Recent Economic Developments
In the first three quarters of 2019, economic growth slowed down considerably to 1 percent year-on-year from 3.7 percent in January–September 2018. Declining exports put a drag on growth, with merchandize exports down by 3.1 percent in nominal U.S. dollars, in sharp contrast to the 18.3 percent increase during the same period of 2018. Domestic consumption has been the only driver of economic growth, on the back of a continued rise in real wages of 7.6 percent in January–August 2019, well above the 1.5 percent growth in labor productivity. On the supply side, output stagnated in most industries. Weaknesses in the corporate sector translated into an almost twofold increase in the volume of bad loans in the banking system from May 1, 2018 to July 1, 2019.
Public debt pressures remain significant, with the ratio of direct and guaranteed debt of the central and local authorities to GDP at 45.7 percent of GDP in 2018, and debt service payments close to 2 percent in 2018 and throughout 2019.
After a short-lived acceleration to 6 percent by mid-2019, annualized inflation fell back to 5.3 percent in September. Because inflation picked up due to non-monetary factors, and broad money growth remained within the established ceiling, the National Bank reduced its policy rate to a historic low of 9.5 percent per annum from the 10 percent set in mid-2018. Notwithstanding this slowdown in exports, exchange rate flexibility has been retained and additional foreign exchange market liberalization measures implemented. Between September 2018 and September 2019, the Belarusian ruble appreciated by 1.8 percent in nominal terms against the U.S. dollar. Gross international reserves amounted to US$8.8 billion at the end of September 2019, covering more than two and a half months of goods and services imports.
The poverty headcount at the national poverty line, after peaking at 5.9 percent in 2017, started to improve in 2018 to 5.6 percent and further in the second quarter of 2019 to 5.1 percent due to the growth of real household income.
The growth outlook in 2019 and in the medium term remains weak, with expected growth slightly above 1 percent per annum. Russia’s tax maneuver, which will imply a loss of export duties on oil products and a rise in input prices for domestic oil refineries, could further subdue growth.
The loss of export duties, along with debt repayments and contingent liabilities related to SOEs and banks, will necessitate additional fiscal tightening, with negative repercussions on GDP growth. Higher input prices will negatively affect the price competitiveness of Belarus’s oil refineries.
To ignite growth, improvements in the regulatory environment for the private sector, implemented during 2017–18, should be accompanied by a restructuring of SOEs to allocate resources toward more productive uses and reduce fiscal risks. To cushion the impact of this restructuring on vulnerable groups, the social safety net needs to be enhanced by introducing proper unemployment assistance mechanisms and the improved targeting of means-tested support.