Country Report Belarus March 2009

Outlook for 2009-10

Although economic recession will increase pressure on his administration, the president, Alyaksandar Lukashenka, will retain control of the political scene. He will use populist policies to keep crucial constituents on his side, and will employ tough measures if necessary to suppress political opposition. Despite some thawing of relations between Belarus and the West, lack of political liberalisation will prevent significantly closer ties, and the relationship with Russia will continue to be Belarus's main foreign policy priority. There will be some progress on relaxing business regulation and on privatisation, but far-reaching structural economic reforms and market liberalisation remain unlikely. Real GDP is expected to contract by 1% in 2009 as access to foreign financing is constrained by global financial turmoil, forcing a correction in domestic demand, before rebounding modestly in 2010 as external conditions improve. Inflation is forecast to slow, to an annual average of 12% in 2009 and 10% in 2010, because of lower oil prices and demand pressures. Despite a weaker export performance owing to falling demand in leading markets, the current-account deficit will narrow, to an average of just over 5.5% of GDP in 2009-10, as financial constraints prompt a collapse in import demand.

The political scene

The EU has stepped up its efforts to engage the Lukashenka administration, even though promises of political liberalisation have fallen short in reality. Opposition parties are divided on how to respond to EU engagement with the regime. Despite some tensions, relations with Russia remain close.

Economic policy

The authorities agreed a US$2.5bn lending programme with the IMF in December. The rubel was promptly devalued by 20.5%. Budget cuts are being enacted. Some steps have been taken to streamline business regulation. The central bank is spending reserves rapidly to shore up the currency.

The domestic economy

The economy has slowed sharply. Real GDP growth was 10% in 2008, but slowed to 2.3% in January-February 2009. Industrial output fell by 4.3% year on year in February. Inflation rose to 15.7% year on year in February. The number of employees on reduced time and unpaid leave has risen considerably.

Foreign trade and payments

Exports collapsed in the final months of 2008, reflecting the crisis in important trade partners. In January 2009 exports were down by 45.4% and imports were down by 32.8% year on year. Belarus obtained a relatively favourable gas price deal with Russia. The current-account deficit widened sharply in 2008.