Recent Economic Developments
In 2020, the economy contracted by 0.9 percent year-on-year, dragged back by external headwinds that were only partially offset by demand-side policy measures. The lack of mobility restrictions, coupled with subsidized lending to SOEs (about 1.6 percent of GDP), prevented a deeper contraction of industrial output, while sustained real wage growth supported consumption.
During the second half of 2020, foreign exchange deposit withdrawals and household foreign exchange demand put strong pressure on the currency and on banking sector liquidity, accommodated by the spending of gross reserves (down 20.5 percent in 2020), increasing banks’ liabilities to non-residents. The weakening currency contributed to an acceleration in headline inflation to 7.4 percent at end-2020 from 4.7 percent in 2019. To prevent additional currency pressures, the National Bank switched from the provision of overnight loans to weekly auctions. To contain consumer inflation, the Government capped monthly price increases on basic food items and drugs beginning in February 2021.
For the first time since 2009, the general government budget shifted into a deficit of 1.2 percent of GDP. Tax revenues dropped on lower revenues from profit tax and foreign trade, while capital expenditures and public sector wages increased. External public debt repayment pressures were alleviated through the issuance of Eurobonds (US$1.25 billion), RUR-denominated bonds (US$135 million), and loans from Russia and the European Fund for Sustainable Development (totaling US$1 billion).
Although the national poverty rate remained unchanged in 2020 at 4.8 percent, this outcome was due to favorable dynamics in the Minsk City, Minsk, and Grodno regions. The poverty rate, at US$5.5/day purchasing power parity, remained stable at a low level (less than 1 percent).
The outlook is for a deepening recession in 2021 and a weak recovery thereafter, assuming negative domestic economic expectations, continued headwinds from the Russian “tax maneuver,” and the lack of structural reforms. Recently announced tax increases to contain the fiscal deficit and that of the pension system will hurt an already struggling private sector hit by the absence of support during the COVID-19 shock. With weak domestic demand expected to persist, the recovery is expected to be modest in the medium term, though slow growth will also help to compress imports and the current account deficit.
This outlook is contingent upon the availability of external financing. In 2021, external financing needs, which will be closed by a combination of agreed debt refinancing from Russia and a drawdown of reserves, appear manageable. However, 2022–23 will be more challenging, as repayments on bilateral loans to Russia come due in 2022, and the principal repayments on the Eurobonds and the nuclear power plant loan in 2023.
The Government’s ability to support vulnerable households is expected to weaken as a result of the limited fiscal space. Yet, measured at the World Bank’s US$5.5/day threshold, the welfare impact is projected to be small, with poverty rates increasing by 0.1 percentage point in 2021.