The Belarusian economy will decline by 0.4% year-on-year in 2017, followed by a modest growth of 0.7% in 2018 and 1.2% in 2019, the World Bank forecasts in its Belarus Economic Update published on May 15.

"Recovery in the manufacturing sector is expected to be supported by gradual improvements in external demand, although structural bottlenecks continue to undermine competitiveness," the document reads. "However, domestic demand will remain constrained as low investment will lead to low capacity utilisation, low output and low income growth. In order to escape this low growth trap, productivity increases are required."

The country’s GDP grew by 0.3% y/y in January-March, the Belstat state statistics committee reported on April 17 as the economy resumed growth after more than two years of recession. GDP was down 2.6% year-on-year in January-December 2016, while the economy contracted by 3.9% y/y in 2015 after a 1.6% y/y growth in 2014.

The Belarusian authorities had forecast that GDP would increase by 1.7% y/y in 2017. The International Monetary Fund (IMF) revised its forecasts for Belarus' GDP decline this year to -0.8% y/y (from a previous -0.5 y/y forecast). Standard and Poors Global Ratings predicted in its April report that the economy of Belarus will still average a modest 1% y/y growth over 2018-2020, which is relatively low compared with countries that have similar levels of economic development.

The World Bank believes that downside risks to medium-term outlook remain significant. Specifically, there is a risk of a disorderly unwinding of financial sector imbalances if mechanisms for addressing insolvent state-owned companies and NPL resolution are not put in place.

"Large historic lending at subsidised rates, especially in foreign currencies to insufficiently-hedged borrowers has contributed to rising shares of bad loans in the banking system and exposed banks to currency-induced credit risks," the document reads.

Large external debt repayments, maturing in 2017 and 2018, also pose a risk of disorderly adjustment in external imbalances. In 2017, the government will allocate US$3.4bn (up to 7.5% of the projected GDP) on foreign public debt repayment and payment of interest.

Meeting all financing needs, including repayment of US$800mn Eurobond in January 2018, will depend on Belarus’s ability to mobilise additional foreign exchange resources from international capital market and/or its ability to borrow in foreign currency on the domestic market, the World Bank added.

"Further strengthening fiscal performance is critical to reduce Belarus’s external vulnerability," the European lender underlined. "This vulnerability is noticeable in the high degree of dollarisation of the economy, in currency mismatches in the asset-liability position of the banking sector, and in the limited power of traditional monetary policy instruments."

The recent agreement between Belarus and Russia provides temporary relief to balance payment pressures; but a more durable solution is needed to address fiscal and quasi-fiscal risks, the World Bank believes.

"This will require considerable improvement in the management of state-owned companies, reform of energy subsidies, prudent wage policy, careful scrutiny of all planned investments, and efforts to improve tax collection without undermining business activities that will ultimately support economic recovery," the document reads.