasi-fiscal activities;
- (d) protection of productive capital expenditures.
- Expect some budget space freed by reforms (lower budget subsidies for utilities and directed lending), but realized contingent liabilities will increase fiscal deficits and debt.
- Gradual fiscal consolidation of about 0.4 percent of GDP annually starting from 2017 is necessary to provide resources for social spending and higher expenditures on interest and capital expenditure, while bringing debt down to target levels over the medium term.
- This adjustment could be lowered somewhat by partial drawdown of government deposits (currently around 12 percent of GDP) or higher privatization receipts.
- Strengthen fiscal framework by:
- (i) including government guarantees in the debt limit;
- (ii) adding an explicit fiscal expenditure adjustment rule to achieve debt targets;
- (iii) increasing transparency and identification of risks in the budgetary process, including by bringing quasi-fiscal items such as directed lending subsidies on budget.
Monetary policy and external stability
- 2015 adoption of monetary aggregate targeting and a more flexible exchange rate considered a major step forward.
- More flexible exchange rate acts as an important shock absorber, preserving scarce reserves.
- Under new framework, significant exchange rate and current account adjustment have taken place; staff estimates current account deficit still somewhat above the level consistent with medium-term fundamentals.
- Given balance sheet vulnerabilities and need to rebuild reserves, competitiveness gaps are best closed by structural reforms and scaling back quasi-fiscal activities.
- Recent lowering of the policy rate corridor by the NBRB appears consistent with re-pricing of the risk premium and recent inflation developments amid tight credit to the economy.
- Recommendation: a pause in further easing to assess impacts on inflation pressures and the financial sector, including depositor behavior, and further progress on real and financial sector vulnerabilities.
- To strengthen NBRB credibility and facilitate a transition to inflation targeting, strengthen the NBRB’s operational capacity and financial independence.
Financial sector stability and market-based lending
- Authorities have taken steps: initiated Independent Diagnostics Studies (“AQRs”) of the top 9 banks; established a Financial Stability Council; undertook a comprehensive review in the context of the Financial Sector Assessment Program (FSAP).
- FSAP diagnostics (April 2016) identified credit and foreign currency liquidity risks, gaps in institutional frameworks, weakening asset quality and profitability, rising non-performing loans, and inadequate resolution of troubled loans.
- Recommended near-term measures:
- (i) Strengthen bank financial resilience, including by completing AQRs and increasing foreign currency liquidity buffers.
- (ii) Transition to an independent and risk-based oversight of the financial sector.
- (iii) Implement a holistic and in-depth NPL resolution strategy alongside corporate restructuring and phasing out directed lending.
- (iv) Maintain a limited, well-targeted role for the Development Bank, focused on areas not adequately addressed by commercial banks, such as longer-term small and medium-size enterprise lending.
- Additional recommendations:
- (i) Set macro prudential policies that could support macroeconomic policies in the de-dollarization of the financial system.
- (ii) Establish a well-functioning financial safety net.
- Encouragement to implement the main findings of the FSAP to address vulnerabilities and bolster financial stability and market-based intermediation.
IMF program discussions and next steps
- Discussions on a potential IMF program are expected to continue, taking into account an assessment of recent policies and the Article IV consultations.
- Progress noted in a number of important policy areas discussed in November, including in the real and financial sector; however, in areas such as utility pricing and SOE reform much more remains to be done.
- Anticipated next steps: discussions on policies to continue in the coming weeks and could form the basis for a negotiating mission in the second half of 2016.
Closing
- The IMF team expressed appreciation to the authorities for cooperation, candid discussions, and warm hospitality.
Belarus: Staff Concluding Statement of the 2016 Article IV Mission — June 30, 2016. IMF Communications Department.