Balance of payments crisis in Belarus
by Alexander Chubrik
18 July 2011
Despite rapid economic growth as well as low levels of poverty and moderate inflation, Belarus is still in need of IMF assistance
If one looks through international databases searching macroeconomic indicators for Belarus, he or she sees quite good performance. There is fast economic growth - per capita gross domestic product is one of the highest in the region – as well as low poverty and moderate inflation. But, most of this picture has already been smashed by recent balance of payments crisis - which has already depreciated the local currency by 50 per cent and forced authorities to search for money to finance the gap.
At the end of May, the country announced its intention to apply for the new stand-by loan from the International Monetary Fund. Simultaneously, the government asked for stabilisation loan from the anti-crisis fund of Eurasian Development Bank. It received its first tranche at the end of June.
The usual questions asked regarding these loans – "what should be done by the authorities of Belarus in order to get the loan from the IMF" or "do political pre-conditions such as release of political prisoners matters for the IMF" or "what amount of money would allow Belarus to continue pre-crisis path" – assume that these loans are needed and important for recovery. Let us ask a different question: would external borrowing support recovery of Belarus from the balance of payments crisis?
This question contains several dimensions. First, what tasks are solved via external borrowing in the case of Belarus, and would these tasks be solved in the current conditions? Second, if a loan is conditioned by making structural reforms, how efficient could the government be in implementing a comprehensive reform package? Finally, if the loan is needed, what is the best timing of its provision?
Belarus has recent experience of implementation of an IMF-supported programme. In 2009, a stand-by loan helped Belarusian monetary authorities to fill international reserves and support stability of the national currency after a momentary 17 per cent devaluation. Additionally - authorities made some steps towards price liberalisation, monetary policy tightening and adopting some new legislative acts aimed at acceleration of privatisation.
Although, the success of the programme was mixed – especially, in terms of sustainability of the results: current BoP crisis occurred after its implementation - it was undoubtedly helpful in terms of recovery of household confidence in the national currency, in particular, and overall economic policy of the government - in general. In other words, that loan played a crucial role in maintaining financial stability in Belarus.
The current situation in the currency market and financial system, in general, is radically different. First, in 2009, no black markets for foreign currency arose – so the Belarusian rouble kept current account convertibility after devaluation. This year, devaluation was implemented after a few months of existence of a black market premium and was more significant - some 36 per cent. And multiple exchange rates persisted after devaluation.
Moreover, these months were filled with inconsistent policies implemented by the government – represented, mainly, by additional interference to import operations. These policies, together with a multiplicity of exchange rates, in a large extent destroyed confidence not only in the Belarusian Rouble - but to the banking system and overall economic policy of the authorities. Unlike in 2009, households started to withdraw their foreign currency deposits from the banking system. They fell by a quarter - about $1.5bn - in three months.
On top of this, monetary policy in the beginning of 2011 was much looser than in the beginning of 2009. This pushed up inflation drastically. Even according to the official data, inflation accelerated from 9.9 per cent in December 2010 to 43.8 per cent in June 2011. Growing inflation expectations together with general mistrust of government policy make restoration of confidence to the financial system and national currency far more complex - and a much slower task than it was in 2009, as it could hardly be solved by external borrowing per se.
Another piece of evidence from cooperation between Belarus and the IMF is represented by a 12-month stand-by loan approved by the IMF - in September of 1995. That loan was aimed at supporting of the Belarusian authorities' economic reform programme, but only a quarter of the amount was disbursed - as the programme criteria were not met by them. The stand-by loan of 2009-10 was disbursed completely and without interruptions - but right after the programme implementation, the same authorities rolled-back in some of their policies and this provoked the current BoP crisis.
The IMF mentioned this fact as one of the weaknesses of the recent programme with Belarus, noting that "explicit endorsement of the goals of any future program should be secured at the very highest levels; ideally, this should also be combined with an approach that sets critical measures as prior actions". Although, in both cases, "the very highest levels" of Belarusian authorities were represented by the same people that hardly kept the "goals of the programmes" unendorsed.
Therefore, the potential drawbacks of any future programme relate to more general things than simple recognition of its goals by the country's leadership – in the overall ability and intention to implement a comprehensive reform programme, which is needed to recover from the current crisis. The fact that the 2011 decision to devalue took at least three months, devaluation was implemented instead of switching to free or managed float and that devaluation had not recovered the current account convertibility of the Belarusian Rouble speaks much about ability of the existing decision-making system.
Although current macroeconomic policy does seem to be more consistent - monetary and fiscal policies have been tightened - its social impact has not fully come to path yet. Last but not least, if Belarus gets the IMF loan for three years as it requested - the programme ends right before the next presidential elections. This created additional incentives for policy weakening in the 2010 and 1996 election years.
Does all this mean that the IMF should not support economic reforms in Belarus? Of course not, if this support assumes some critical measures as prior actions. International financial institutions may put clear quantitative criteria for such prior actions: the size of the current account deficit, money supply growth, the amount of quasi-fiscal operations of the government and so on. And after meeting these criteria, support their clear intention to achieve sustainability of their economic reform programmes. Without such criteria they should be ready to prepare another series of explanations for shortcomings in programme-design implementation.
Alexander Chubrik is a fellow at CASE - the Centre for Social and Economic Research, in Poland
If one looks through international databases searching macroeconomic indicators for Belarus, he or she sees quite good performance. There is fast economic growth - per capita gross domestic product is one of the highest in the region – as well as low poverty and moderate inflation. But, most of this picture has already been smashed by recent balance of payments crisis - which has already depreciated the local currency by 50 per cent and forced authorities to search for money to finance the gap.
At the end of May, the country announced its intention to apply for the new stand-by loan from the International Monetary Fund. Simultaneously, the government asked for stabilisation loan from the anti-crisis fund of Eurasian Development Bank. It received its first tranche at the end of June.
The usual questions asked regarding these loans – "what should be done by the authorities of Belarus in order to get the loan from the IMF" or "do political pre-conditions such as release of political prisoners matters for the IMF" or "what amount of money would allow Belarus to continue pre-crisis path" – assume that these loans are needed and important for recovery. Let us ask a different question: would external borrowing support recovery of Belarus from the balance of payments crisis?
This question contains several dimensions. First, what tasks are solved via external borrowing in the case of Belarus, and would these tasks be solved in the current conditions? Second, if a loan is conditioned by making structural reforms, how efficient could the government be in implementing a comprehensive reform package? Finally, if the loan is needed, what is the best timing of its provision?
Belarus has recent experience of implementation of an IMF-supported programme. In 2009, a stand-by loan helped Belarusian monetary authorities to fill international reserves and support stability of the national currency after a momentary 17 per cent devaluation. Additionally - authorities made some steps towards price liberalisation, monetary policy tightening and adopting some new legislative acts aimed at acceleration of privatisation.
Although, the success of the programme was mixed – especially, in terms of sustainability of the results: current BoP crisis occurred after its implementation - it was undoubtedly helpful in terms of recovery of household confidence in the national currency, in particular, and overall economic policy of the government - in general. In other words, that loan played a crucial role in maintaining financial stability in Belarus.
The current situation in the currency market and financial system, in general, is radically different. First, in 2009, no black markets for foreign currency arose – so the Belarusian rouble kept current account convertibility after devaluation. This year, devaluation was implemented after a few months of existence of a black market premium and was more significant - some 36 per cent. And multiple exchange rates persisted after devaluation.
Moreover, these months were filled with inconsistent policies implemented by the government – represented, mainly, by additional interference to import operations. These policies, together with a multiplicity of exchange rates, in a large extent destroyed confidence not only in the Belarusian Rouble - but to the banking system and overall economic policy of the authorities. Unlike in 2009, households started to withdraw their foreign currency deposits from the banking system. They fell by a quarter - about $1.5bn - in three months.
On top of this, monetary policy in the beginning of 2011 was much looser than in the beginning of 2009. This pushed up inflation drastically. Even according to the official data, inflation accelerated from 9.9 per cent in December 2010 to 43.8 per cent in June 2011. Growing inflation expectations together with general mistrust of government policy make restoration of confidence to the financial system and national currency far more complex - and a much slower task than it was in 2009, as it could hardly be solved by external borrowing per se.
Another piece of evidence from cooperation between Belarus and the IMF is represented by a 12-month stand-by loan approved by the IMF - in September of 1995. That loan was aimed at supporting of the Belarusian authorities' economic reform programme, but only a quarter of the amount was disbursed - as the programme criteria were not met by them. The stand-by loan of 2009-10 was disbursed completely and without interruptions - but right after the programme implementation, the same authorities rolled-back in some of their policies and this provoked the current BoP crisis.
The IMF mentioned this fact as one of the weaknesses of the recent programme with Belarus, noting that "explicit endorsement of the goals of any future program should be secured at the very highest levels; ideally, this should also be combined with an approach that sets critical measures as prior actions". Although, in both cases, "the very highest levels" of Belarusian authorities were represented by the same people that hardly kept the "goals of the programmes" unendorsed.
Therefore, the potential drawbacks of any future programme relate to more general things than simple recognition of its goals by the country's leadership – in the overall ability and intention to implement a comprehensive reform programme, which is needed to recover from the current crisis. The fact that the 2011 decision to devalue took at least three months, devaluation was implemented instead of switching to free or managed float and that devaluation had not recovered the current account convertibility of the Belarusian Rouble speaks much about ability of the existing decision-making system.
Although current macroeconomic policy does seem to be more consistent - monetary and fiscal policies have been tightened - its social impact has not fully come to path yet. Last but not least, if Belarus gets the IMF loan for three years as it requested - the programme ends right before the next presidential elections. This created additional incentives for policy weakening in the 2010 and 1996 election years.
Does all this mean that the IMF should not support economic reforms in Belarus? Of course not, if this support assumes some critical measures as prior actions. International financial institutions may put clear quantitative criteria for such prior actions: the size of the current account deficit, money supply growth, the amount of quasi-fiscal operations of the government and so on. And after meeting these criteria, support their clear intention to achieve sustainability of their economic reform programmes. Without such criteria they should be ready to prepare another series of explanations for shortcomings in programme-design implementation.
Alexander Chubrik is a fellow at CASE - the Centre for Social and Economic Research, in Poland
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