Eurasian Development Bank recommends Minsk to restrict domestic demand

The Eurasian Development Bank (EDB) has recommended the Belarusian authorities to "restrict domestic demand significantly" as part of efforts to cut the country's current account deficit, BelaPAN said.

In a paper assessing the Belarusian finance ministry's report on the implementation by the country of the conditions for receiving the second tranche of the Eurasian Economic Community (EurAsEC)'s Anti-crisis Fund's $3-billion loan, EDB experts blame Belarus' "critically high" current account deficit on the excessive stimulation of domestic demand, which they say also caused a triple-digit inflation rate and problems affecting the banking sector in 2011.

The experts suggest that the Belarusian authorities should limit domestic demand by stopping printing money to finance state programs and tighten their monetary policy, in particular bring interest rates to positive levels.

The EDB paper slams the government's practice of printing money to finance state programs and warns that if Minsk continues the practice this year it may not receive the next tranche of the EurAsEC loan.

Last year's currency crisis hit hard the Belarusian banking sector, compromising the banks' liquidity and deteriorating the quality of their assets, according to the paper.

Although there were welcome trends in foreign trade in late 2011, the country's current account deficit still remains wide, while the state gold and foreign exchange reserves are "at an unacceptably low level", the EDB experts say.

They warn that the further stimulation of domestic demand would again accelerate inflation, further weaken the rubel against major currencies and increase the country's foreign debt.

The $440-million tranche was transferred to Belarus on December 30.

On November 28, 2011, the board of the Russian-controlled Anti-crisis Fund approved the disbursement of the tranche to Belarus in December. The EDB then said that the second tranche would be disbursed automatically after Alyaksandr Lukashenka signed an edict ordering the National Bank to sell its non-core assets and the Bank increased its rate on liquidity support operations by five percent.

The first, $800-million tranche of the EurAsEC loan was made available to Belarus in June last year.

The board of the EurAsEC Anti-crisis Fund approved the loan, aimed at supporting the country's efforts to improve its balance of payments, on June 4. Under the agreement, the 10-year loan was to be disbursed in six tranches within three calendar years.

The loan has a grace period of three years and carries a floating interest rate set on the basis of the reference rates of the Russian Federation and Kazakhstan.