Belarus strategy overview

Full strategy  (0.6Mb) Approved 10  Dec 2009

Стратегия для Беларуси  (1.5Mb)

Since 1996 the Bank’s activities in the Republic of Belarus have been limited by the country’s slow progress in democratic and market-oriented transition. Previous Country Strategies have highlighted inconsistencies in the Belarusian authorities’ commitment to and application of the principles of multiparty democracy, pluralism and market economics, as contained in Article 1 of the Agreement Establishing the Bank. As a result of the difficult operational environment created by these inconsistencies, the Bank’s engagement with Belarus has been constrained.

The Bank remains concerned about the slow pace of reform in Belarus. Elections are not fully free and fair and the development of political pluralism, free media and civil society has a way to go before meeting the standards of a mature democracy. The state continues to dominate the economy and the use of production targets, wage restrictions, price controls and directed lending remain common. However, towards the end of the last Strategy period there have been encouraging signs of progress on both the political and economic fronts that, if continued and intensified, would provide a basis for deeper engagement with the Bank.

During the course of 2008, Belarus implemented some democratic reforms, including the release of political prisoners, the partial liberalisation of print media distribution, and showed greater tolerance towards the political opposition.

Economic reforms

There were also several economic reforms implemented in recent years. The golden share provision was abolished across all industries in 2008 and a number of privatisations via sales to foreign investors took place. In the financial sector, improvements in regulation and supervision have been accompanied by the removal of lending interest rate caps. The simplification of the taxation regime has benefited small and medium-sized enterprises as well as companies operating in small towns. Notable progress has been made in the area of deregulation. As a result, Belarus has made impressive progress on the World Bank’s Doing Business indicators in recent years, rising from the 115th ranked country globally in 2008 to 82nd in 2009 and to 58th in 2010. Further advancement of privatisation and price liberalisation are among the key stated commitments under the IMF programme agreed in January 2009.

At the same time, the macroeconomic environment has become more demanding. The Belarusian economy grew rapidly in recent years, at 8.2 per cent in 2007 and 10 per cent in 2008. However, as an open industrialised economy, Belarus has been severely hit by the global economic crisis, primarily through the external demand channel. The economy has been simultaneously exposed to negative terms of trade shocks on both the import and the export sides: while the price of Russian gas continued to increase, the price of its key commodity export, potassium, fell sharply from its 2008 peak. As a result, economic growth slowed from 10 per cent in 2008 to 1.2 per cent in the first four months of 2009 (year-on-year), despite the rapid accumulation of stocks of unsold industrial output. Belarus is one of the few countries in the transition region still showing positive growth in 2009.

The Belarusian authorities have become more open to cooperation with the international financial institutions with regard to the development and implementation of market-oriented reforms. The combination of a positive direction of change and the greater willingness from the authorities to work with the international community on ways to address outstanding issues on the transition agenda is a basis for a modified strategic approach. By cautiously increasing its level of engagement, the Bank will seek to enhance the effect of programmes recently introduced by other organisations with a similarly strong interest in moving the Belarusian transition forward.

Transition challenges

In its Strategy, the Bank will work together with private sector investors, the Belarusian authorities and other IFIs and donors to address the following key transition challenges:

• Development of private sector micro, small, and medium-sized businesses, in particular through enhanced access to finance for MSMEs located outside Minsk and the regional centres.
• Implementation of a transparent privatisation programme across various sectors of the economy, including further commercialisation of operations and privatisation of large state-owned banks.
• Liberalisation of trade and adequate provision of trade finance.
• Improvements in energy efficiency across various sectors of the economy, particularly in Belarus’ large and highly inefficient manufacturing industry.
• Commercialisation of municipal infrastructure as well as improvements in environmental standards.
  The Bank’s activities in addressing these challenges will continue to be guided by its mandate and its adherence to the principles of Article 1. The focus in all its operations will be on finding private sector solutions and preserving market discipline. The operational priorities in the present Country Strategy build on the foundations laid in recent years on developing the MSME sector and attracting foreign investors to Belarus.
  

Strategic priorities

The Strategy therefore outlines a calibrated strategic approach that will allow the Bank to increase its engagement with Belarus on the basis of concrete implementation of sector-specific reforms designed to promote the further development of a market economy. The objectives in Belarus over the Strategy period will include the following, with certain areas of activity to be phased in as progress in meeting sector conditions is documented:

• Expansion of existing credit lines for micro, small and medium-sized enterprises via established privately owned partner banks, including the Belarusian Bank for Small Business. The Bank will also consider expanding its SME credit lines to commercially oriented state-owned banks with credible privatisation prospects in order to increase the geographical reach of its credit lines into the Belarusian regions and to support future privatisation efforts.
• Provision of technical assistance and, potentially, financial support to pre-privatisation and privatisation measures. These activities will focus in the first instance on technical assistance for the establishment of a Privatisation Agency and the pre-privatisation of a number of medium-sized and large state-owned firms, in line with Belarus’ Stand-by Agreement with the IMF and Development Policy Loan with the World Bank.
• Promotion and financing of activities aimed at increasing energy efficiency, by working with local financial intermediaries to develop dedicated energy efficiency credit lines. The Bank will also work with private operators and foreign strategic investors to support the development of sustainable energy sources. The development of both energy efficiency credit lines and renewable sources of energy will require the Belarusian authorities to develop an appropriate regulatory framework to foster long term investments in this sector.
• Expansion of the Bank’s Trade Facilitation Programme (TFP) to promote cross-border activities. TFP for existing Bank clients will be increased for on-lending to private sector clients. In addition, the Bank will consider the step-by-step expansion of the TFP programme to allow private sector partner banks to provide trade finance to selected state-owned clients and make TFP available to selected state-owned banks, with similar requirements in terms of commercial nature of operations and privatisation prospects as in the MSME credit line case for on-lending to private sector clients.
• Provision of support for the reform and technical upgrade of the environmental infrastructure and municipal services sector in cities and smaller urban areas to reduce pollution, improve energy efficiency, and improve standards for basic services including provision of clean drinking water, sustainable processing of waste and waste water, and enhancing energy efficiency of district heating and other urban infrastructure. Where possible the Bank will work alongside partners such as the NDEP, NIB and EIB to achieve these mutually shared objectives.
  

In view of proposed strategic approach and operational content, Belarus would be a full beneficiary of the ETC Initiative, with the benefit of optimising the development of the private sector and required institutions, including the provision of Technical Assistance from donors and the EBRD. In this context it is proposed, following Board adoption of this Strategy, to ask donors in the ETC Assembly of Contributors to consider including Belarus as a recipient of ETC fund resources for technical assistance.

Policy dialog

An important dimension of the Bank’s activities in the current Strategy period will be proactive policy dialogue with the authorities on the continuing need for acceleration of reforms and importance of enhanced political and economic openness. In that connection, the Bank will continue to closely monitor progress in these domains against a set of reform benchmarks.

In the political sphere:

• Further progress toward meaningful political accountability, including the strengthening of checks and balances in the political system, removal of impediments to NGO and opposition parties’ active engagement in political life and even-handed application of the rule of law.
• Further progress in increasing media freedom and freedom of expression.
• Further progress in enforcing the human and civic rights protections guaranteed in the Constitution, including freedom from arbitrary arrest and detention.

In the economic sphere:

• Creating adequate space for private sector development and competition.
• Strengthening of market-supporting institutions and the legal and regulatory framework for private sector firms to enter and compete in the market.
• Significant reduction in arbitrary and distortionary state intervention in the economy, including through directed lending in state-owned banks, wage restrictions, price controls and production targets.

The Bank will actively and continually monitor developments against these benchmarks and report to the Board of Directors on an annual basis on progress/regress. This will further enable the Bank’s management and shareholders to calibrate the appropriate strategic response to changes in the situation on the ground.

Sustainable development

The Bank will continue to ensure that all EBRD operations in the Republic of Belarus meet sound banking principles, have transition impact, are additional and are subject to the Bank’s Environmental and Social Policy and incorporate, where appropriate, Environmental and Social Action Plans. The Bank will continue and enhance its cooperation with other IFIs and international organisations through co-financing and policy dialogue, and will seek to mobilise donor grant financing from other multilateral and bilateral donors and, if available, the Early Transition Countries Fund to support preparation, implementation and grant co-financing of selected investment projects.