IMF and government split over measures to overcome crippling economic problems in Belarus

On June 12^th, the IMF published a country report on Belarus in the framework of post-program monitoring.

Despite similar assessments of the situation in the Belarusian economy, the IMF and the government have different views on measures needed to overcome the economic crisis in Belarus. Without profound economic reforms, Belarus’ economic model is becoming increasingly insolvent.

Both, the Government and the IMF agree there is a need for a consistent macroeconomic policy and profound structural reforms. However, measures they suggest to implement differ. The IMF recommends tightening the monetary policy, while the National Bank wants to implement a monetary policy which will stimulate GDP growth. The IMF recommends implementing inflation targeting measures, while the government intends to keep inflation by deferring increase in regulated prices. The IMF proposes to implement structural reforms, and the government prefers a gradual approach. The difference in approaches delays Belarus’ loan negotiations with the IMF.

Increase in real wages in Belarus by 35.2% in 2012 (December to December 2011) resulted in Belarusian economy losing its competitive advantage. Producer’s industrial production price index in March 2013 was 288.9%, which is higher than the USD / BYR exchange rate fluctuations (258%). The IMF assessed that the real exchange rate was overvalued by 11%. The current account demonstrates there are problems in the Belarus’ economy. In Q1 2013 the current account payment balance was minus USD 2,437 million. The situation was worse only in Q1 2011.

As a result, Belarus’ economy becomes less competitive in foreign markets and loses its positions in the domestic market, regardless of restrictive measures against some imported goods. Various subsidies for state enterprises hamper stimulus for their efficient operations and put additional strains on the state budget. Against the widening gap between the declining labor productivity and real wage growth, the Government’s plans to increase wages in the public sector may stimulate consumer imports and increase pressure on the foreign exchange market.

The IMF once again noted the Government’s commitment to short-term tight monetary policy measures. Looser monetary policy in the recent past had resulted in 2011 devaluation, and currently Belarus is confidently moving in the same direction.