Belarus,Russian Federation : Eurasian Development Bank disburses the second tranche of the financial credit of the Eurasian Fund for Stabilisation and Development to the Republic of Belarus.
The EFSD Council approved the tranche on 27 July 2016 based on Belarus compliance with all conditions of the second tranche, except for one indicative target envisaging a ceiling for government borrowings. The EFSD Council has also approved amendments and addenda to the Letter of Intent of the Government and the National Bank of the Republic of Belarus. These adjustments will help strengthen the stabilisation nature of the reforms, mitigate the risks of necessity for sharp policy adjustments, as well as improve the quality of monitoring and strengthen the transparency of the programme supported with the EFSD financial credit. All these adjustments have been reflected in the Economic Policy and Structural Reform Matrix (hereinafter the Matrix).
The conditionalities for the second tranche focused on bringing the inflation down and ensuring continuing replenishment of the gross international reserves (GIR) through implementation of tight and consistent economic policies, as well as on continued structural reforms envisaging price liberalisation, improved performance of state-owned enterprises, creation of enabling conditions for transition to corporate governance principles and private sector development.
While there was a significant reduction of the share of controlled prices in the consumer price index (CPI) basket and an upward adjustment of tariffs in the housing and utilities sector, the tight economic policies, including compliance with the ceilings fixed for all the monetary indicators, reduction of directed lending, and formation of an augmented consolidated budget surplus, have contributed to a considerable deceleration of inflation in the first half of 2016 to 12.4% against 15.4% for six months of 2015. The still highcompared to Belarus major partner countriesshare of controlled prices in the CPI basket (about 20%) has also contained the price growth. Taking into account the growth of world food prices observed since the start of 2016, the volatility of energy prices, the expanding current account (CA) deficit, and the need for further price liberalisation as a key measure to improve the efficiency of resource use and allocation in the economy, tight economic policies have to be maintained to achieve the end-year inflation target.
The policies of maintaining a flexible exchange rate in the framework of the two-way currency auction regime and the tight monetary policies have facilitated the achievement of the GIR target set for the second tranche despite the execution of significant debt obligations of the NBRB and the Government denominated in foreign currencies. An important factor contributing to maintaining the GIR level in the first half of 2016 was the positive net supply of foreign exchange in the market resulting from higher sales of foreign exchange by households to maintain their current consumption level in the environment of lower real incomes. As the surplus of foreign exchange has been generated by declining savings of households to finance consumption and is accompanied by the CA deficit expansion and continued recession, this source of GIR replenishment and foreign exchange market stabilisation is not sustainable, therefore emergency measures could be called for should a financing deficit materialise. An excessive reliance on the floating exchange rate regime to manage external imbalances will result in deterioration of balance sheets of enterprises and banks and create price pressures that could lead to renewed interest rate growth. The commitment to the flexible exchange rate policies should be combined with the authorities preparedness to address the external imbalances primarily through structural policy measures, including further reduction of directed lending and subsidies.
The key causes of the CA deficit expansion from 5.8% of GDP in January-May 2015 to 10.3% of GDP in the current period include weaker terms of trade for energy goods, lower external demand and declining potash exports. The energy balance deficit has more than doubled over that period, increasing from 2.6% of GDP to 5.6% of GDP. As a result of the tax reform implemented in Russias oil sector, the amount of export duties remaining at disposal of Belarus will be gradually going down that will be accompanied by growing prices for imported Russian oil, resulting in energy balance deterioration irrespective of oil price developments in the world market. Taking into account this factor, as well as the probability of accelerated implementation of the tax reform in Russias oil market that could lead to an increase in import prices for Belarus to the international level already in the next few years, the countrys authorities should focus on improving the non-energy balance as a key factor contributing to the reduction of external imbalances, which can be achieved through consistent implementation of structural reforms aimed at strengthening the competitiveness of the economy and exports. In this respect, the essential measures should still include further liberalisation of prices and financial markets, transition of state-owned enterprises to commercial principles of operation, as well as creation of enabling conditions for privatisation and private sector development to mobilise financing and promote implementation of new technologies. That will facilitate an efficient reallocation of resources released as a result of phasing out directed lending and their use in more productive sectors of the economy.
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