‘Hello? We’ve heard the IMF is still headed by a European pariah…’
RTRS-BELARUS MAY ASK IMF FOR FINANCIAL SUPPORT -LUKASHENKO PRESS SERVICE
‘…room for one more?’
Yes, it’s time for a trip through the inverted world of Bizarro to Europe’s last dicatorship Belarus — a sovereign that’s facing crisis on just about everything but its government debt. Unusual for Europe these days, so do permit us a swift car-crash journalism tour of what’s happened to the country.
Also odd here — Belarus has imploded just over a year after concluding the last IMF programme it received, which might well be a new record.
That’s kind of embarrassing for the Fund in itself. According to its own review of the 2009 bailout, Minsk executed the programme perfectly:
Perfect, except for the current account deficit increasing through the programme.
Apart from the IMF, President Lukashenko has been busy writing himself a $6bn cheque from the Russians. Whoever ends up bailing Belarus out, they’ve got the mother of all policy adjustments on their hands.
Here’s a primer via Gabriel Sterne, economist at frontier markets specialists Exotix:
1. Political crisis: following rigged elections and a crackdown on opposition candidates, Belarus has been frozen out by the West. On 14 May the EU high representative responded to the five-year jail sentence handed out to former presidential candidate Andrey Sannikaw by reiterating “the readiness of the EU to consider further targeted restrictive measures in all areas of cooperation.”
2. Investor confidence crisis: The fragility of investor confidence was illustrated by the sudden fall in prices of the eurobonds in late March. The [2015 eurobonds] fell 8.4% in just two days between 21 and 23 March (Chart 9), as the country’s foreign exchange reserves fell to just one month’s import cover. There has been a partial recovery in the bonds since then, in part because of investor realisation that an imminent default was not likely given the low debt servicing due in 2011-13, but the policy response to the crisis has been weak, and investor impatience could easily translate into a new downturn, in our opinion.
3. Balance of payments crisis (see Chart 11): Strong and unsustainable credit provision to state-owned enterprises led to a demand boom and a massive current account deficit of 16% of GDP at end-2010; hence official reserves have fallen by 37% in the year to April 2011 (since the end of the IMF programme). They now stand at around 1 month’s import cover. And even this sharp decline in official reserves understates the underlying deterioration, since at end-2010 there was a sharp increase in foreign currency borrowing by the [central bank] from Belarusian commercial banks.
4. Currency crisis (see Chart 10). With such limited fx reserves remaining, and in the absence of conventional policy adjustment, non-conventional adjustment has been forced upon the economy through a multiple fx regime, with all the ugly fx queues and misallocation of fx that inevitably accompanies such a second-best policy. In March, the central bank introduced parallel exchange rates, with restrictions on foreign-currency sales. Some restrictions on sales to households were lifted on 11 May, and the exchange rate plummeted around 23%, currently at 3,892. And the differential between the official and interbank rate is even more striking, with quotes from Belagropombank showing that the interbank rate was at 6,225 on 16 May, compared with the official rate of 3,085.
5. Crises in fiscal and monetary policy management: although the central bank has increased interest rates (Chart 12), these have fallen some way behind core inflation. Owing to high spending, the overall fiscal deficit is estimated by the IMF to have increased from 1% to 4% of GDP even as the economy recovered to record growth of 8% of GDP in 2010, up from zero in 2009. And credit policy is the weakest of all, with the IMF pointing to unsustainable credit growth of 38% yoy at end-2010. Yet it appears as though policymakers do not yet accept the need for conventional policy measures. They have been playing for time in the hope of a Russian-led bailout. The policies implemented since mid-March can best be thought of as a series of sticking plasters that do little to cover a gaping economic wound. And interest rates were increased to 14%. But without deeper changes in monetary and fiscal policies, this will be nowhere near enough.
‘Venezuela without the oil,’ say Exotix, which about sums it up.
The trick here is that Belarus needs tough conditions on bailout loans, which is probably why Russia is happy to allow the IMF to take the lead, and the flak, of lending. But that’s a good reason as any that the Fund should be wary of getting involved again. The country is under the iron grip of a dictator. ‘Bad policy’ pretty much comes as standard…
Related links:
A rouble re-rerun – FT Alphaville
Pressure mounts on Strauss-Kahn to quit – FT
The IMF needs another European head - FT
Belarus – “I Love Belarus” – Eurovision Song Contest 2011 – BBC One – Youtube