EurAsEC ACF: Economic Stability in Belarus Depends on its Authorities’ Commitment
At the end of last year, the Council of the EurAsEC Anti-Crisis Fund adopted a decision to postpone the discussion of the disbursement of the sixth tranche (US $440 million) of its credit to Belarus. The decision adopted was based on Belarus’ failure to comply with its commitments undertaken in the framework of the credit programme.
On what conditions would Belarus be able to get the last tranche of the credit disbursed? How sustainable is today’s economic stability in Belarus, which is the aim of the ACF credit programme? What exchange rate policies should be followed by Belarus in the environment of its mounting external deficit?
BelaPAN has found answers to these and other questions in an interview of Sergey Shatalov, Deputy Chairman of the Management Board of Eurasian Development Bank, Resources Manager of the EurAsEC Anti-Crisis Fund.
TASK FOR FIRST SIX MONTHS
Mr. Shatalov, at end-December 2013, the ACF Council adopted a decision to postpone the disbursement of the sixth tranche of its financial credit. The Belarusian side is expected to clear with the ACF Manager its new Letter of Intent and the disbursement of the sixth tranche will depend on compliance with the targets fixed therein. When can a new Letter of Intent be ready?
“The teams of the Borrower and the ACF Resources Manager started revising the targets for the sixth tranche immediately after the ACF Council adopted the decision to postpone the disbursement of the sixth tranche.
“Having drafted their Letter of Intent for 2014, our colleagues from Minsk are currently clearing its parameters with the ministries and agencies concerned. We hope that they will start the procedure of clearing the document with us in the nearest future and the new Letter of Intent will be ready for signing at the beginning of February.”
In your capacity of the ACF Manager, what key indicators (commitments) do you think should be fixed in the new Letter of Intent?
“In our view, all the targets for the 6th tranche should remain valid as meeting them will help eliminate the economic imbalances creating pressure on the international reserves, the exchange rate, and prices. It is important to meet not only the control targets, but the indicative ones as well. Failure to meet the indicative targets undermines the stabilisation effect generated by the control ones.
“For instance, raising the utility tariffs (indicative target) to the levels fixed in the programme will result not only in lower budget subsidies, improved efficiency of public spending, containing the domestic demand, but will also improve the competitiveness of Belarusian exports owing to reduced cross-subsidisation, which burden currently lies with industrial enterprises.”
The stabilisation programme has been extended until July 1, and the availability of the ACF financial credit — until the end of the year. However, the ACF Council stated at end-December that Belarus had failed to meet 10 targets under the credit programme and it would, most likely, be quite difficult to meet them within six months. Is the ACF, figuratively speaking, prepared to “turn a blind eye” to non-compliance with certain parameters?
"Absolutely all the agreed targets can be met, otherwise we wouldn’t have recommended to the ACF Council to postpone the disbursement of the sixth tranche.
“The Belarusian authorities have demonstrated their ability to make efficient use of economic policy instruments to contain the domestic demand on many occasions, but these policies have not been consistent.
“Privatisation can play a significant role in meeting the programme targets. But in the absence of tight monetary and fiscal policies and the long-needed structural reforms, which have been declared, but have not been implemented by the authorities, privatisation would generate only a temporary positive effect. This is exactly why it will remain an indicative target. A certain amount of time will be needed to adjust the situation, but six months is a long enough period to meet all the targets.”
SOURCES OF BELARUS’ EXTERNAL DEFICIT GROWTH
Mr. Shatalov, the ACF has shared concerns about the high rate of credit growth in Belarus. However, at the beginning of January, the National Bank of the Republic of Belarus announced monetary policy tightening and limiting the rate of credit growth to 0.7% per month. Moreover, by now, the National Bank has established a ban on extending loans in foreign currency for the purposes of domestic settlements. What is the ACF’s opinion concerning the above steps?
"The authorities set the right targets of limiting credit to the economy in the past as well, but those targets were not met. For instance, the rate of growth of credit to the economy for 9 months of 2013 was to have stayed within 15%, but the actual rate was significantly higher — in excess of 22%.
“Based on the results of evaluation of implementation of the previous tranches, we recommended the authorities to limit lending in foreign currency as this is the type of lending, which explains non-compliance with the general target of growth of credit to the economy. In addition, a significant volume of foreign currency loans has been extended to those sectors, which generate no foreign exchange sales proceeds, that raised the foreign exchange risks even further against the background of the expanding foreign trade deficit and declining international reserves.
“It is necessary to limit lending, but it should be done through constraining the directed and concessional lending, which volume remains excessively high, constituting at least 40% of the loan portfolio of the banking system. This type of lending significantly weakens the efficiency of the traditional monetary policy instruments, including the interest rate, from the point of view of optimising the volume of lending. Therefore, this is currently credit to the economy that is targeted and used as a control target.”
During 2013, the negative trade balance and the current account deficit were growing in Belarus. In this respect, at end-October, the mission of the International Monetary Fund recommended the Belarusian authorities “to ensure greater flexibility of the exchange rate”. In your opinion, what exchange rate policies should be implemented by the Belarusian monetary authorities in the environment of the growing external deficit?
“The key reason for the growing foreign trade deficit in 2013 is not the degree of the exchange rate flexibility, but the excessive expansion of domestic demand and lack of adjustment policy measures in response to the declining export revenues. It is true that the exchange rate flexibility would promote mitigation of negative impacts of external shocks and the IMF recommendation is right. But it is not always correct to interpret IMF recommendations, as well as ours, in isolation from other policy measures, in particular, in isolation from the recommendations to follow tight monetary and balanced income policies that the IMF has been constantly speaking about.
In the environment of credit expansion and growth of incomes at a rate in excess of the rate of labour productivity growth, against the background of mounting devaluation expectations, a more flexible exchange rate can result in creating a devaluation and inflation spiral. Therefore, it is currently a priority to ensure tight control over money supply combined with greater flexibility of the exchange rate.
“In the medium-term perspective, it will be necessary to move towards the policies of inflation targeting, and this transition should start already now. This approach and sequence of addressing the issues of reducing the external imbalance will help the policies of a flexible exchange rate efficiently protect Belarus’ economy from negative external shocks and maintain its competitiveness.”
INFLATION SHOULD BE NO MORE THAN 7%
In spite of the official plans to replenish Belarus’ gold and foreign currency reserves in 2013, they have been steadily declining since May 2013. What steps do you recommend to resolve this issue?
"The answer is obvious: all the conditions of the sixth tranche should be met. In addition, the stabilisation policies should continue irrespective of the fact whether there is an ACF programme in future or not. Such policies are needed to achieve a sustainable level of the current account deficit, which we see as no more than 4% of GDP, and annual inflation of no more than 7% (the actual inflation for 2013 was 16.5%) that is comparable with that of Belarus’ trade partners.
“Implementation of the Joint Action Plan of the Council of Ministers and the National Bank to reform the economy, which was adopted on October 10, 2013, as well as decisive structural reforms aimed at reducing the role of the state in the economy would help address these issues.”
Russia has stated that Belarus can get credit resources in the amount of US $2 billion during 2014. Part of the funds (US $450 million) was disbursed already at the end of last year to Belarus that helped support the country’s reserves. According to the Russian embassy in Belarus, the sources to allocate the remaining amount have not yet been identified. Are the ACF resources seen as such a source?
“If the conditionality attached to the 6th tranche is complied with, the country will be able to receive US $440 million. In addition to that amount, Belarus can mobilise resources in the framework of a new ACF programme. But a new agreement with the ACF can be discussed only based on evaluation of performance under the 6th tranche.”
Mr. Shatalov, over the years of working with Belarus, the EurAsEC Anti-Crisis Fund has had a chance to study the economic developments in our country in detail. How sustainable, do you think, today’s macroeconomic stability in Belarus, achieved, among other things, owing to the recommendations and financial support of the ACF, is?
"After the crisis of 2011, the Belarusian authorities took a range of decisive steps aimed at stabilisation. But unfortunately already in spring 2012, the authorities’ economic policies deviated from the stabilisation path that was reflected in their failure to meet most of the indicative targets under the fifth tranche, and then —10 targets, including 5 control ones, under the sixth tranche.
“As a result, based on some preliminary data, we can state that the external position of the country deteriorated in 2013 as compared to 2012 that is reflected in the foreign trade deficit growing up to 2% of GDP against a surplus of 4.7% of GDP in 2012, the foreign debt going up to 55.7% of GDP against 53.1% of GDP, and the international reserves declining to 1.7 months of imports against 2 months of imports in 2012. In addition, the inflation target was not met: the inflation grew up to 16.5% compared to the target of 12% planned by the authorities.
“The devaluation expectations, which they managed to bring down significantly as a result of the rubel exchange rate unification in October 2011 and tight monetary policies implemented over the first six months of 2012, strengthened again in 2013, especially in the second half of last year. The situation is, however, under control and further developments will depend on the authorities’ commitment to carry on their stabilisation efforts.”
Background Information from BelaPAN
The current programme of Belarus with the EurAsEC Anti-Crisis Fund was launched two and a half years ago. On June 4, 2011 the ACF Council approved allocation of a financial credit to Belarus in the amount of US $3 billion, with its resources to be used to stabilise the balance of payments and improve the competitiveness of Belarus’ economy.
The credit was expected to be disbursed in six tranches during
On December 27, 2013, in its thirteenth meeting (in absentia), the ACF Council adopted a decision to postpone disbursement of the sixth tranche to Belarus for half a year as the country had failed to meet ten of the programme targets.