Public Information Notice

Public Information Notice (PIN) No. 11/34
March 9, 2011

On March 4, 2011 the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Belarus.¹

Background

For nearly a decade before the crisis, Belarus’s economy grew rapidly but remained vulnerable to external shocks. The crisis exposed the external weaknesses and prompted the authorities to embark on a Fund-supported adjustment program. The program aimed at addressing the vulnerabilities and establishing conditions for sustainable growth: the exchange rate was realigned and supported by a new exchange rate regime, monetary and the fiscal policies were tightened, and several important structural reforms initiated. Belarus avoided output loss during the crisis and completed program in March 2010. However, the current account deficit failed to adjust due to the strength of the external shock but also owing to high credit growth spurred by lending under government programs.

After the end of the program policies have been loosened to the extent of becoming unsustainable: 12-month credit growth rate increased to 38 percent in the end of 2010, 1^st grade wage in the budget sector was increased by about 50 percent, and the Republican budget deficit limit was increased to 3 percent of GDP. Moreover, the National Bank of the Republic of Belarus (NBRB) did not make use of the exchange rate flexibility provided by the existing exchange rate system. Loose macroeconomic policies succeeded in increasing the growth rate of GDP to about 7½ percent, but at the cost of estimated further increase in the current account deficit to about 16 percent of GDP and strong pressures on the international reserves. Gross reserves were supported by a sharp increase in foreign currency borrowing by the NBRB from Belarusian commercial banks at the end of 2010: during all of 2010, the stock of such borrowing amounted to some US$3.8 billion, with US$2.3 billion having been accumulated in the final quarter of the year.

Belarus’s prospects are expected to improve due to the recent agreement on the Common Economic Area with Russia and Kazakhstan, but it would not be sufficient to restore current account sustainability without significant adjustment measures. The new agreement with Russia on the regime for oil imports reached in December 2010 will entail the net gain of about 2 percent of GDP in the oil balance, but it does not fundamentally change the outlook. Without prompt adjustment measures, the current account deficit will remain too high. The authorities need to make quickly difficult decisions to restore external sustainability.

Executive Board Assessment

Executive Directors commended the authorities for the progress made under the Fund-supported program that expired in March 2010. Under this program, Belarus avoided loss of output during the global recession, contained inflation, and increased gross reserves. Against this background, Directors regretted the recent relaxation of macroeconomic policies which has boosted domestic demand and has contributed to an unsustainable current account deficit. To restore external sustainability, they stressed the urgent need for policy adjustments and far-reaching structural reforms.

Directors underscored that reducing the current account deficit is critical. They emphasized the need for fiscal and monetary tightening and cuts in lending under government programs. Noting the impact of high credit and wage growth on the external accounts, Directors reiterated the importance of prudent monetary policy and a lower wage bill in the public sector. In general, they considered that exchange rate flexibility would also facilitate the adjustment.

Directors expressed concern about the authorities’ decision to borrow foreign exchange from domestic banks to meet mounting pressures on international reserves. They encouraged the authorities to refrain from such borrowing and reorient macroeconomic policies to support the balance of payments.

Directors welcomed the plans for structural reforms contained in the Program for Social and Economic Development for 2011-15 and the recently adopted President’s Directive aimed at liberalizing the economy. These reforms, if accompanied by macroeconomic adjustment, would help address structural balance of payments problems and improve competitiveness. Directors urged the authorities to pursue an ambitious structural reform agenda centered on economic liberalization, a shift in investment from the housing sector to the tradable sector, a smaller role of the state, and the development of the financial sector. They agreed that establishing a Development Bank to administer lending under government programs would free the central bank and commercial banks from a quasi-fiscal activity.

Directors welcomed the opportunity to review Belarus’ experience with the 2009 exceptional access Stand-By Arrangement. They agreed with the main message from the ex post evaluation that the Fund-supported program was generally successful. Directors stressed the need to ensure ownership, including at the highest levels, of program design and conditionality. They saw merit in continued close engagement with the Fund but stressed that any future financial arrangement should be accompanied by a credible commitment to strong stability-oriented policies and an ambitious structural reform agenda. Directors supported the proposal to initiate post-program monitoring, which would enhance the policy dialogue between the Belarus authorities and the Fund.

Belarus: Selected Economic Indicators, 2007–11
	2007	2008	2009	2010	2011
			Prel.	Est.	Proj.
	(Annual percentage change, unless otherwise specified)
National accounts
Real GDP	8.6	10.2	0.2	7.6	6.9
Total domestic demand	11.9	17.8	-1.1	10.3	4.7
Consumption	9.7	12.5	0.0	7.0	5.7
Nongovernment	13.4	16.3	0.0	8.6	6.9
Government	-0.5	0.3	-0.1	1.3	1.0
Investment	16.4	28.2	-2.9	16.1	2.9
Of which: fixed	16.4	23.8	5.0	16.6	3.0
Net exports 1/	-1.5	-9.4	1.5	-4.3	1.4
Consumer prices
End of period	12.1	13.3	10.1	9.9	10.5
Average	8.4	14.8	13.0	7.7	11.0
Monetary accounts
Rubel broad money	35.0	22.5	1.0	27.5	13.2
Growth of credit to the economy at constant exchange rates	48.5	50.0	27.7	38.2	24.8
	(Percent of GDP)
External debt and balance of payments
Current account	-6.7	-8.6	-13.0	-16.0	-14.1
Trade balance	-8.9	-10.3	-14.1	-16.9	-11.7
Exports of goods	53.8	54.0	43.4	46.3	51.3
Imports of goods	-62.7	-64.3	-57.5	-63.2	-62.9
Gross external debt	27.7	25.0	44.9	52.4	57.3
Public 2/	6.5	6.8	18.1	21.2	24.3
Private (mostly state-owned-enterprises)	21.2	18.1	26.7	31.2	33.0
Savings and investment
Gross domestic investment	34.1	37.6	37.3	42.8	39.5
National saving	27.4	29.0	24.3	26.8	25.4
Public sector finance
Republican and local government balance	-0.6	0.0	-1.8	-2.6	-3.0
General government balance 3/	0.4	-3.5	-0.7	-4.3	-2.2
Revenue	49.5	50.6	45.7	41.9	40.9
Expenditure 4/	49.0	54.1	46.4	46.3	43.1
Of which:
Wages	8.0	6.6	6.7	7.1	8.0
Subsidies and transfers	10.5	11.5	11.7	8.4	7.8
Investment	8.5	10.0	8.1	8.4	6.0
Gross public debt	8.9	10.7	20.0	22.4	25.5
	(Annual percentage change, unless indicated otherwise)
Memorandum items:
Nominal GDP (billions of U.S. dollars)	45.3	60.8	49.2	54.7	…
Nominal GDP (trillions of rubels)	97.2	129.8	137.4	163.0	197.4
Terms of trade	-1.5	8.6	-8.0	-1.0	3.8
Real effective exchange rate	-3.9	1.6	-4.5	-4.9	1.2
Official reserves (billions of U.S. dollars)	4.2	3.1	5.7	5.0	6.2
Months of imports of goods and services	1.2	1.2	1.8	1.4	1.5
Percent of short-term debt	56.8	40.4	63.2	42.5	46.2
Financing gap (billions of U.S. dollars)		…	…	…	4.6
Sources: Belarusian authorities; and IMF staff estimates.
1/ Contribution to growth.
2/ Gross consolidated debt of the public sector (central bank and general government debt including publicly guaranteed debt).
3/ Refers to the augmented balance of the general government.
4/ Refers to the augmented expenditure of the general government.

Belarus: Selected Economic Indicators, 2007–11     2007 2008 2009 2010 2011       Prel. Est. Proj.     (Annual percentage change, unless otherwise specified) National accounts            Real GDP 8.6 10.2 0.2 7.6 6.9     Total domestic demand 11.9 17.8 -1.1 10.3 4.7      Consumption 9.7 12.5 0.0 7.0 5.7       Nongovernment 13.4 16.3 0.0 8.6 6.9       Government -0.5 0.3 -0.1 1.3 1.0      Investment 16.4 28.2 -2.9 16.1 2.9       Of which: fixed 16.4 23.8 5.0 16.6 3.0      Net exports 1/ -1.5 -9.4 1.5 -4.3 1.4     Consumer prices                End of period 12.1 13.3 10.1 9.9 10.5      Average 8.4 14.8 13.0 7.7 11.0             Monetary accounts            Rubel broad money 35.0 22.5 1.0 27.5 13.2  Growth of credit to the economy at constant exchange rates 48.5 50.0 27.7 38.2 24.8   (Percent of GDP) External debt and balance of payments            Current account -6.7 -8.6 -13.0 -16.0 -14.1  Trade balance -8.9 -10.3 -14.1 -16.9 -11.7    Exports of goods 53.8 54.0 43.4 46.3 51.3    Imports of goods -62.7 -64.3 -57.5 -63.2 -62.9  Gross external debt 27.7 25.0 44.9 52.4 57.3    Public 2/ 6.5 6.8 18.1 21.2 24.3    Private (mostly state-owned-enterprises) 21.2 18.1 26.7 31.2 33.0 Savings and investment            Gross domestic investment 34.1 37.6 37.3 42.8 39.5  National saving 27.4 29.0 24.3 26.8 25.4 Public sector finance            Republican and local government balance -0.6 0.0 -1.8 -2.6 -3.0  General government balance 3/ 0.4 -3.5 -0.7 -4.3 -2.2    Revenue 49.5 50.6 45.7 41.9 40.9    Expenditure 4/ 49.0 54.1 46.4 46.3 43.1    Of which:                Wages 8.0 6.6 6.7 7.1 8.0      Subsidies and transfers 10.5 11.5 11.7 8.4 7.8      Investment 8.5 10.0 8.1 8.4 6.0  Gross public debt 8.9 10.7 20.0 22.4 25.5   (Annual percentage change, unless indicated otherwise) Memorandum items:            Nominal GDP (billions of U.S. dollars) 45.3 60.8 49.2 54.7 …  Nominal GDP (trillions of rubels) 97.2 129.8 137.4 163.0 197.4  Terms of trade -1.5 8.6 -8.0 -1.0 3.8  Real effective exchange rate -3.9 1.6 -4.5 -4.9 1.2  Official reserves (billions of U.S. dollars) 4.2 3.1 5.7 5.0 6.2    Months of imports of goods and services 1.2 1.2 1.8 1.4 1.5    Percent of short-term debt 56.8 40.4 63.2 42.5 46.2  Financing gap (billions of U.S. dollars)   … … … 4.6   Sources: Belarusian authorities; and IMF staff estimates. 1/ Contribution to growth. 2/ Gross consolidated debt of the public sector (central bank and general government debt including publicly guaranteed debt). 3/ Refers to the augmented balance of the general government. 4/ Refers to the augmented expenditure of the general government. 1 Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. An explanation of any qualifiers used in summings up can be found here: http://www.imf.org/external/np/sec/misc/qualifiers.htm.