Eurasian Development Bank continues consultations with the authorities of the Republic of Belarus on preparing a new EFSD financial credit
Minsk, 3 September 2015. On
The key objective of the Programme prepared by the Government and the National Bank of the Republic of Belarus and presented for the consideration of the Fund’s Council in early July 2015 is to achieve macroeconomic stabilisation and lay the ground for sustainable long-term growth by following tight monetary, prudent fiscal, and balanced income policies and implementing deep structural reforms aimed at reducing the role of the state in the economy and ensuring active development of the private sector. In particular, the Programme includes reduced financing of new government programmes that—combined with lower subsidies to support the housing and utilities sector by means of improving the level of cost recovery through tariffs—would both ensure a balanced state budget and release resources needed to develop entrepreneurship. In general, more efficient resource allocation in the economy, including the financial resources released as a result of government programme reduction, would result from price and market liberalisation, deregulation and commercialisation of enterprises. If implemented, these measures would improve the sustainability of the balance of payments, stabilisation and replenishment of the international reserves, deceleration of inflation, lower interest rates, and reallocation of resources to the most profitable sectors of the economy. Having considered the Manager’s opinion on the request of the Republic of Belarus for a financial credit, the Fund’s Council noted the need to strengthen the Programme to ensure sustainable reform results, inter alia based on the lessons of the previous Stabilisation Programme for
Under the instruction of the Fund’s Council, the consultations held during the visit focused on developing additional mechanisms to mitigate the risks of the new Programme failure. Since continued stimulation of domestic demand against the background of declining external incomes was one of the key factors for the previous programme to get off track, the Government and the National Bank of the Republic of Belarus intend to follow more prudent domestic demand policies under the new programme. If new shocks intensifying the risks of economic destabilisation materialise, the authorities of Belarus are to resort to the following mechanisms: implementing the augmented state budget with a surplus; using monetary policy measures to offset the effects of monetary factors of inflation against the background of the planned price and market liberalisation; and other measures. In the near future, the authorities of the Republic of Belarus will prioritise these adjustment measures depending on the nature of potential risks.
Despite the relative stabilisation in the foreign exchange market, Belarus’ economy is in recession similar to a process observed in Russia. In January-July 2015, the GDP contracted by 4% compared to the same period of 2014. The more unfavourable external environment, including the worsening terms of trade, and lower competitiveness of non-commodity exports mainly sold to Russia result in weaker export proceeds and foreign capital inflows. Taking into account the limited national savings and capacity to borrow in external and domestic markets, this prevents financing and efficient stimulation of economic growth through domestic demand. At the same time, it should be noted that, despite the real GDP contraction and the nominal drop of export proceeds in dollar terms, exports have increased in volume terms. This growth is a result of higher food and oil product exports. In 2014, new niches opened in the Russian food market as a result of Russia’s counter-measures in response to Western sanctions that strengthened Belarus’ competitive advantages in these markets. Higher oil imports from Russia to produce refined oil products, combined with lower oil prices and declining domestic oil product consumption, have helped Belarus expand exports of these products. The GDP contraction accelerated in July largely as a result of the delayed start of harvesting this year.
Tight monetary policies and transition to a more flexible exchange rate regime, including the use of the two-way auction mechanism starting from June 2015, in response to the balance of payments worsening in Q 4 2014, helped stabilise the foreign exchange market situation in the first half of 2015 and avoid destabilisation in August in the environment of renewed acceleration of Russian rouble depreciation.
The economic recession, lower external prices, contained utility tariff growth, and high interest rates have resulted in inflation deceleration. In July 2015, the annualised inflation—although still two-digit at 12.5 %—was record low from 2011 onward.
Lower inflation and domestic demand contraction resulted in a higher surplus of foreign trade in goods and services in the first half of 2015—up to 4.2% of GDP against 1.7% of GDP in the same period of 2014. This, combined with transfer to the Belarusian budget of the oil product export duties, which used to be transferred to the Russian budget, helped reduce the current account deficit to 2% of GDP against 7.1% of GDP in the same period of 2014 (preliminary estimate). The current account deficit was mainly a result of incomes of non-residents accrued from foreign investment (around 7.5% of GDP). A significant part of these incomes (4.1% of GDP) is reinvested, thus their effect on the balance of payments is neutral. Net of these operations, the current account balance was in surplus in the first half of 2015 at 2.2% of GDP, generating a net inflow of foreign exchange through the current account. Against the background of relative stability of the foreign exchange market, the gross international reserves have started to build up. But this process is slow due to the need to service external liabilities.
In the first half of 2015, the state budget was executed with a surplus of 3.9% of GDP against 0.1% of GDP a year earlier that was supported with transfer of oil product exports duties to the budget of the Republic of Belarus. A significant role was also played by the introduction of additional fees, mainly on natural resource extraction and gas distribution, that became feasible owing to unchanged tariffs for domestic gas consumption by industrial enterprises, kept at the level of the previous year in the environment of lower gas import prices.
The Manager welcomes the measures undertaken by the authorities to ensure macroeconomic stabilisation. Unlike in previous years, the tight monetary and fiscal policies have prevented another surge of inflation despite the significant Belarusian ruble depreciation. However, taking into account the uncertainty in external markets and slow economic recovery forecasted for Russia, it is essential for Belarus to find internal reserves to boost the competitiveness of its economy, which is a key factor of stabilisation and sustainable growth. If implemented, the planned structural reforms, based on reduced role of the state in the economy, commercialisation of state-owned enterprises, and corresponding reduction of their financial support, combined with price and market liberalisation, would help utilise the released financial resources and labour in those sectors, which demonstrate higher labour productivity, strengthen and unleash the potential of the most competitive and advanced sectors of the economy. Continued balanced income policies, observed since mid-2014 and aimed at reducing the accumulated mismatch between wage growth and labour productive growth, combined with more market-based pricing policies and money supply targeting mechanisms, which ensure and maintain the exchange rate at an equilibrium level, are vital to improve the economy’s competitiveness.
The Manager is planning to present its finalised Appraisal of the request of the Republic of Belarus for the consideration of the EFSD Council in its meeting scheduled for Q4 2015.
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