Country Report Belarus November 2009

Outlook for 2010-11

Although economic recession will increase pressure on his administration, the president, Alyaksandar Lukashenka, will retain control of the political scene. The opposition will hope to challenge him at the 2011 presidential election, but he will use populist policies to keep crucial constituents on his side, and employ tough measures to retain control, if necessary. Despite some thawing of relations with the West, lack of political liberalisation will place limits on closer ties. The relationship with Russia will remain Belarus's main foreign policy priority. Despite some progress on business regulation and privatisation, far-reaching structural reforms are unlikely. Real GDP is forecast to contract by 2% in 2010, as domestic demand weakens under the delayed impact of the global economic downturn, before growing by 3% in 2011. Inflation is forecast to slow, to an annual average of 8% in 2010, because of lower demand pressures, before strengthening slightly in 2011, to 9%. The current-account deficit has widened alarmingly, but will undergo a correction as financial constraints depress import demand, contracting to an annual average of 5.5% of GDP in 2010-11.

The political scene

The acrimony evident in relations with Russia earlier in 2009 has largely disappeared, and military co-operation continues to deepen. Ties with the EU continue to develop, but relations with the US have been slower to thaw. The opposition remains sidelined, and its internal divisions appear to be deepening.

Economic policy

The IMF is generally satisfied with Belarus's adherence to the terms of its stand-by programme, and a third tranche of lending was approved in October. There has been some progress on streamlining regulation for foreign investors. The target of a balanced budget for 2009 is looking difficult to achieve.

The domestic economy

The economy has entered recession, and real GDP contracted by 0.3% year on year in January-September. Industrial output fell by 4.5%, and the rate of decline increased in the third quarter. Inflation fell to 11.7% year on year in September. Rising non-performing loans (NPLs) could threaten banks' capital adequacy.

Foreign trade and payments

The slump in exports under the impact of the regional economic downturn has abated slightly, but the trade deficit was still up considerably in January-August, at US$4.7bn. The current-account deficit has widened alarmingly, and was 15.7% of GDP in the second quarter. This was funded mainly from reserves, and Belarus appears at considerable risk of a balance-of-payments crisis.