Public Information Notice No. 13/66

Public Information Notice: IMF Executive Board Concludes 2013 Article IV Consultation with Belarus and Fourth Post-Program Monitoring Discussions

June 12, 2013

On May 24, 2013, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation and Fourth Post-Program Monitoring discussions with Belarus.¹

Background

Following the 2011 crisis, the economy stabilized in early 2012. Sharp policy tightening in response to the crisis helped stabilize the exchange rate and achieve a rapid reduction of inflation. At the same time, the balance of payments improved markedly owing in part to a temporary large-scale trade in solvents and related products.

Since then, stop-go stimulus efforts have resulted in renewed volatility and kept inflation at a high level. During the first half of the year, policies were relaxed in pursuit of the official 5½ percent GDP growth target for 2012. The National Bank of the Republic of Belarus (NBRB) refinancing rate was rapidly reduced, and real wages grew much faster than productivity. The policy loosening together with the end of the solvent trade led to the return of price and exchange rate pressures in the fall of 2012. To stem pressures, liquidity conditions were tightened again with an increase in reserve requirements and restrictions on banks’ access to refinancing. The measures helped calm market conditions toward the end of the year. Early developments in 2013 have been mixed. Monthly inflation has fallen and GDP growth has rebounded strongly. However, average wages have grown briskly during the first quarter. Also, liquidity conditions in the banking system have eased substantially and the NBRB has further reduced its main policy rate—signaling another loosening of policies.

On structural reform, welcome steps were recently taken on tax reform and a new bankruptcy law. However, the privatization and price liberalization agendas have stalled. Meanwhile, the Development Bank’s broadened mandate and sources of financing risk further distorting the efficient allocation of credit and potentially create large contingent liabilities for the government.

Executive Board Assessment

Executive Directors welcomed the authorities’ efforts to regain macroeconomic stability following the 2011 crisis, but noted that policies had been prematurely loosened. Efforts to boost growth have resulted in renewed pressures on the exchange rate, inflation and the current account, while extensive state control of the economy continues to restrain productivity growth and competitiveness. Against this background, Directors expressed concern about the authorities’ pursuit of inconsistent growth and inflation targets and urged the authorities to improve the consistency and predictability of their policies, and to focus on restoring stability, rebuilding policy buffers, and implementing deep structural reforms.

Directors emphasized the need for a tight management of domestic demand to further reduce inflation, contain reemerging external imbalances, and ensure adequate capacity to meet external obligations. They welcomed the recent reduction in directed lending and recommended a further substantial reduction to a level below one percent of GDP over the medium term. Directors welcomed the authorities’ commitment to a balanced budget, but stressed the importance of reflecting fiscal risks from quasi-fiscal operations and directed lending in the budget. Nominal wage growth should not exceed the target inflation rate in 2013 to avoid fueling domestic demand and to help recover lost competitiveness.

Directors agreed that the NBRB should tighten liquidity conditions and stand ready to increase the policy rate if the recent declining trend in inflation is not sustained. They emphasized the importance of maintaining exchange rate flexibility as a buffer against shocks and to discourage dollarization, and took note of the authorities’ commitment to eliminate remaining exchange restrictions and multiple currency practices.

Directors commended recent improvements in the banking code that enhance supervision. They expressed concern about rapid foreign currency lending growth, much of it to unhedged borrowers, and encouraged the NBRB to consider additional measures to curb such lending, and to maintain the prohibition on such lending to households. Developments in non-performing loans also warrant close monitoring. Directors were generally of the view that the development bank should become the sole provider of directed lending, thus allowing the banking system to operate on fully commercial terms, and agreed that development bank debt should not be eligible as collateral for central bank refinancing.

Directors underscored the need for deep structural reform to achieve higher sustainable growth. They welcomed recent progress on tax reform and the new bankruptcy law, but noted that progress in other areas has been limited. To boost productivity and competitiveness, a well-sequenced, comprehensive reform agenda is needed, including price liberalization, privatization and restructuring of state-owned enterprises, and targeted social safety nets.