Recent Economic Developments
The cyclical expansion continues, supported by improved external conditions and a recovery in industry. In 2017, the economy grew by 2.4% year-on-year (y-o-y), a rebound from the 2.5% contraction a year ago. In January–February 2018, GDP growth accelerated to 5.6% y-o-y, with the main contributions from manufacturing (2.7 percentage points) and domestic trade (0.9 percentage points).
Industrial output expanded by 10.3% y-o-y in the first two months of 2018, up from 6.1% y-o-y in 2017. Modest economic growth in Russia and a gradual increase in commodity prices contributed to a revival of production and exports of machinery and oil products. Merchandise exports recovered (21.7% y-o-y in U.S. dollar terms), helping to bring down the current account deficit to 1.7% of GDP in 2017 (compared to 3.5% in 2016).
On the demand side, real wage increases led to household consumption growth of almost 6% in the third quarter of 2017 (compared to a 6.5% fall in the same period in 2016) and stopped the deterioration in household income. As a result, the share of households below the official poverty threshold remained stable throughout 2017. However, real wage growth outpaced productivity in 2017 (6.2 vs. 3.6%) and in January–February 2018 (13.4 vs. 5%).
Annual average inflation slowed down to the historically low level of 6%, helped by better anchored inflation expectations, a moderation in administrative price adjustments, and imported disinflation. Quasi-fiscal expenditures continue to put pressures on public debt levels (repayment and service amounted to 6.9% of GDP in 2017), which were partially eased by the disbursement of the three tranches of the Eurasian Fund for Stabilisation and Development loan (US$0.8 billion), a bilateral loan from Russia (US$0.7 billion), and the issuance of Eurobonds (US$2 billion).
Although recovery is underway, the trending annual economic growth rate is unlikely to exceed 3%. Improved household consumption and investment activity, along with an increase in exports, will help the economy grow. At the same time, persistent domestic structural bottlenecks related to unaddressed legacies of the misallocation of capital and low export diversification will continue to constrain growth potential.
Modest growth rates would ease balance-of-payment pressures, allowing Belarus to maintain a current account deficit of between 2 and 3% over the next three years. A series of promising policy measures, introduced in 2017 to stimulate private sector development and job creation, as well as new economic activities in information and communications technology (ICT), are expected to provide support for an economic recovery in the medium term.
A recovery in household incomes, due to resumed wage growth, is expected to stabilize the poverty rate. Nevertheless, if real wage growth continues to exceed productivity, this could undermine the sustainability of the growth trajectory and further weaken enterprise performance and the financial sector. Risks to fiscal sustainability remain, stemming from existing quasi-fiscal deficits (the recorded budget surplus is entirely spent on public debt repayment) related to the excesses of the expansionary policies of the past.
Looking forward, boosting the productivity of available capital and labor remains a sustainable way to mitigate the risks of prolonged growth and income stagnation, which would lead to widening per capita gaps between Belarus and its neighbors.