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Belarus: Staff Concluding Statement of the 2017 Article IV Mission
November 9, 2017
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IMF Communications Department
MEDIA RELATIONS
PRESS OFFICER: is Olga Stankova
Phone: +1 202 623-7100Email: MEDIA@IMF.org
An International Monetary Fund (IMF) staff team led by Mr. Peter Dohlman visited Belarus from October 26–November 9 to conduct the 2017 Article IV Consultation discussions.
The Belarusian economy is recovering after two years of recession, supported by better fiscal and monetary policies, stronger domestic demand, and a more favorable external environment. Near-term external financing pressures have eased following the mid-2017 energy and financing agreements with Russia and Eurobond issuance. However, elevated vulnerabilities leave the Belarusian economy susceptible to shocks. State-influenced distortions to resource allocation continue to undermine economic efficiency and generate large quasi-fiscal liabilities, putting pressure on monetary and fiscal policies and limiting medium-term growth prospects. The authorities are encouraged to use the current recovery, and better external conditions, to implement deeper and faster institutional and structural reforms to pave the way for higher growth, while reducing vulnerabilities and maintaining stability.
Recent Developments and Outlook
1. A cyclical recovery is underway. Following 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, particularly consumption—on the back of wage increases and consumer credit. Over the medium term, growth will increase to around 2 percent, limited by negative demographics, weak credit conditions, and lagging productivity and competitiveness. Annual inflation is expected to decelerate broadly in line with the authorities’ objectives. The authorities’ stabilization policies contributed to the narrowing of the current account deficit. Going forward, the current account deficit is projected to widen temporarily, reflecting imports associated with the nuclear power plant (NPP) project, before narrowing again to under 2½ percent of GDP in the medium term.
2. Better macroeconomic and financial sector policies have been crucial to support this recovery and increase confidence. In the aftermath of the 2014–15 crisis, the authorities tightened fiscal and monetary policies and implemented a more flexible exchange rate regime. These have been supported by institutional upgrades of the monetary and financial sector policy frameworks, the 2016-17 asset quality review of banks, and fiscal structural measures such as the 2017 pension reform. Dollarization, albeit very high, has begun to fall in the wake of central bank measures, and deposits are rising.
3. However, the build-up of vulnerabilities tied to past policies and several rounds of crises in recent years have left Belarus susceptible to shocks. The external and public debt burdens are high. International reserves have increased significantly during 2017, but remain below prudent levels. Corporate and bank balance sheets have been weakened by depreciation and recession. Despite some exceptions, the state-dominated enterprise sector remains inefficient, continuing to require fiscal injections and remaining a drag on growth. Product and labor markets remain rigid and the private sector’s role is relatively small.
4. There is growing recognition among the authorities that deeper reforms are needed to modernize the economy and improve productivity, albeit at a gradual pace. The authorities increasingly recognize the current structural weaknesses of the economy. Their economic strategy includes steps to: (i) improve state-owned enterprise (SOE) operations, oversight, and corporate governance and address SOE inefficiencies; (ii) strengthen private sector activity by improving the business environment, boosting SME growth, and attracting FDI; and (iii) diversify exports via bilateral trade agreements, and seeking WTO accession. Some important changes have already been made, such as tightening SOE budget constraints and deregulation, but progress in many areas is slow and implementation has lagged, with a preference for pilot projects in the SOE sector, rather than a more comprehensive approach.
Economic Policies
5. The mission recommends a faster pace of real sector reforms to boost the economy’s resilience to shocks and increase growth and competitiveness prospects . While the authorities’ recent efforts are commendable, including to build broader support for reforms, the slow pace risks leaving vulnerabilities to linger for too long and inviting pressures for continued state involvement in resource allocation that spillover into the financial sector and public debt, and in turn put pressure on monetary and fiscal policies. In this regard, staff recommends:
6. To ensure public debt sustainability, the mission recommends the continuation of fiscal consolidation over 2018-19, backed by improvements to the fiscal framework. The authorities have successfully kept their narrowly defined state budget balance under control, but quasi-fiscal activities have continued to put upward pressure on debt. A more broadly defined fiscal deficit measure—covering the 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. To secure a faster downward trajectory of public debt towards a more sustainable level of 45 percent of GDP over the medium term, while also creating space for stronger social safety nets, staff recommends a further fiscal 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, in line with earlier government intentions. In addition, to ensure a more sustainable fiscal path, the fiscal framework should be strengthened 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.
7. Monetary policy, though burdened by quasi-fiscal activities, has been successful in reducing inflation. Further space for easing the monetary policy stance would be created by a tighter fiscal stance, lower quasi-fiscal activities, particularly directed lending, and wage increases consistent with productivity growth. For the medium term, the authorities should continue to lay the groundwork for the planned transition to inflation targeting, including further development of financial markets, reducing market distortions (specifically fiscal dominance), and further strengthening the NBRB’s operational capacity and independence. The current exchange rate regime, which is an important shock absorber, should be maintained and exchange rate flexibility should be supported. In this regard, the authorities should continue to limit interventions to preventing disorderly market conditions, while seeking opportunities to further liberalize the FX market, and rebuild reserves. Given still-high dollarization, efforts to increase competitiveness and lower the current account deficit should be undertaken primarily through structural reforms rather than exchange rate movements.
8. Significant work has been done to strengthen financial sector stability and frameworks, but vulnerabilities remain. In this regard, the implementation of the 2016 FSAP recommendations should continue. Near-term steps should include further strengthening of bank regulation and supervision, divesting NBRB shareholdings in commercial banks to address potential conflict of interest and strengthen performance, refining and broadening the risk management framework, and further enhancing foreign currency risk management in banks. The NPL resolution framework should be strengthened and enhanced in the context of SOE restructuring.
The IMF mission team expresses its appreciation to the authorities for cooperation, candid discussions, and warm hospitality.
