Eurasian Development Bank continues consultations with the authorities of the Republic of Belarus on a new stabilization loan from EFSD

09 September 2015

Minsk, 3 September 2015. A team of Eurasian Development Bank (EDB), Resource Manager of the Eurasian Fund for Stabilisation and Development (EFSD, the Fund), led by Director of the EFSD Project Group Alisher Mirzoev, visited Minsk on 24-28 August 2015 to continue consultations with the authorities of the Republic of Belarus to further develop a Reform Program that could be supported by a new EFSD stabilization loan. During the visit, EDB experts met with the First Deputy Prime Minister V. Matyushevsky, Minister of Finance V. Amarin, managers and experts of other ministries, agencies, and the National Bank of Belarus, as well as with representatives of international financial institutions.

The Reform Program of the Government and the National Bank of the Republic of Belarus was presented to the Fund’s Council for consideration in early June 2015. Its key objective is to achieve macroeconomic stabilisation and to lay the ground for sustainable long-term growth by following tight monetary, prudent fiscal and income policies as well as 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, Program envisages reduction of the lending under government programs, which along with decreased subsidies for the housing and utilities sector due to increased level of cost recovery through tariffs, will ensure a balanced state budget and will release resources to stimulate entrepreneurship. Efficient resource allocation in the economy, including the financial resources released as a result of government programs reduction in mid-term period, will be provided by price and market liberalisation, deregulation and commercialisation of government-owned enterprises. In general, these measures will improve the sustainability of the balance of payments, stabilise and replenish the international reserves, decelerate inflation and lower interest rates. Having considered the Manager’s opinion on the request of the Republic of Belarus for the stabilization loan, the Fund’s Council pointed out the need to strengthen the Program to ensure sustainable reform results, inter alia based on the lessons of the previous Stabilisation Program for 2011-2013.

In accordance with recommendations of the Fund’s Council, the consultations held during the visit focused on developing additional mechanisms to minimise the risks of the non-observance of new Program targets. Since continued stimulation of domestic demand despite declining export proceeds was one of the key factors for the previous program 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 Program. If new shocks intensifying the risks of economic destabilisation occur, the authorities of Belarus consider undertaking the following measures: implementing the augmented state budget with a surplus; using monetary policy measures to neutralize the effects of monetary factors of inflation against the plans to liberalise prices and markets; and other mechanisms. Shortly, the authorities of the Republic of Belarus will prioritise these adjustment measures depending on the nature of potential shocks.

Despite the relative stabilisation in the foreign exchange market, the economy of Belarus is in recession, following the trends in the Russian economy. In January-July 2015, Belarus’ GDP contracted by 4% compared to the same period of 2014. Unfavourable external environment, including the worsening terms of trade, and lower competitiveness of non-commodity exports mainly sold to Russia have resulted in the weaker export proceeds and foreign capital inflows. Given limited national savings and capacity to borrow in external and domestic markets, this constraints efficient financing and stimulation of economic growth through domestic demand. At the same time, despite the real GDP contraction and the nominal drop of export proceeds in dollar terms, export volumes have increased due to higher exports of food and oil products. Russia’s counter-measures in response to Western sanctions created new opportunities for Belarus’ exporters, and strengthened their competitive advantages in the Russian food market. Higher oil imports from Russia to produce refined oil products and declining domestic consumption of oil products have allowed Belarus to expand exports of these products. 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 deterioration in Q 4 2014, helped stabilise the foreign exchange markets in the first half of 2015 and to shield it in August from the effects of the new wave of depreciation of the Russian rouble.

Economic recession, lower external prices, restrained utility tariff growth, and high interest rates have all contributed to the slowdown of inflation. In July 2015, annualised inflation was recorded low from 2011 onward, though it still was in the double-digit range (12.5%).

Lower inflation and domestic demand contraction resulted in a higher surplus of foreign trade in goods and services in the first half of 2015—it rose to 4.2% of GDP against 1.7% of GDP in the same period of 2014. This, combined with transfer of the duties for oil product exports to the Belarusian budget (prior to this, they were collected by the Russian budget), helped to 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 resulted mainly from accrued incomes of non-residents from direct foreign investment (of 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 recorded a surplus of 2.2% of GDP in the first half of 2015, generating a net inflow of foreign exchange. Against the background of relative stability of the foreign exchange market, the country’s gross international reserves have started to build up slowly. However, foreign exchange interventions of the National Bank to support the exchange rate in response to the sharp depreciations of Russian rouble in August-December 2014 and June-August 2015 and still high external debt service outflows restrain the replenishment of gross international reserves.

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. Among other factors, the surplus was supported with the reassignment of duties for oil product exports to the budget of the Republic of Belarus. A significant contribution was also made by the introduction of additional charges on natural resource extraction and gas distribution. The new proceeds from gas distribution became possible due to unchanged tariffs for domestic gas consumption by industrial enterprises, which were kept at the level of the previous year despite the declining prices of imported gas.

The Manager welcomes the measures undertaken by the Belarusian Authorities to achieve macroeconomic stabilisation. Unlike in previous years, tight monetary and fiscal policies have prevented the surge of inflation, despite significant depreciation of the domestic currency. However, given uncertain external markets and slow economic recovery forecasted for Russia, it is essential for Belarus to use internal potential to boost the competitiveness of its economy, which is a key factor of stabilisation and sustainable growth. Implementation of the planned structural reforms, including reduction of the 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, will channel the released financial and labour resources into sectors with higher labour productivity, and will allow to unleash the potential of the most competitive and promising sectors of the economy. Continued implementation of prudent income policies, observed since mid-2014 and aimed to reduce the accumulated gap between wage and labour productivity, as well as further improvement of mechanisms for money supply targeting and market-based exchange rate policies to achieve and maintain low inflation and actual exchange rate at 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 a stabilization loan for the consideration of the EFSD Council in its meeting scheduled for fourth quarter 2015.

Additional Information
Eurasian Development Bank 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. 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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The Eurasian Fund for Stabilisation and Development (EFSD) amounting to US$8.513 billion was formed as the EurAsEC Anti-Crisis Fund on 9 June 2009 by the governments of six countries: Armenia, Belarus, Kazakhstan, Kyrgyzstan, Russia, and Tajikistan. The objectives of the Fund are to assist its member countries in overcoming the consequences of the global financial crisis, ensure their economic and financial stability, and foster integration processes in the region. The Fund's member countries signed the Fund Management Agreement with Eurasian Development Bank giving it the role of the Fund's Resources Manager. 

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