Public Information Notices
Republic of Belarus and the IMF
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On April 16, 2003 the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with the Republic of Belarus.1
Belarus made noticeable progress in some areas of economic reform over the past several years, but overall macroeconomic performance in 2002 was mixed. Inflation in 2002 was the lowest since Belarus became independent, yet it remains the highest in the Commonwealth of Independent States. Fiscal and monetary policies were tighter in 2002 than in previous years. Reported real GDP growth was 4.7 percent, similar to the 2001 level. However, large administrative wage increases in late 2001-combined with a substantial real appreciation of the rubel-adversely affected corporate finances and the balance of payments.
Fiscal policy was marked by weaker revenue performance and tight financing constraints. Government expenditure continued to be affected by the 2001 wage increases and the commitment to maintain or increase spending on priority social areas. The fiscal balance, after remaining tight for most of 2002, expanded in December to yield a cash deficit of 1.8 percent of GDP for the year. While the authorities took strong measures to stabilize the finances of the Social Protection Fund, quasi-fiscal activities continue to impose a heavy burden on the economy, and progress with tax reform has been mixed.
Monetary policy in 2002 was tighter than in previous years and there has been some remonetization, which has been a region-wide phenomenon. Rubel broad money grew by more than 60 percent, and household rubel deposits more than doubled in nominal terms as interest rates were held at very high levels until late in the year.
The real appreciation of the rubel had an impact on the competitiveness of Belarusian exports. From September 2001 to end-February 2003, the rubel rose by 20 percent in real terms against the U.S. dollar and by 6 percent against the Russian ruble. The balance of payments situation therefore remained relatively weak. The current account deficit, at US$279 million (2.0 percent of GDP), was almost unchanged compared to 2000-01, while the overall balance of payments recorded a $167 million surplus, mainly because of large capital inflows in December. Gross official reserves remained at extremely low levels until December, when they rose to $601 million (0.8 months of imports) following one large privatization transaction.
Current plans for monetary union with Russia envisage a peg of the Belarusian rubel to the Russian ruble in January 2004, and currency union in January 2005. While the two countries have made some progress in aligning customs duties, the Belarusian authorities will need to implement a substantial adjustment in macroeconomic policies if inflation is to be brought down to Russian levels by the start of next year.
The record of structural reforms continues to be mixed. Energy sector cross-subsidization has been reduced, as utility tariffs and rental payments were increased by an average of 190 percent over the course of 2002. Some progress was also achieved in price liberalization, and a recent draft decree would reportedly reduce the number of activities requiring licenses sharply. But 80 percent of GDP is still produced by the state sector, and the "golden share" rule remains in place, effectively allowing the state to take over any firm that is not fully privatized.
Under current policies, the outlook for 2003 is broadly similar to the outcome for 2002. Inflation is expected at around 27 percent, and real GDP growth is likely to slow modestly to about 4 percent.
Executive Board Assessment
Directors noted that the Belarusian authorities have made noticeable progress in policy implementation in several areas. They have tightened fiscal and monetary policies, and they have been implementing a number of structural reforms, most notably reduced cross-subsidization and raised cost recovery in the energy sector, trade reform, price liberalization, privatization, streamlined registration requirements for small enterprises, and politically difficult measures to avert a crisis in the pension system. As a result, economic growth has been maintained and inflation declined further in 2002.
Nevertheless, Directors emphasized that major economic challenges lie ahead. In particular, they stressed the need to continue to strengthen the macroeconomic framework in order to further reduce inflation, increase external competitiveness, and prepare the way for the planned currency union with Russia. These efforts would need to be complemented with more vigorous implementation of structural reforms to raise productivity, improve the environment for private business, and address vulnerabilities in the financial sector. In this regard, most Directors cautioned that the authorities' macroeconomic projections for 2003 may be optimistic-especially concerning real GDP growth, foreign direct investment, and re-monetization of the economy.
Directors considered that the current policy mix is not consistent with plans to peg the Belarusian rubel to the Russian ruble. They stressed that macroeconomic policies need to be consistent with the exchange rate regime, and that the exchange rate ought to be appropriately competitive at the time it is fixed to the ruble. In this regard, most Directors agreed that the Belarusian rubel is somewhat over-valued at present, and called for more rapid disinflation and maintenance of the pre-announced path for depreciation of the rubel to restore lost competitiveness. They urged tighter monetary and fiscal policies, aggressive economic liberalization and formal elimination of U.S. dollar wage targets to bring inflation down.
On fiscal policy, Directors put particular emphasis on expenditure rationalization in view of the relatively large size of the government. They recommended a reduction in subsidies to agriculture, housing and road construction, a cutback in budgetary lending, and immediate elimination of central bank financing of the government budget deficit. They also called for increased budgetary transparency.
Directors encouraged the authorities to take action to reduce vulnerabilities in the financial sector, including tightening of prudential regulations. They particularly regretted the reappearance of directed credits, whose elimination had been a key achievement of the 2001 Staff-Monitored Program. Directors supported preparation of a comprehensive reform and privatization program for the corporate and financial sectors. Directors also welcomed the authorities' request for an early Financial Sector Assessment Program, their intention to undertake a safeguards assessment of the central bank, and their efforts to enforce and strengthen legislation to combat money laundering and terrorism financing, and stressed the importance of central bank independence.
Directors believed that increased labor market flexibility, particularly by allowing state enterprises to lay off redundant workers, would greatly help to raise productivity and support the exchange rate peg. They advised that wage policy be driven principally by growth in labor productivity. Directors also observed that the environment for private business in Belarus needs to be improved in order to promote foreign and domestic investment. To this end, they encouraged elimination of legal and administrative barriers to private sector activity, increased stability of the legal and administrative framework, a reduction of the tax burden, and curtailment of state intervention and inspections.
Directors welcomed the authorities' plans to accelerate large-scale privatization. At the same time, they underscored the importance of ensuring the transparency and effectiveness of the privatization process. Directors again urged elimination of the "golden share" rule, as this would help to encourage foreign direct investment in Belarus.
Most Directors continued to emphasize that a good track record of policy implementation of a critical mass of reforms would be required before negotiations on a Stand-By Arrangement could begin. Such a track record could be established in the context of a staff-monitored program. However, a few Directors felt that the authorities have made sufficient progress in policy implementation to warrant immediate negotiations on possible Fund financial assistance to Belarus.
Directors supported expansion of technical assistance and related forms of collaboration with Belarus, given the authorities' good record of implementing past IMF technical assistance recommendations. They welcomed the authorities' efforts to increase the dissemination of statistical information and their plans to subscribe to the IMF's Special Data Dissemination Standard.
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.
IMF EXTERNAL RELATIONS DEPARTMENT