Belarus: Staff Concluding Statement of the 2017 Article IV Mission
IMF News, November 9, 2017
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- Published: November 9, 2017
Recent developments and outlook
- Real GDP:
- A cyclical recovery is underway after "a 6.4 percent cumulative drop during 2015-16".
- Real GDP growth is estimated at "1.7 percent in 2017", driven by higher net exports and recovering domestic demand (consumption, wage increases, and consumer credit).
- Over the medium term, growth will increase to "around 2 percent", constrained by negative demographics, weak credit conditions, and lagging productivity and competitiveness.
- Inflation and current account:
- Annual inflation is expected to decelerate broadly in line with the authorities’ objectives.
- The current account deficit narrowed with stabilization policies but is projected to widen temporarily because of imports associated with the nuclear power plant (NPP) project before narrowing again to "under 2½ percent of GDP in the medium term".
- External financing and vulnerabilities:
- Near-term external financing pressures eased after mid-2017 energy and financing agreements with Russia and Eurobond issuance.
- External and public debt burdens are high.
- International reserves increased significantly during 2017 but remain below prudent levels.
- Corporate and bank balance sheets have been weakened by depreciation and recession.
- Structural context:
- State-dominated enterprise sector remains inefficient, requiring fiscal injections and dragging on growth.
- Product and labor markets are rigid; the private sector’s role is relatively small.
- Authorities increasingly recognize structural weaknesses and propose measures to: (i) improve SOE operations, oversight, and corporate governance; (ii) strengthen private sector activity, boost SME growth, and attract FDI; and (iii) diversify exports and seek WTO accession.
Fiscal policy and public debt sustainability
- Fiscal stance and risks:
- Narrowly defined state budget balance has been kept under control, but quasi-fiscal activities continue to put upward pressure on debt.
- A more broadly defined fiscal deficit measure—including general government, financing of the NPP construction, and other off-balance sheet operations—is projected to rise to "5-5½ percent of GDP over 2018-19".
- Broadly defined general government debt (including general government guarantees) is projected to reach "about 59 percent of GDP in 2019".
- Staff’s medium-term sustainability objective: lower public debt toward "a more sustainable level of 45 percent of GDP over the medium term".
- Fiscal policy recommendations:
- Continue fiscal consolidation over 2018-19, including a further consolidation in the range of "0.5 percent of GDP over 2018-19", while allowing major investment spending tied to NPP expenditures to taper off as planned.
- Supporting measures could include limiting growth of the public wage bill to nominal GDP growth.
- Strengthen the fiscal framework by: (i) expanding the coverage of the debt anchor and the annual budget balance target, (ii) considering an operational fiscal rule, (iii) strengthening fiscal risk assessment capacity, and (iv) implementing three-year medium term budgeting.
Real sector and structural reform priorities
- Need for faster real sector reforms:
- Slow pace of reforms risks lingering vulnerabilities and continued state involvement in resource allocation that spills over into financial sector and public debt, pressuring monetary and fiscal policies.
- Key reform recommendations:
- Adopt a comprehensive strategy to significantly improve SOE efficiency and reduce quasi-fiscal pressures, including:
- Strengthen SOE corporate governance and oversight.
- Tighten budget constraints by cutting back directed lending and subsidies.
- Set up clear criteria for state ownership or privatization and allow exit of unviable enterprises.
- Enhance capacity to monitor and assess risks from SOEs.
- Continue and deepen efforts to remove impediments to private sector growth, promote competition (including in the agricultural sector), and further liberalize prices.
- Eliminate the end-2017 monthly wage target in favor of allowing firm-level wage adjustments linked to productivity; eliminate the tax on social dependency.
- Adjust household utility tariffs and lower costs to reach full cost recovery within two years; replace the current price subsidy to households with an expanded and better-targeted system of support for the poorest.
- Modernize the social safety net, including the unemployment framework, to provide cushion for SOE restructuring.
Monetary policy and exchange rate
- Achievements and constraints:
- Monetary policy has been successful in reducing inflation despite being burdened by quasi-fiscal activities.
- Dollarization is still high but has begun to fall; deposits are rising.
- Policy recommendations:
- Create space for monetary easing by pursuing a tighter fiscal stance, reducing quasi-fiscal activities (particularly directed lending), and aligning wage increases with productivity growth.
- Continue laying groundwork for planned transition to inflation targeting by developing financial markets, reducing market distortions (specifically fiscal dominance), and strengthening the NBRB’s operational capacity and independence.
- Maintain current exchange rate regime as an important shock absorber and support exchange rate flexibility; limit interventions to preventing disorderly market conditions, seek opportunities to further liberalize the FX market, and rebuild reserves.
- Given still-high dollarization, increase competitiveness and lower the current account deficit primarily through structural reforms rather than exchange rate movements.
Financial sector stability
- Progress and remaining vulnerabilities:
- Significant work completed to strengthen financial sector stability and frameworks, including a 2016-17 asset quality review of banks and monetary/financial institutional upgrades.
- Vulnerabilities persist in banks and corporate sectors due to past depreciation and recession; quasi-fiscal activities remain a concern.
- Recommended near-term steps:
- Continue implementation of the 2016 FSAP recommendations.
- Further strengthen bank regulation and supervision.
- Divest NBRB shareholdings in commercial banks to address potential conflict of interest and strengthen performance.
- Refine and broaden the risk management framework, and further enhance foreign currency risk management in banks.
- Strengthen and enhance the NPL resolution framework in the context of SOE restructuring.
Source: Belarus: Staff Concluding Statement of the 2017 Article IV Mission, November 9, 2017 — IMF Communications Department.