EDB extends the fifth tranche of the EFSD credit to Belarus

26 October 2017

Moscow, 26 October 2017. Eurasian Development Bank (EDB), acting as the Resources Manager of the Eurasian Fund for Stabilisation and Development (EFSD, Fund), extended the fifth tranche of the EFSD financial credit to Belarus, totalling US $200 million. Out of the total of US $2 billion to support the Belarusian reform programme in 2016-2017 (Programme), the country has already disbursed US $1.6 billion (including the previous tranches).

The conditions precedent for extending the fifth tranche was the country’s compliance with 21 indicators, out of which five indicative targets have not been achieved as at the compliance checking date (1 June 2017). The Fund’s Council that met on 29 September 2017 granted releases from three targets and decided to maintain one of the remaining two targets as the condition precedent for extending the fifth tranche and to include the other one as one of the control targets of the seventh tranche. The fifth tranche was transferred to Belarus after the government provided the Resources Manager with documentary evidence of compliance with the conditions precedent. On 9 October 2017, the President of Belarus passed a decree titled On Free Property Transfer envisioning the transfer of 22 enterprises from national into communal ownership. On 19 October 2017, the government and the National Bank of Belarus signed a letter of intent, which includes actions towards the adoption of a new law On Insolvency and Bankruptcy as a control target for the provision of the seventh tranche.

The Programme has significantly stabilised the economic situation in Belarus. Despite the quick decrease in the key interest rate, money supply grew along with the reduction in directed lending and tough fiscal policy. The favourable external environment, including improved trade conditions and growing economic activity in Russia, drove demand for non-primary exports. This, alongside the significant inflow of foreign currency from external borrowings and the net sale of currency by the population, has improved the balance of payments and stabilised the rate of exchange. These combined factors fostered a quick decline in inflation. As at 1 June 2017, inflation was at 6.1% per annum, compared to 12.4% the year before. It should be noted that the government’s success in controlling inflation was largely due to the liberalisation of consumer prices that has helped to decrease the share of regulated goods and services in the CPI basket to 20%, from 33% as at the beginning of the Programme implementation, and increased payback on residential utilities from 51.6% to estimated 62%. In September 2017, the average inflation went down to 6.4%, while in 2010-2015 it was 28.4%, and the 12-month inflation declined to 4.9%.

The control over money supply, by means of arranging regular auctions to sell short-term bonds of the National Bank, and the maintenance of positive real interest rates for liquidity loans, have helped to significantly limit the increase in money supply over the recent two years. The annual increase in the broad money as at 1 June 2016 was 16.9% and as at 1 June 2017 4.5%, compared to an average of 43% per year in 2010-2015. 

The Belarusian authorities continued to stick to a tough fiscal policy. In January–May 2017, the wide surplus of public administration bodies (including the government’s off-balance expenditure) grew to 2.7% of GDP, compared to 2.0% year-on-year. Despite the boost in capital expenditure, the replenishment of the charter capitals of enterprises and the extended credit support from the Social Protection Fund, the surplus widened as a result of the accelerated growth in fiscal revenues, primarily due to the restored imports to the EAEU and increased excise rates, as well as thanks to a relatively moderate current expenditure policy. Over the first eight months of the current year, the fiscal surplus widened to 3.7% of GDP, compared to 1.9% year-on-year and an average deficit of 6.2% over 2010-2015.

The weakening of the rouble by 7.5% in real terms in January–May 2017 (using the producer price index), against the background of the flexible exchange rate policy, and certain growth in economic activity in Russia have improved Belarus’ non-energy exports as the main driver for the country’s economic recovery. In January–May 2017, GDP grew by 0.9%. The continued growth in exports and the emerging recovery of domestic demand have accelerated economic growth to 1.7% in the first nine months of the year.

The current account deficit shrunk considerably, to 3.6% of GDP, over the first five months of 2017, compared to 9.6% year-on-year. In the first half of the year the figure amounted to 2.5% of GDP vs. 6.3% year-on-year and an average of 8.8% over 2010-2015. The current account deficit was influenced positively by the improved competitiveness of Belarusian exports in terms of prices, the wide surplus formed by public administration bodies, the increased payback on residential utilities, and the maintenance of positive real interest rates. Other factors that contributed to the reduction in the current account deficit were external: the increase in global oil prices following the agreement on the amount of supplies with the Russian Federation and economic recovery in Russia. With improvements in the foreign trade environment, the net sale of foreign currency by the population and the net inflow on foreign debt, gross international reserves over the first five months of the year increased from US $4.9 billion to US $5.2 billion, and over the first nine months to US $7 billion.

Despite significant macroeconomic improvements, the Resources Manager believes that the quick softening of the monetary policy is associated with serious inflation risks that may emerge as early as in 2018. The quick and significant decrease in the refinancing rate in January–October 2017 from 18% to 11% accelerated growth in the broad money in the second half of 2017. In addition, reduced inflation became possible due to the stabilisation of the exchange rate of the national currency, supported by foreign borrowings and the net sale of foreign currency by the population. Given that Belarus has almost achieved the threshold for its foreign debt and that the net sale of foreign currency by the population from savings made in the previous year beyond banks cannot be considered as a stable source for replenishing gross international reserves, these supports to the balance of payments and stabilisation of the rate of exchange cannot be deemed sustainable. Structural problems, including excessive employment by public enterprises and the conservation of issues at inefficient enterprises, restrict the monetary policy’s capacity to reduce inflation further, while the recovery of real population income and the softening of the monetary policy in the context of the persisting high inflation expectations aggravate the risk that inflation will speed up shortly.

The suboptimal progress in the fulfilment of structural market reforms increases the risk that the country’s foreign position will worsen in the medium term. This year, the physical volumes of imports exceed significantly those of exports in all commodity aggregates. At the same time, the continued reduction in FDI and the growing share of borrowings to finance the current account deficit, coupled with low economic growth and the high cost of foreign borrowings, suggest that fundamental imbalances continue to persist in the economy.

Additional Information:

The Eurasian Fund for Stabilisation and Development (EFSD) amounting to US$8.513 billion was formed on 9 June 2009 by the governments of the same six countries. The objectives of the EFSD are to assist its member countries in overcoming the consequences of the global financial crisis, ensure their economic and financial stability, and foster integration in the region. The EFSD member countries signed the Fund Management Agreement with Eurasian Development Bank giving it the role of the EFSD Resources Manager.

The Fund's Council represents the Fund's members as regards any issues concerning the raising, allocation (investment) and use of the Fund's resources and any other issues related to the Fund. The current members of the Fund’s Council are:

·         Anton Siluanov, Chairman of the Fund’s Council, Minister of Finance of the Russian Federation;

·         Bahyt Sultanov, Minister of Finance of the Republic of the Republic of Kazakhstan;

·         Adylbek Kasymaliyev, Minister of Finance of the Kyrgyz Republic;

·         Abdusalom Kurboniyon, Minister of Finance of the Republic of Tajikistan;

·         Vardan Aramyan, Minister of Finance of the Republic of Armenia; and

·         Vladimir Amarin, Minister of Finance of the Republic of Belarus.

Eurasian Development Bank (EDB) is an international financial institution founded by Russia and Kazakhstan in January 2006 with the mission to facilitate the development of market economies, sustainable economic growth, and the expansion of mutual trade and other economic ties in its member states. EDB's charter capital totals US $7 billion. The member states of the Bank are the Republic of Armenia, the Republic of Belarus, the Republic of Kazakhstan, the Kyrgyz Republic, the Russian Federation, and the Republic of Tajikistan.

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