Minsk, April 28, 2016 – Recession in Russia and low commodity prices have had a major impact on Belarus’s economy. The economy is expected to contract by 3 percent in 2016 and by 1 percent in 2017 as the external shocks have an enduring impact on the economy. While current account deficit is narrowing due to prudent macroeconomic adjustments made to overcome the recession, significant external financing will nevertheless be required to meet large foreign debt repayment needs, especially in the face of declining exports.
The newly released World Bank Economic Update for Belarus suggests that future-oriented policy reforms can help raise productivity and employment growth in the country. Continued upgrading of goods produced in Belarus and penetration into new markets will require restructuring of state-owned enterprises (SOEs) to regain competitiveness, reducing their dependence on state subsidies and proactively attracting foreign investment through joint ventures and investment climate reforms. While this will inevitably entail short-term labor retrenchment, strengthened unemployment benefits and job transition systems would help workers to gradually move from low productivity sectors to more efficient firms. Comprehensive actions are planned by the authorities to steer the economy from the ongoing recession, which is likely to continue in both 2016 and 2017, toward a robust growth path.
‘‘Faster progress on structural reforms would bolster Belarus’ medium-term prospects, but growth is unlikely to pick up immediately because of lags in diversifying products and markets, particularly for state-owned enterprises. However, the economy has the basic ingredients needed to transition to upper-middle income status, including strong scientific and engineering capability, and has proven relatively resilient to multiple external shocks in the past. Therefore, we remain upbeat about the country’s medium-term growth prospects,” noted Mr. Young Chul Kim, World Bank Country Manager for Belarus.
A Special Focus Note on Improving Credit Allocation emphasized the need to transition toward more efficient resource allocation, currently encumbered by sizeable Government Directed Lending (GDL). In comparison to other countries, the volume and terms of government directed lending have produced considerable distortions in the financial system, while leading to significant fiscal costs and contingent fiscal liabilities. The system for monitoring and accounting for GDL also needs to be strengthened. Recent policy steps taken on tightening the conditions for new GDL are encouraging, but further strengthening is needed to improve the selection of projects to be supported by GDL. The strategy for GDL reduction should be ambitious, while its scale and speed should take into consideration secondary effects on the economy.
"By any measure, reduction of GDL would imply less new credit for SOEs and hopefully more affordable loans for thriving sectors of the economy. As SOEs adjust to tighter resource envelope, commercial banks will need to be vigilant to prevent erosion of the quality of their loan portfolio. A forward-looking analysis to estimate the impact of various GDL reduction scenarios on SOEs and commercial banks will be essential, including potential fiscal costs for bank recapitalization and unemployment support programs. Reduction of GDL should be closely aligned with a time-bound plan for enterprise restructuring,” stressed Mr. Kiryl Haiduk, World Bank Economist.
Since the Republic of Belarus joined the World Bank in 1992, lending commitments to the country have totaled US$1.5 billion. In addition, grant financing totaling US$28 million has been provided to various programs, including those with civil society organizations. The current investment lending portfolio includes nine operations totaling US$998 million.