Publication - IMF Executive Board Concludes 2016 Article IV Consultation with the Republic of Belarus
On September 2, 2016, the Executive Board of the International Monetary Fund (IMF) concluded the 2016 Article IV consultation1 with the Republic of Belarus.
Economic conditions in Belarus were volatile during much of 2015 and early 2016. The economy contracted by 3.9 percent in 2015, with a similar performance in the first half of 2016, hurt by domestic structural weaknesses and rigidities as well as external shocks. The exchange rate depreciated sharply during 2015 and part of 2016. Real wages are down substantially relative to 2014, and corporate losses are up. Unemployment has risen somewhat, though remains at relatively low levels.
Tighter fiscal and monetary policies during much of 2015–16 have helped support macroeconomic stabilization. The exchange rate has now stabilized and international bond spreads have narrowed. Since the shift to a more flexible exchange rate regime in early 2015, reserves have stabilized and, in recent months, begun to rise. The current account deficit is up slightly this year, but down sharply from the level of several years ago. Headline inflation has slowed in recent months, despite a sizeable hike in regulated utility tariffs in early 2016.
Vulnerabilities remain elevated. Credit to the private sector has slowed and banks’ asset quality and profitability have weakened. This, together with a slow resolution of troubled loans, has resulted in rising non-performing loans. Systemic liquidity risks are elevated as banks are highly dollarized and carry an asset-liability mismatch in some key foreign currencies. Public debt has risen, in spite of headline surpluses, in part due to rising realized losses in the state-owned enterprise sector. External debt has also risen, and reserves remain low by international standards.
The economy is expected to contract further this year and next, reflecting still-weak balance sheets and structural impediments. A subdued recovery is expected as of 2018, while over the medium-term the potential growth would only increase to around 1¾ percent, limited by negative demographics and, in the absence of deeper structural reforms, low productivity growth. Inflation is expected to gradually fall to the high single digits over the next few years.
Key domestic risks to the outlook include the pace of implementation of the policy reform agenda and uncertainties about the size of quasi-fiscal liabilities. On the external side, key risks include persistently lower international energy prices or disruptions in energy price arrangements with Russia. Corporate and bank balance sheets and household confidence remain sensitive to any significant exchange rate movements, owing to high dollarization, currency mismatches, limited access to foreign exchange liquidity, and significant annual gross external financing requirements.
Executive Board Assessment2
Executive Directors welcomed the measures taken by the authorities since early 2015 to stabilize the economy and begin implementing institutional and structural reforms, in a context of difficult economic conditions. Directors underscored, however, that sustained and far-reaching reforms are needed to reduce macrofinancial vulnerabilities, rebuild buffers, and raise economic growth and jobs prospects.
Directors highlighted the importance of deeper reforms to unlock growth potential. They urged implementation of a comprehensive reform strategy for state-owned enterprises to improve productivity and efficiency and reduce fiscal risks. This should include stronger corporate governance and oversight and clearer mechanisms for addressing problem entities. They also recommended identifying clear, evenly paced measures to achieve full cost recovery in the utility sector by end-2018. Directors stressed that improving the business environment, including through pursuit of WTO membership and steps to enhance product market competition, will be crucial.
Directors encouraged the authorities to continue their efforts to strengthen the fiscal framework. They noted that some easing is possible in the near term, given the deep recession and negative output gap. This should be followed by a gradual medium-term fiscal consolidation to reduce public debt while preserving space for enhanced social safety nets and capital expenditure. They stressed the need to strengthen the debt anchor by encompassing government guarantees and local government debt. They also recommended reflecting in the budget all quasi-fiscal support to enhance transparency. Further pension reforms will also be important.
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