IMF welcomes shift on reform in Belarus but sees instability risk in energy row with Russia

By bne IntelliNews September 21, 2016

The International Monetary Fund (IMF) has welcomed economic stabilisation efforts and some movement towards a reform agenda in Belarus, but warns of disruptions to external and domestic stability if the energy price dispute with Russia is not resolved.

"The authorities have taken some welcome steps to support stabilisation and reduce vulnerabilities, but more is needed," the IMF says in a staff report published on September 21 and detailing results of its talks in Belarus this year. "Faster and deeper progress on the reform agenda, particularly in the closely linked [state-owned enterprises] and financial sectors, is needed to reduce macro financial vulnerabilities and raise growth prospects."

The report came out a day after Belarusian President Alexander Lukashenko warned the Russian leadership not to pressure his country over energy supplies amid the continuing oil and gas pricing dispute. "On the external side, key risks include persistently lower international energy prices or disruptions in energy price arrangements with Russia," the document warned.

Since the start of July, Russian oil pipeline monopoly Transneft pumped some 40% less oil to Belarus than in the second quarter of 2016 because of Minsk's alleged $270mn debt to Russian natural gas producer Gazprom for past supplies. The Kremlin has often used Gazprom to apply political pressure on Russia's post-Soviet neighbours, especially Belarus and Ukraine.

Minsk is still aiming to secure a new up to $3bn support package with the IMF after it recently agreed a $2bn stand-by loan with the Russia-led Eurasian Fund for Stabilisation and Development (EFSD).

The IMF's executive board noted the Belarusian authorities' interest in a lender-supported programme and "underscored the importance of strong commitment at the highest level to consistent macroeconomic policies and deep, market-oriented reforms".

According to the report, key domestic risks to the outlook for Belarus include the pace of implementation of the policy reform agenda and uncertainties about the size of quasi-fiscal liabilities.

"Corporate and bank balance sheets and household confidence remain sensitive to any significant exchange rate movements, owing to high dollarisation, currency mismatches, limited access to foreign exchange liquidity, and significant annual gross external financing requirements," it says.

Under the IMF's partially adjusted baseline scenario, Belarus' economic growth will remain negative this year (-3.0%) and next (-0.5 %), with a subdued recovery beginning in 2018 (+0.5%). According to official statistics, GDP was down 3% y/y in January-August after a 2.7% y/y decline in January-July.

"Under staff's adjustment scenario, deeper and faster reforms would initially push growth lower, mainly due to lower domestic demand, but productivity gains and rising domestic demand would then drive growth up to 4.5% during 2020–21 before settling into a 3.5% long-term potential growth rate," the report adds.

The IMF forecasts inflation in Belarus to reach 13% y/y by end-December, which is almost 1 percentage point higher than in 2015. The result would be driven mainly by recent exchange rate depreciation and higher utility tariffs.

"Inflation is projected to remain in the low double digits over the next three years under the baseline scenario. Better policy implementation under the adjustment scenario would bring inflation down to around 6% by 2020," the multinational lender believes.

The current account deficit of Belarus is projected to widen by about 1% of its GDP this year and then narrow gradually in the medium term to 3-3.55% under the baseline scenario. Under the adjustment scenario, the current account deficit would significantly narrow to around 0.5% of GDP by 2021, with higher reserve build-up.

"This reflects significant reforms, including to small- and medium enterprises, that could sustainably lower import demand and promote higher FDI and other capital inflows," the report says, calling also for a comprehensive strategy to increase the performance and efficiency of state-run companies.

Strengthening of the business environment, including through efforts to secure membership of the World Trade Organisation (WTO), and steps to expand competition on commodity markets will be crucial, said the board. It also welcomed a more flexible exchange rate which serves as an important shock absorber, preserving scarce reserves.

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