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IMF Executive Board Concludes 2018 Article IV Consultation with the Republic of Belarus

On January 16, 2019, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation [1] with the Republic of Belarus.

The cyclical recovery of the Belarusian economy continues, with growth in the first three quarters of 2018 reaching 3.7 percent. Higher oil prices and robust external demand have supported exports, while domestic demand got an impulse from double-digit wage growth in response to ambitious wage targets. In turn, stronger imports, including related to the nuclear power plant construction, have led to some deterioration in the external accounts despite the positive terms of trade; the current account deficit could thus reach 2½ percent of GDP in 2018, versus 1.6 percent in 2017. Prudent monetary policy coupled with increasing central bank credibility are keeping inflation at historically low levels (5 percent y/y in November) despite rapid wage growth. Importantly, the exchange rate has remained relatively stable on a nominal effective basis, as have international reserves.

Strong external demand, better terms of trade, and a higher-than-expected redistribution of import duties within the Eurasian Economic Union have boosted budget revenues, which could increase by some ¾ percentage points of GDP in 2018 relative to 2017. Expenditures, however, have been rising even faster, particularly capital spending but also wages and salaries. All in all, the overall budget deficit including quasi-fiscal spending on state-owned enterprises could reach 1.3 percent of GDP in 2018, from 0.3 percent in 2017. The deficit is projected to fall modestly over the medium-term to about ½ percent of GDP, notably thanks to the planned completion of the nuclear power plant.

The medium-term outlook is subdued absent vigorous structural reforms, weighed down by unfavorable demographics and weak productivity. At this juncture, medium-term growth is projected at 2 percent, limiting convergence towards the income levels of richer neighboring countries. This modest outlook is conditional on full compensation from Russia for losses triggered by the latter’s new energy taxation system (the so-called tax maneuver). Should compensation be significantly less than full—and this is the key risk hovering over the Belarusian economy at this stage—medium-term growth could be materially lower than 2 percent, and the budget and current account deficits higher than projected above.

Executive Board Assessment [2]

Executive Directors welcomed Belarus’ continued economic recovery, supported by improved policy frameworks. However, Directors noted that rapidly rising public debt, high dollarization, and the uncertainty about negative spillovers from Russia’s new energy taxation system pose risks. They encouraged the authorities to use the current cyclical recovery to implement comprehensive macroeconomic policies and ambitious reforms, including the reform of state-owned enterprises, to strengthen economic resilience and increase potential growth.

Directors noted that, while the authorities have undertaken several fiscal adjustment measures, more needs to be done to stem the rapidly rising public debt. They encouraged the authorities to undertake additional consolidation, spread over the next three years, to achieve a credible medium-term debt target, which strikes an appropriate balance between development needs and fiscal sustainability. Directors also encouraged the authorities to monitor fiscal risks from state-owned enterprises and to gradually switch funding toward rubel-denominated debt, in order to make debt less susceptible to exchange rate movements.

Directors agreed on the importance of continued central bank independence. They supported the authorities’ current monetary policy stance, which is consistent with the inflation target goal. Looking ahead, Directors welcomed continued progress towards inflation targeting. In this context, they commended the authorities for the liberalization of the FX market and for reductions in directed lending. It will be equally important to eliminate interest rate caps.

Directors encouraged the authorities to continue to strengthen financial sector stability. They welcomed the progress made in implementing the FSAP recommendations and encouraged implementation of the remaining ones. Directors emphasized the need to further reduce the high dollarization to continue building confidence in the rubel. They also stressed that developing local capital markets will be a key component of successful de-dollarization.

Directors emphasized that advancing structural reforms is key to reducing macroeconomic vulnerabilities and raising growth potential. They called for a comprehensive reform of state-owned enterprises via a systematic, risk-based assessment of SOEs’ viability, followed by an actionable plan to guide restructuring. In addition, Directors underscored the need for enhanced social safety nets, to cushion the impact of restructuring on vulnerable groups. Separately, facilitating private sector activity by improving the business climate and leveling the playing field will also be important.

Quota (2016): SDR 681.5 million (923.5 million U.S. dollars)

Sources: Belarusian authorities; and IMF staff estimates. 1/ Contribution to growth.

2/ Includes general government and off-balance sheet operations.

[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 summing up can be found here: http://www.imf.org/external/np/sec/misc/qualifiers.htm.


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