Belarus seen complying with conditions of 3rd tranche of EurAsEC loan

By bne IntelliNews September 14, 2012

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Belarus probably suffered more than any other country in Central and Eastern Europe during the 2008 crisis, but four years on how is it doing? And more importantly, will it qualify for the next tranche due this November from the Anti-Crisis Fund?

An expansionary monetary policy under a fixed-exchange rate combined with the deterioration of terms of trade and several external shocks hit Belarus hard. The government had to devalue the national currency twice and saw the economy come to a virtual standstill.

In order to keep its head above water, Belarus requested a financial loan from the Anti-Crisis Fund (ACF) set up by the members of the Eurasia Economic Community and administered by the Eurasian Development Bank (EDB). A third tranche of $440m was distributed in June and another tranche is due to be released in November. The republic has so far met 15 of the ACF's 17 conditions for the release of the next tranche of money and the much-needed cash injections have stabilised the economy.

In 2011, GDP grew 5.3%, following 7.7% in 2010, a sharp turnaround from the 0.2% in 2009. In the first six months of 2012, Belarus' GDP grew by 2.9%, dragged down by the collapse in internal demand mainly driven by an almost 20% drop in investment. Although Belarusian exports have grown significantly, the prospects for the rest of the year don't look very rosy, as the positive effects of the real depreciation of the ruble are vanishing due to high inflation.

But despite the difficulties, the government acted more decisively than the likes of Greece: the National Bank of the Republic of Belarus (NBB) ended directed lending in June 2011 and adopted a unified exchange rate in October 2011, which resulted in a return to real positive interest rates by the end of 2011. Inflation has also been brought down from the hyperinflation levels: between January and June 2012, the average monthly inflation rate was below the 2% level and the end-of-year rate is forecast not to exceed 22%, against the rate of 108.7% in 2011.

But to fully recover, the country needs to grow out of the trough it has fallen into and the bugbear here is the large current account deficit. However, some progress has been made here too: in the second half of 2011, the current account deficit began to fall from almost 16% of GDP in January-June 2011 to the 4.5% in July-December 2011. And it turned positive in the first quarter of 2012 when it was a surplus of 0.2% of GDP. At the same time, international reserves doubled and were equivalent of 2.1 months of imports (still below the three months of import cover most economists believe is necessary to maintain the stability of the domestic currency) as of the end of the first quarter.

The republic has taken several shaky steps forward, but much remains to be done. "The success of stabilization completely rests with the prudent monetary management and fiscal policy followed by the authorities of the Republic of Belarus with simultaneous maintenance of a flexible exchange rate. Further decline in inflation is a key condition of sustainable growth and external balance improvement in the medium-term perspective," Sergey Shatalov, the head of the ACF, says.

The government is also burdened with a relatively high level of debt (by CIS standards, but not by EU standards) that has risen to 28% of GDP in the last few years, which needs to be repaid to external creditors over the next three years. Still, this problem can be tackled thanks to the fact the government is running a budget surplus: the 2011 budget was implemented with a surplus of 2.3% of GDP against the initially planned deficit of 1.5% of GDP. The strong budget position was possible by cutting expenditure and surprising high revenue arisen from inflationary income.

The gross external debt is still a relatively high 62.3% of GDP, of which a quarter is destabilising short-term debt and could put pressure on the currency market or deplete official reserves.

Going forward, the NBB and government signed a new letter of intent with the AFC that lays out the conditions for managing the economy this year, clearing the way for the release of the next $440m tranche in November.

Still, the government's plans for this year are too ambitious, targeting growth of over 5% for 2012. Economists warn that if the state attempts to artificially stimulate the economy, this will accelerate inflation and quickly run down the countries hard currency reserves due to increases in domestic demand and real exchange rate appreciation. So the AFC has explicitly recommended Belarus goes more slowly. "Any attempts at artificial stimulation of the economy to attain GDP growth planned by the authorities on the level of 5% will exert high pressure on the international reserves level, the exchange rate and inflation, and through accumulation of structural disparities will reduce the competitiveness of the economy," says Shatalov.

The AFC has called on the government to be a bit more modest in its plans and resist the temptation to return salaries to their pre-crisis levels, as well as keeping a tight rein on state-directed lending. At the same time, the European Bank for Reconstruction and Development is calling on the government to accelerate the privatisation programme. The AFC says that if the government can hold state lending to a total of BYR7bn and general lending increases to 15%, then inflation could be brought down to 20% by the end of this year, with growth running at between 2% and 3%.

"The government needs to manage a tricky balancing act between keeping a tight rein on monetary policy and encouraging the recovery," says Shatalov. "Rising deposits, the state efforts at recapitalising banks and the reduction of state programmes at the end of 2011 have all contributed to excess liquidity at the banks. This year, the government needs to curb credits of the real economy and to gradually bring down the refinancing rate. Tough money management over the medium term means the government will be able to fight inflation, whilst doing the minimum damage to growth prospects."

Still, all said and done, determining what will happen this year is outside the government's control. The current account deficit will depend heavily on what energy subsidies can be won from Russia and how the end of the Eurozone crisis plays out. September alone is packed with meetings and events that could accelerate what is currently a slow-moving train wreck, or perhaps bring the train to a slow stop. In the meantime, countries like Belarus will have to muddle through as best they can.

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