An International Monetary Fund (IMF) team led by Mr. David Hofman visited Belarus during April 17–28 to hold the 2014 Article IV Consultation discussions with the authorities. The team met with Deputy Prime Minister Piotr Prokopovich, Chair of the Board of the National Bank of the Republic of Belarus (NBRB) Nadezhda Ermakova, Minister of the Economy Nikolai Snopkov, officials from the Presidential Administration, and representatives from think tanks, business, and the diplomatic community.

At the conclusion of the mission today in Minsk, Mr. Hofman made the following statement:

“Expansionary macroeconomic policies, slowing trade-partner growth, and falling competitiveness caused the current account deficit to reach 10 percent of GDP last year. Meanwhile, output growth has remained low and inflation high. With high external debt payments this year, financing needs are large. At the same time, prospects for foreign financing remain uncertain and international reserves have declined. Recent developments in neighboring countries—which likely imply a continued weakening of demand for Belarusian exports this year—accentuate short-term risks.

“Recognizing the challenges, the authorities have started to adjust policies. In comparison to recent years, the emphasis on mandatory GDP and wage growth targets is being reduced. This is realistic and welcome. The mission also notes and supports the authorities’ efforts to contain directed lending through the recently adopted “Financing Plan.” The plan usefully identifies and sets a binding limit on the combined subsidized lending volumes of the Development Bank and other banks, and is a step forward—even though the established overall lending limit remains too high and subsidized housing lending would also need to be included for complete coverage. The mission recommends making such an annual financing plan a permanent feature of the authorities’ policy framework.

“More decisive policy changes are urgently needed to mitigate the risk of a disorderly adjustment of external imbalances. In particular, to contain domestic demand and reduce imbalances, directed lending needs to be reduced much more rapidly than currently envisaged and wages should not be raised further this year. Also, the government should pursue an adequately tight fiscal stance, and the NBRB should allow more exchange rate flexibility and simultaneously tighten monetary policy. Meanwhile, the NBRB should closely monitor risks in the banking sector, including in light of rising nonperforming loans, and intensify its efforts to contain the growth of foreign currency loans to unhedged borrowers.

“Deep structural reforms continue to be needed to boost sustainable growth. The mission welcomes recent reductions in the number of goods subject to price controls, but it will be important to leverage this effort by stepping up reforms in other areas to improve overall resource allocation. Specific steps would include initiation of a time-bound plan to reach full cost recovery of utility and transport tariffs, and concrete steps to reduce the role of the state in the economy. The latter should include a rapid phase out of the system of mandatory targets for enterprises and credible plans for privatization. A strengthening of social safety nets should protect the most vulnerable in society.

“The Fund will continue to engage closely with the authorities. While post-program monitoring has now formally ended as the bulk of IMF financing has been repaid, the mission envisages returning in the fall to continue policy discussions. In the meantime, the Fund will continue to support the authorities through regular visits by the senior regional resident representative and technical assistance.

“The team thanks the authorities and other counterparts for the interesting, candid, and constructive discussions.”