OREANDA-NEWS.The Belarusian authorities have maintained macroeconomic and financial stability amidst a challenging environment during 2015-16, relying on tight budgetary and monetary policies while pursuing institutional and structural reforms. Macroeconomic and financial conditions remain fragile, however, with weakened balance sheets, elevated vulnerabilities, and eroded policy buffers. Faster and deeper progress on the reform agenda, particularly in the closely linked state-owned enterprise (SOE) and financial sectors, are recommended to reduce vulnerabilities and more fundamentally transform and modernize the economy—aiming for higher market-led growth and higher living standards.

Outlook and Risks

1. Recession is expected to continue next year, followed by a slow recovery. External shocks—including recession in Russia and lower commodity prices—have hit an economy already hindered by low competitiveness, weak balance sheets, and other domestic structural impediments to growth. Tight macroeconomic policies remain critical to supporting stability, with the pace of easing contingent on the pace of structural reforms.. Real GDP is expected to fall in 2016 (-3.0 percent) and more moderately in 2017 (-0.5 percent). A slow recovery will then take root, helped by gradually improving external conditions and reforms now underway, but dampened by negative demographics. Real GDP growth is expected to reach just under 2 percent in the medium term. Belarus will remain vulnerable in view of elevated public and external sector debt, high dollarization, low reserve buffers, and other structural impediments. The outlook is sensitive to potential external shocks, resistance to stabilization policies and structural reforms, fiscal contingent liabilities, and confidence shifts.

Economic Policies

2. The authorities have undertaken some important measures and reforms, but more is needed. Recent stabilization efforts, structural reforms, efforts to diagnose real and financial sector vulnerabilities, and articulation of medium-term economic and social objectives—including the 2016-20 Government Action Plan—represent important steps. But faster and deeper reforms in the areas specified below are needed to support macroeconomic and financial sector stability, reduce vulnerabilities, and raise growth prospects.

3. The mission recommends deeper and accelerated real sector reforms, aiming for a more fundamental reorientation of the economy towards market-led growth. The authorities have taken some important steps forward including: (a) further price liberalization; (b) increasing utility cost recovery; and (c) SOE reform. The latter includes recent de jure moves to replace production targets with efficiency indicators, launching a phased reduction in directed lending, and a decision to separate ownership and regulatory functions. To more fundamentally improve resource allocation, boost productivity and competitiveness, and help support financial sector stability, the following steps are recommended: (i) implement legislation requiring all SOEs to adopt international accounting standards; (ii) carry out a comprehensive review of fiscal risks emanating from the SOE sector and develop the capacity to monitor these risks on an ongoing basis; (iii) undertake an in depth inventory of SOEs to determine which carry out commercial as opposed to government functions, and incorporate all commercial enterprises; (iv) strengthen SOE corporate governance, including by implementing the policy to separate ownership and regulatory functions through centralizing ownership in a single entity and strengthening the independence and capacities of SOE boards; (v) enhance and strengthen the framework for restructuring SOEs, including by developing clear insolvency and privatization procedures; (vi) articulate time-bound policies to achieve full utility tariff cost recovery by 2018; (vii) de facto implementation of efficiency objectives; and (viii) strengthen the business environment, including reduction of nuisance taxes; and (ix) securing WTO membership.

4. Fiscal policy should be further strengthened and recalibrated. The authorities have implemented welcome changes to their fiscal framework, including a new debt target and medium-term budget planning. The recent parametric pension reform is an important step that will help preserve fiscal sustainability of the pension system through 2022. Looking ahead, the mission recommends fiscal policies to support structural reforms and growth. This should include budget resources for: (a) well-targeted social safety nets; (b) SOE and financial sector reforms; (c) realization of contingent liabilities from quasi-fiscal activities; and (d) protection of productive capital expenditures. Some of the needed budget space will come from resources freed up by reforms—including lower budget subsidies for utilities and directed lending—but the additional fiscal pressures, particularly from realized contingent liabilities, will increase fiscal deficits and debt. Therefore, gradual fiscal consolidation of about 0.4 percent of GDP annually starting from 2017 will be necessary to provide resources for social spending and higher expenditures on interest and capital expenditure, while bring debt down to target levels over the medium term. This adjustment could be lowered somewhat by partial drawdown of government deposits (currently around 12 percent of GDP) or higher privatization receipts. The mission also recommends that the fiscal framework be strengthened by: (i) including government guarantees in the debt limit; (ii) adding an explicit fiscal expenditure adjustment rule to achieve debt targets; and (iii) increasing transparency and identification of risks in the budgetary process, including by bringing quasi-fiscal items such as directed lending subsidies on budget.

5. Additional steps are recommended to reinforce domestic and external stability. The adoption of monetary aggregate targeting and a more flexible exchange rate in 2015 was a major step forward. The more flexible exchange rate serves as an important shock absorber, preserving scarce reserves. Under the new framework, significant exchange rate and current account adjustment have taken place, though staff estimates that the current account deficit is still somewhat above the level consistent with medium-term fundamentals. Given balance sheet vulnerabilities and the need to rebuild reserves, competitiveness gaps are best closed by structural reforms and scaling back quasi-fiscal activities. The recent lowering of the policy rate corridor by the NBRB appears consistent with both re-pricing of the risk premium—given credibility gains by the NBRB—and with recent inflation developments, amid tight credit to the economy. However, a pause is now warranted to assess the impact of these measures on inflation pressures and the financial sector, including depositor behavior, and further progress in addressing real and financial sector vulnerabilities. To further strengthen NBRB credibility and facilitate a transition to inflation targeting, the NBRB’s operational capacity and financial independence should be strengthened.

6. It is important to build on recent steps to bolster financial stability and strengthen market-based lending. The authorities are taking some important steps to strengthen their institutional frameworks and banking supervisory process. They initiated Independent Diagnostics Studies (“AQRs”) of the top 9 banks, recently established a Financial Stability Council to monitor macro-financial linkages and risks and coordinate policy responses, and undertook a comprehensive review of financial sector frameworks and development in the context of the Financial Sector Assessment Program (FSAP).1 To address existing vulnerabilities, bolster financial stability and strengthen market-based intermediation, the authorities are encouraged to implement the main findings of the FSAP.

  • The FSAP diagnostics identified credit and foreign currency liquidity risks, and gaps in institutional frameworks. Credit to the private sector is stuck in low gear and banks’ asset quality and profitability have weakened. This, together with an inadequate resolution of troubled loans, has resulted in rising non-performing loans.
  • Recommended near-term measures include: (i) strengthening bank financial resilience, including by completing AQRs and increasing foreign currency liquidity buffers, (ii) transitioning to an independent and risk-based oversight of the financial sector; (iii) a holistic and in-depth NPL resolution strategy alongside corporate restructuring and phasing out directed lending, and (iv) maintaining a limited, well-targeted role for the Development Bank, with operations focused on areas not adequately addressed by commercial banks, such as longer-term small and medium-size enterprise lending.
  • To help support financial stability, the mission also recommends: (i) steps to set macro prudential policies that could support macroeconomic policies in the de-dollarization of the financial system; and (ii) a well-functioning financial safety net.

7. Discussions on a potential IMF program are expected to continue, taking into account an assessment of recent policies and the Article IV consultations. There has been good progress in a number of important policy areas discussed in November, including in the real and financial sector. But in other areas, particularly utility pricing and SOE reform, much more remains to be done. The mission anticipates that discussions on policies will continue in the coming weeks and could form the basis for a negotiating mission in the second half of 2016.