Recent Economic Developments
The economy started to stabilize in the first half of 2017 and grew modestly, ending a two-year long contraction. Real GDP grew 1.1% year-on-year (y-o-y) in the first seven months of 2017, in sharp contrast to the 2.7% decline y-o-y in the same period of last year. A tentative economic recovery in Russia helped to boost exports and support a moderate increase in domestic business activity, especially in industry.
The deterioration of household income slowed with resumed real wage growth. In the first half of 2017, real disposable income declined by 0.8% (compared to a 6.6% y-o-y drop a year ago). The poverty rate (national headcount ratio) increased from 5.5% in the second quarter of 2016 to 5.9% in the second quarter of 2017. Moderate poverty, measured at the purchasing power parity (PPP) US$5.5/day threshold, remained low at 0.7% in 2016.
The macroeconomic policy stance has remained tight, despite some easing measures introduced recently as inflation stabilized. The tight fiscal and monetary policies of previous years helped reduce inflation to 6% in July 2017, the lowest level in a decade.
The Government’s official fiscal accounts continue to register a surplus, but public debt levels continue to increase. General government revenues recorded modest real growth due to increased value added tax (VAT), excise, and corporate income tax revenues. To meet the public debt obligations, general government expenditures were cut—mainly subsidies and transfers—to generate a budget surplus of 3.2% (net of quasi-fiscal expenses).
The April 2017 agreements between Belarus and Russia over gas price and oil supplies have paved the way for the disbursement of two tranches of a Eurasian Fund for Stabilisation and Development (EFSD) loan totaling US$600 million and the issuance of two Eurobonds in the amount of US$800 million and US$600 million, for five and ten years, respectively.
Despite a tentative recovery in 2017, medium-term economic growth is expected to remain weak as structural bottlenecks persist and domestic demand remains subdued. Improved external conditions are expected to remain in place, supporting moderate growth of 1.8% y-o-y in 2017 and 2.1% in 2018.
Moderate growth will help to maintain a current account deficit below 4% of GDP over the forecast period. The pathway to sustainable growth includes restructuring SOEs and resolving related fiscal risks, addressing nonperforming loans, and better targeting social protection and unemployment assistance.
Despite the growth of real wages and a nominal 6.5% increase in budget sector wages beginning in September 2017, the moderate poverty rate (PPP US$5/day) is projected to remain stable during 2017–18 due to the very slow recovery of real household income as a result o5.9f the Government’s 8% increase in household utility tariffs, also beginning in September.
Another rise of 10% is planned starting December 1 to reach full cost-recovery level on all utilities except for heating by the beginning of 2018.
Tariff growth would require more robust mitigation measures by improving the targeting of the existing household utility subsidy program. Labor market conditions will remain tight, as a still weak financial situation and accumulated debts will prevent enterprises from increasing employment.