## Belarus: Staff Concluding Statement of the 2017 Article IV Mission

_IMF News, November 9, 2017_

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## Bibliographic details
- Published: November 9, 2017

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### 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.*

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## References

- [Republic of Belarus and the IMF](http://www.imf.org/external/country/BLR/index.htm)
- [IMF Policy Advice -- A Factsheet](https://www.imf.org/en/about/factsheets/imf-surveillance)
- [Mission Concluding Statements](https://www.imf.org/en/news/searchnews)
- [PRESS CENTER](http://presscenter.imf.org/)
- [https://www.imf.org/en/home](https://www.imf.org/en/home)

_Source: https://www.imf.org/en/news/articles/2017/11/09/ms110917-belarus-staff-concluding-statement-of-the-2017-article-iv-mission_