Belarus strategy overview

Full strategy  (0.6Mb) Approved 12  Dec 2006

Стратегия для Беларуси  (1Mb) (RU)

Summary of public comments  (0.1Mb)

For the past ten years the Bank’s activities in Belarus have been limited by the country’s slow progress in democratic and market transition. Previous Country Strategies have drawn attention to inconsistencies in Belarus’ commitment to, and application of, principles of multi-party democracy, pluralism and market economics in accordance with Article 1 of the Agreement Establishing the Bank. During the last two-year Strategy period there has been no improvement in the political environment while some progress in the economic sphere has been seen in the area of macroeconomic management. In some aspects of democratic governance there has been significant backtracking.

Private sector development

As a result of the difficult conditions still present in Belarus, the Bank will continue to concentrate its operations in the private sector where its investments can have the greatest potential transition impact. The Bank will maintain the three alternative scenarios as a graduated response to domestic circumstances, referred to as a Baseline, an Intermediate and a Regular Scenario. This approach is consistent with that adopted in previous Strategies. As in the past, the Bank will remain ready to expand its operations outside the private sector, should domestic circumstances in Belarus allow. This Strategy identifies clear, measurable, political and economic benchmarks that the Bank will monitor regularly and specifies the operational response that could follow in the event of significant progress.

The Bank will continue to remain engaged in Belarus, despite the persistent lack of progress in government policies favouring democracy and market formation, so long as it can contribute to the development of a dynamic private sector and an entrepreneurial class. Through its lending and an active policy dialogue with the authorities, the Bank has made some strides in these areas. During the previous Strategy period, the Bank’s activities expanded significantly with commitments of EUR 41.5 million in new business for 7 private projects and committed about EUR 700,000 in technical assistance funds. The private sector remains small by comparison with more advanced transition countries; however, it is growing and continues to require external sources of finance.

Need for reform

While it is important to build democracy and markets through the development of civil society, the private sector and a thriving middle class, a real breakthrough in Belarus will only be possible when government policies and institutions change. In particular, weak mechanisms of accountability, constraints on political competition and lack of political will to uphold Constitutional guarantees of basic civil, political and human rights continue to raise serious concern within the international community. The leadership in Belarus faced key tests of its commitment to adhere to democratic norms in the organisation of the parliamentary and presidential elections in October 2004 and March 2006. In both cases, the elections were severely criticised by most international and independent domestic observers.

Economic performance

In the economic sphere, macroeconomic performance has improved while there has been very little progress in structural and institutional reform. Average annual growth exceeded 9% over the last three years, driven by rapid expansion in domestic investment and private consumption. Macroeconomic stabilisation has advanced since the last Country Strategy. Tighter monetary policy coupled with on-going re-monetisation of the economy have resulted in much lower inflation, although administered price controls and interest rate caps have also played a role. Exchange rate stability has further underpinned disinflation. The country’s external position has improved. Exports have been buoyant due to high commodity prices and strong demand from Russia. For the first time, the current account recorded a surplus of about 1.5% of GDP in 2005, although the trend is unlikely to hold in 2006. Belarus’ external debt continues to be low. Greater transparency in fiscal accounts and some reduction in the tax burden have been achieved in recent years, but the size of the government remains large.

Favourable external factors have allowed the government to continue its policy of enterprise support and directed wage increases while maintaining macroeconomic stability. However, this growth strategy is not sustainable in the long term. To ensure sustainable private sector-led growth over the longer term, fundamental market-oriented reforms and improvements in the country’s business climate are needed. Yet Belarus has made little progress in advancing structural and institutional reforms since the last Country Strategy. The state continues to dominate the economic environment through budget and off-budget financing, support to enterprises through state-owned banks, and various targets imposed on enterprises. The privatisation process remains stalled, and the state regained its stakes in some formerly privatised enterprises. Private enterprises experience excessive regulation and a high tax burden. Finally, the law on “golden shares” remains a serious concern for investors, although the recent abolishment of the golden share for the banking sector is a positive development.

Baseline scenario

In light of these political and economic challenges, the Bank is proposing to maintain a Baseline Scenario in which the operational focus will remain on the private sector, particularly on financing of micro, small and medium-sized companies. As in the previous Strategy, all of the Bank’s operations must demonstrate that the proposed investments are not effectively controlled by the state or state entities, and government officials will not personally benefit financially from such investments. The Bank will continue to ensure that all EBRD operations in Belarus are subject to the Bank’s Environmental Procedures and incorporate, where appropriate, Environmental Action Plans.

Operational priorities

Accordingly, in the coming Strategy period the Bank will focus on the following priorities under the Baseline Scenario:

• Portfolio management of existing investments in Belarus, including continued support to MSMEs through approved Lines of Credit with privately-owned banks.
• Advisory services to SMEs via the Bank’s TurnAround Management (TAM) and the Business Advisory (BAS) programmes, provided funding from donors will be made available;
• Selective direct investments in local and foreign private companies, including through the Direct Investment Facility (DIF) programme; and
• Expansion of the trade facilitation programme to additional bona fide private banks.
• In accordance with the need to support private MSMEs, Foreign Direct Investment, as well as competition in the financial sector, the Bank will consider providing MSME credit lines directly to individual private banks, and equity investments in private banks, together with related technical assistance, when the investments are small and particularly if this can be done alongside reputable international strategic investors, and the State has no control, including veto power over decision making.

If substantial progress is made in democratic reforms and if the authorities embark on a consistent programme of economic liberalisation and reform, the Bank would be in a position to conduct a broader range of operations either on an Intermediate or a Regular Scenario. As in the past, the Bank will employ a number of benchmarks in gauging political and economic progress. Should evidence of significant progress under these benchmarks emerge, the resultant improved investment climate would allow the Bank to consider on a project-by-project basis and in consultation with the Board of Directors, further involvement in the Belarus economy.

Policy dialogue

The Bank will continue to engage actively in policy dialogue with the authorities in a range of issues related to the political situation, economic reforms and improvements in the business environment. In these areas as well as in its specific project-related discussions with the authorities, the Bank will continue its close cooperation with other IFIs and international institutions. A special effort will be made towards the donor community to raise technical assistance funding to support institutional development provided to local private sector enterprises including through the micro-lending programme and the TAM/BAS programmes. The Strategy recognises the link between the promotion of entrepreneurial activity at the grass roots level and the consequent emergence of civil society which could contribute towards political and economic reforms. Under current conditions, enhanced support for private sector investment and development remains the most appropriate way for the Bank to maintain and grow its engagement in Belarus.