Document of The World Bank FOR OFFICIAL USE ONLY Report No. 50991-BY INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT PROGRAM DOCUMENT FOR A PROPOSED DEVELOPMENT POLICY LOAN IN THE AMOUNT OF US$200 MILLION TO THE REPUBLIC OF BELARUS October 22,2009 Poverty Reduction and Economic Management Unit Europe and Central Asia Region This document has a restricted distribution and may be used by recipients only in the performance of their official duties. I t s contents may not otherwise be disclosed without World Bank authorization. CURRENCY AND EQUIVALENT UNITS (as o f October 22,2009) Currency Unit =Ruble USI$= 2,718 BYR GOVERNMENT FISCAL YEAR January 1 - December 3 1 ACRONYMS AND ABREVIATIONS AAA Analytical and Advisory Assistance NBRB National Bank o f the Republic of CAR Capital Adequacy Ratio Belarus (- Central Bank) CAS Country Assistance Strategy NDA Net Domestic Assets CEM Country Economic Memorandum NGO Non-Governmental Organization CIS Commonwealth o f Independent NIR Net InternationalReserves States NPL Non-PerformingLoan DB Doing Business PEFA Public Expenditure and Financial DPL Development Policy Loan Accountability Assessment EIB European Investment Bank PPG Public and Publicly Guaranteed EBRD European Bank for Reconstruction PFM Public FinancialManagement and Development PPP Purchasing Power Parity EC European Commission SBA Stand-By Arrangement ECA Europe and Central Asia Region SCC State Control Committee EU European Union , SOE State-Owned Enterprise FDI ForeignDirect Investment TSA Targeted Social Assistance FSAP Financial Sector Assessment Program TTL Task Team Leader GDP Gross Domestic Product VAT Value Added Tax HD Human Development UNDP United Nations Development IBRD InternationalBank for Programme Reconstruction and Development IFRS InternationalFinancial Reporting Standards IMF InternationalMonetary Fund KRU State Control-Revision Service MoF Ministry of Finance Vice President: Philippe H. L e Houerou Country Director: Martin Raiser Sector Director: Luca Barbone Sector Manager: Benu Bidani Task Team Leader: Pablo Saavedra Co-Task Team Leader Marina Bakanova ii FOR OFFICIAL USE ONLY TABLE OF CONTENTS . 1 INTRODUCTION AND COUNTRY CONTEXT ................................................................................ 1 2. RECENT ECONOMIC DEVELOPMENTS AND MACROECONOMIC OUTLOOK .................. 4 A. Recent Economic Developments .......................................................................... 4 B. The Government's Macroeconomic Response And The IMF's SBA ................... 7 C . Medium Term Economic Prospects .................................................................... 10 3 . STRUCTURAL REFORM AND THE GOVERNMENT'S SHORT AND MEDIUM TERM PROGRAMS TO ENABLE RECOVERY: REVISITING BELARUS'S GROWTH MODEL .....15 A . Progress I n Structural Reforms And The Growth Model 2000-2007 ................. 15 B. Pressures On The Economic Model And The First Round Of Reforms 2007-08 18 C. The Government's Short Term And Medium Term Programs: RecalibratingThe Economic Growth Model To Achieve Sustainability......................................... 20 4 . BANK SUPPORT TO THE GOVERNMENT'S PROGRAM.......................................................... 22 A. Links To The CAS .............................................................................................. 22 B . Collaboration With The IMF And Other Donors ................................................ 22 C . Analytical Underpinnings................................................................................... 23 . 5 THE PROPOSED OPERATION ......................................................................................................... 23 A. Overall Operation Description............................................................................ 23 B . Policy Areas ........................................................................................................ 26 6 . OPERATION IMPLEMENTATION .................................................................................................. 30 A. Poverty And Social Impact Analysis................................................................... 30 B . EnvironmentalAspects ....................................................................................... 34 C.. Fiduciary Aspects ................................................................................................ 34 D. Disbursement And Auditing................................................................................ 36 E. Risks And Mitigation .......................................................................................... 37 ANNEXES ANNEX 1: Belarus Policy Matrix for Development Policy Loan ............................................... 39 ANNEX 2: Letter of Development Policy.................................................................................... 43 ANNEX 3: IMF Stand-By Arrangement Press Release ............................................................... 60 ANNEX 4: Belarus at a Glance ..................................................................................................... 62 This document has a restricted distribution and may be used by recipients only in the performance o f their official duties . I t s contents may not otherwise be disclosed without World Bank authorization. This document has a restricted distribution and may be used by recipients only in the performance o f their official duties. I t s contents may not be otherwise disclosed without W o r l d Bank authorization . The proposed DPL operation was prepared by a team consisting of Pablo Saavedra and Marina Bakanova (co-TTLs), Lawrence Bouton (co-TTL between December 2008 and July 2009), Ruslan Piontkivsky, Ivan Velev, Victor Sulla, KaterinaPetrina, Maria Koreniako, Alexander Pankov, Lev Freinkman, Elena Klochan, Michael Edwards, Marius Vismantas, Dejan Ostojic, Pekka Salminen, Alexander Sharabaroff, Rajeev Swami, Hanna Koilpillai, Anarkan Akerova, Maryna Sidarenka, Ashley Taylor, Irina Trukhan, Larysa Hrebianchuk, with the participationof Craig Bell, Valeri Fadeev and Vyacheskav Zhuk (IFC) and in close collaborationwith the Belarusian authorities. The team gratefully acknowledges the guidance of Martin Raiser, Luca Barbone, Benu Bidani, Indermit Gill and Asad Alam, and valuable comments from Erika Jorgensen, Roumeen Islam, and the Operations Committee. iv LOAN AND PROGRAM SUMMARY REPUBLIC OF BELARUS DEVELOPMENT POLICY LOAN Borrower The Government o f the Republic o f Belarus Implementing N o t applicable Agency Terms: IBRD Flexible Loan in U S Dollars with an interest rate equal to 6 months L I B O R plus variable spread with final maturity o f 16 years including a grace period o f 6 years. The Borrower selected repayment dates - o f April 15 and October 15. The Loan will be Financing Data Disbursement Linked with level repayment pattern. Front end fee: 0.25% o f loan amount to be financed out o f loan proceeds Amount: U S D 200 million Operation Type Development Policy Loan (DPL) Social assistance, fiscal efficiency and discipline, private sector entry M a i n Policy Areas and competitiveness. The key outcome indicators are: (i) strengthened safety nets to work as automatic stabilizers with better targeting for the poor; (ii) reduced number o f burdensome inspection and regulatory procedures for Key Outcome ii businesses; ( i )decreased tax distortions; (iv) advanced price Indicators liberalization reforms; (v) improved cost recovery o f energy and utility tariffs and energy efficiency; and (vii) more transparent reporting o f state support to the real economy. The proposed D P L supports the Government's socioeconomic reform program to mitigate the impact o f the recession and promote a stronger recovery. The Government's reform program aims to strengthen social safety nets with a particular emphasis on scaling up better-targeted social assistance programs. The program also encourages resource reallocation in the economy by reducing the cost o f entry (through lower regulatory costs, less inefficient taxation, and deregulation o f pricing). With the increased scarcity o f fiscal Program resources, the Government is beginning to harden budget constraints Development on the enterprise sector (through higher energy tariffs and a reduction Objective(s) and o f cross-subsidies), directing fewer resources toward less competitive Contribution to CAS sectors. It is also creating a legal and institutional basis for better privatization. This operation i s a part o f the FY08-FY11 revised Country Assistance Strategy (CAS). The revised CAS lending program has been broadened to include development policy lending and investment lending to support the competitiveness pillar o f this strategy. The CAS lending envelope will be revised from $100 million to $250 V million per annum. The proposed D P L i s a high risk operation. Belarus is in the middle o f an adjustment in its balance o f payments, and the external environment remains challenging. There i s the risk that the macroeconomic policies planned may be insufficient or not fully implemented, leading to a disorderly adjustment and the need for additional financing. External additional bilateral financing may also be constrained by several factors, including perceived political and governance risks in the country. Credit risks associated with the downturn will continue to put pressure on the balance sheets o f banks as NPLs rise. The proposed D P L operation i s based on reform Risks and Risk measures that are achieved prior to i t s approval. Nevertheless, there Mitigation are risks that the medium-term reform agenda may not be sustained, may be slower than anticipated, or individual measures reversed. The IMF macroeconomic program anchor under the current SBA, the engagement o f the Bank supporting structural reform to attract FDI and help enabling the recovery, the engagement o f other donors including the European Commission (EC) and the European Bank for Reconstruction and Development (EBRD) will provide some mitigation for those risks. But residual risks remain large even after mitigation. Operation ID BY- P115700 vi PROGRAM DOCUMENT BELARUS DEVELOPMENT POLICY LOAN 1. INTRODUCTION AND COUNTRY CONTEXT 1. A window of opportunity has opened to engage with the Belarusian authorities on deepened structural reforms in the wake o f the international financial crisis and the urgency to revisit the country's growth model. Against the backdrop o f a worsening external environment, the phasing-out o f underpriced energy supplies, and the consequent strains on the domestic economy, the authorities have launched a macroeconomic stabilization program and deepened structural reform efforts. To deal with the balance o f payments pressures the authorities requested an IMF Stand-By Arrangement (SBA) (approved in January 2009), which i s currently on track. They also sought bi-lateral financing support for this purpose, particularly from Russia. It has become apparent that the model o f economic growth pursued by country over the last years has run out o f steam. With the aim o f achieving a sustainable recovery, the authorities sought World Bank assistance to support and accelerate the structural reform agenda they initiated in 2008. The authorities envisage structural reforms to run in parallel to the macroeconomic stabilization efforts, given their strong inter-linkages, particularly in the case of Belarus. 2. This document describes the Development Policy Loan @PL) for $200 million that supports the Government's program aimed at addressing the social impact of the crisis, while advancing the structural reforms to foster economic recovery. The reforms supported by this operation aim at strengthening social assistance programs to function better as a cushion to protect the poorest and those vulnerable to fall into poverty due to the economic slowdown and future reforms. Moreover, this operation supports a significant structural reform agenda aimed at unlocking new sources o f recovery and medium term growth, particularly through further price liberalization, reducing the costs o f entry for new businesses, reducing regulatory and administrative costs o f operation for the private sector, reducing subsidies, and eliminating inefficient taxes. At the same time, it supports initial steps in setting the legal and institutional basis for an adequate and transparent privatization process. 3. This operation comes at a time when the Belarusian authorities revisit their international political relations. The authorities undertook several positive steps toward the improvement o f relations with the European Union (EU). The EU responded by lifting sanctions imposed o n the travel o f Belarusian officials to the EU, reestablishing closer political contact, and including Belarus in the EU Eastern Partnership initiative. The government has stated i t s intention to pursue a multi-vector foreign economic policy aimed at developing closer ties with Russia, revitalizing cooperation with the EU and the United States, and seeking new markets in Latin America and Asia. Political change in Belarus is nonetheless likely to be very gradual. Presidential elections are planned for early 20 11. 4. Belarus i s a middle income country with a good track record o f service delivery, but ranks low on governance and accountability indicators. The authorities have placed significant emphasis on redistribution and performed well in human development indicators, as 1 measured by international ranking indices.' Moreover, Belarus has been a regional top performer in terms o f energy efficiency improvements and containment o f the HIV/AIDS epidemic. According to Business Enterprise Environment Survey (BEEPS)2, the level o f administrative corruption i s lower compared to other CIS countries,, but higher to that in comparable middle income economies in the world. Moreover, the country continues to rank at the bottom on voice, participation, and accountability indicator^.^ (see also CAS progress report). This context provides for significant implementation risks for this operation. 5. Between 2003 and 2008 real GDP grew at an average o f 9 percent'per annum, delivering one o f the highest poverty rate reductions in the region. A high level of investments, subsidies in the form o f underpriced energy supplies, and the price boom benefitting Belarus's major exports (e.g., o i l products and fertilizers), supported economic growth. The gains were redistributed through socially-oriented public spending whilst tight controls on employment were implemented. The government's extensive system o f social transfers ensured that the benefits o f high growth were broadly redistributed. The social insurance programs redistribute a large amount o f public resources (close to 11.5 percent of GDP) and their coverage i s almost universal. The social assistance programs are also well- endowed in terms o f budget resources at more than 1.5 percent o f GDP (this is discussed in detail in Sections 5B and 6A). The poverty rate (using the national definition) f e l l from i t s peak at almost 47 percent in 1999 to just above 6 percent in 2008, while inequality remained relatively stable and l o w by international standards (see Figure 1.1). Using the U S D 5 a day international poverty line in purchasing power parity (PPP), Belarus's poverty rate f e l l from 29.5 percent in 2003 to 3.5 percent in 2007. The share o f the population below the USD 5 threshold in Belarus is lower than in Russia and Ukraine, and closer to that in Estonia, Latvia and Bulgaria. GDP Growth Index and Poverty rates Poverty Rates and GIN1Index 50 45 - 40 - 35 - - 30 25- ---- 20 - 15 - -Poverty headcount ratio ( % of population below national poverty line) IO - 5 -- GIN1index O T I , , q ' ' I I I I I 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 I E Source: Belstat; W 3 Staff calculations. Belarus i s placed under the category o f "High Human Development" by the United Nations Human Development Index 2008. Business Enterprise and Environment Performance Surveys in Anticorruption in Transition Series 1-3. 3 Governance Matters Indicators 2009. 2 6. Belarus has followed its own economic model, mainly driven by investments and support to its State Owned Enterprises (SOEs). Belarus i s a small open economy, with a trade openness ratio comparable to other countries in the ECA region, but with slow progress in structural reform (see Section 3) and a small private sector. The private sector i s roughly 30 percent of the e ~ o n o m yThe banking sector i s dominated by state banks, which hold 80 percent .~ of the assets in the system. I t s growth model has relied heavily on high and sustained levels o f public investment and significant support (through subsidies as well as directed and "recommended" banking loans) to i t s flagship state owned enterprises (see Section 3). The external environment, particularly higher prices for Belarusian exports and underpriced energy supplies helped to maintain the level o f investments in the state owned sector (Sections 2C and 3). At the same time, the country has kept tight controls over product and factor markets, introducing market principles only gradually. Several SOEs have shown to be highly productive and well-managed over the last 8 years, although there are also many that rely heavily on subsidies for their survival. There are forward and backward linkages within the enterprise sector that were rebuilt (although not entirely) following the collapse o f the Soviet Union and the fracture o f the production chains across i t s republics. 7. I n recent years the government has been revisiting the sustainability o f its economic growth model, an effort that has accelerated with the phasing out o f under-priced energy supplies and the international economic crisis. Faced with significant external imbalances, the phasing-out o f underpriced energy supplies, and higher international costs o f capital for the state owned sector, the government sees liberalization as a way to expand the private sector and support economic recovery. The government plans envisage a gradual but decisive move to increase the role o f the private sector. It has started the process o f reducing subsidies and cross- subsidies in the energy sector to face the challenge o f import prices converging to market prices over the next years. It has intensified the dialogue on liberalization reforms with the World Bank, the IMF, and the European Commission. This has happened in the context o f interaction and consultations o f the government (particularly the Presidential Administration) with the business community. 8. The proposed DPL i s a high risk operation. The external environment remains challenging and there i s the risk that the macroeconomic program supported by the IMF program may not be fully implemented or the required adjustment may be greater than anticipated, leading to additional financing needs. External bilateral financing may also be constrained by different factors, including perceived political and governance risks. Given that all the measures and reforms supported by this operation were achieved prior to its approval, the main risks are related to the continued implementation and medium term commitment o f the authorities to sustain them. Political decision-making remains centralized and policy reversal risks are high. A backsliding in the reform agenda would increase the probability o f a more protracted contraction in the near-term and reduce the potential for sustained economic recovery over the medium-term. ~ ~~ According the EBRD, the share of private sector in Belarus's GDP i s 30 percent (that is, income generated by enterprisedactivities that are privately owned or where private shareholders own more than 50 percent; these figures include estimations o f informal activities). This may be overestimated, however, given the degree of the presence o f the state in economic activities and the possibility to execute heavy controls at enterprises where i t does not have a majority stake. 3 9. Notwithstanding these risks, the current situation represents an important opportunity to engage the authorities in a sustained dialogue on structural reforms. This engagement would also help to partially mitigate those risks highlighted. The macroeconomic program anchored under the IMF's SBA, the engagement o f the Bank in structural reform through policy lending, the engagement o f the European Commission (EC), and the engagement o f other IFIs and donors also help to mitigate the risks. Moreover, Belarus's external economic conditions are likely to remain sufficiently tight to help mitigate against the risk o f a full-scale reversal o f reforms in the near to medium term. But risks remain large even after mitigation. This DPL was designed as a one-shot operation to establish a reform track record but with the view to later evaluate the possibility o f a medium term engagement through policy lending. This operation provided the Bank with the opportunity to engage in a medium term reform dialogue with the authorities. 2. RECENT ECONOMIC DEVELOPMENTS AND MACROECONOMIC OUTLOOK A. RECENT ECONOMIC DEVELOPMENTS 10. Economic growth in Belarus has come to a halt mirroring the impact of the crisis in the region. The global economic and financial crisis led to a sharp reduction in export demand and prices that, combined with constrained access to external finance, resulted in external financing difficulties. The government's macroeconomic policy response, supported by the IMF SBA, has involved external adjustment via expenditure compression, induding fiscal discipline and wage restraints, and expenditure switching, through a one o f f adjustment o f the exchange rate (which remains the main nominal anchor). Table 2.1: M a i n Macroeconomic Indicators, 2003-2008 2003 2004 2005 2006 2007 2008 Real GDP (change in percent) 7.0 11.4 9.4 10.0 8.6 10.0 Real Industrial Production (change in percent) 7.1 15.9 10.5 11.4 8.7 10.8 CPI, e.0.p. (change in percent) 25.4 14.4 7.9 6.6 12.1 13.3 Real Effective Exchange Rate, y/y percent change (f denotes depreciation) -2.9 -2.1 -0.1 -2.0 -4.5 -1.1 Terms o f Trade (change in percent) 0.04 2.2 12.3 3.8 -2.5 11 Current Account Balance (percent o f GDP) -2.4 -5.2 1.4 -3.9 -6.8 -8.4 Foreign Exchange Reserves (USD billions) 0.5 0.8 1.3 1.4 4.2 3.1 In months o f imports o f goods and services 0.5 0.5 0.9 0.7 1.6 0.9 Net FDI (USD billions) 0.2 0.2 0.3 0.4 1.8 2.1 Budget Revenues (percent GDP) 45.8 46.9 47.4 49.1 49.5 51.0 Budget Expenditures (percent GDP) 47.5 46.8 48.0 47.6 49.0 49.6 Fiscal Balance (percent o f GDP) -1.7 0.0 -0.7 1.4 0.4 1.4 PPG Debt (percent o f GDP) 10.4 8.9 8.3 8.8 11.6 13.7 o f which: Domestic 5.9 5.7 5.7 6.5 6.4 6.8 External 4.5 3.2 2.6 2.3 5.2 6.9 Memo: Nominal GDP (in billions o f USD) 17.8 23.1 30.2 37.0 45.3 60.3 GNI Der caPita KJSD. Atlas method) 1 . I 1610 2150 2780 3470 4220 5380 Sources: National Statistics, IMF, WB. 4 11. Economic growth in Belarus averaged over 9 percent between 2003 and 2008 driven mainly by a favorable external environment and high investment rates. Supportive external factors were the re-alignment o f the exchange rate following the 1998 crisis, substantial terms of trade improvements for Belarus exports (in particular o i l products and chemicals), under-priced energy supplies, and strong growth in the country's main trading partners (in particular in Russia). Prices o f Belarus's major exports rose sharply in the commodity price boom from 2006 to 2008. Prices of o i l products doubled, and prices o f fertilizers tripled over that period while energy imports from Russia were highly subsidized until 2007 when a gradual move toward market prices began. The centralized economic model used these terms-of-trade gains to deliver high levels of investment and credit to flagship SOEs, allowing them to maintain high levels of productivity and defend or even gain market share in major export markets. Investment demand, particularly fueling industry and construction, made an important contribution to growth, with an average growth rate o f over 20 percent (see Figure 2.1). At the same time, terms o f trade gains were also redistributed through higher wages, l o w levels o f unemployment and transfers to the population, thereby boosting domestic demand. Household consumption rose in real terms by 12 percent per annum on average over the last 6 years. Strong economic growth and a more stable financial situation in the household and corporate sectors were also accompanied by increased financial intermediation, reflected in growing bank deposits and lending, including directed lending. Figure 2.1: Average Change in GDP Components (by Expenditure) in 2003-2008, percent I I Source: Belstat; Bank Staff calculations. 12. However, signs o f overheating and vulnerabilities emerged in 2007-2008. The exchange rate peg to the USD and selective price controls helped to contain inflation from over 60 percent in 2001 to 7 percent in 2006. At the same time, high economic growth and small fiscal deficits contributed to public debt ratios at l o w double digits levels (13 percent o f GDP at the end o f 2008). However, with rapid wage and credit growth fuelling domestic consumption and increased directed lending from the state-owned banks to maintain high investment growth, the current account position shifted from a surplus o f 1.4 percent o f GDP in 2005 to a deficit o f 8.4 percent o f GDP in 2008 (see Table 2.1). The rapidly widening domestic savings-investment gap was covered mostly through short-term borrowings, particularly bank borrowings and trade credits, weakening the external debt maturity structure (see Table 2.3). At the same time, FDI 5 played a more limited role. International reserves remained at persistently low levels, in the range of 0.6 to 1.6 months o f imports from 2004 to 2008 (see Table 2.2). Table 2.2: External Vulnerability Indicators Table 2.3: Gross External Debt (as o f Julv 1,2009) " I 2007 2008 2009HI US$ million % GDI Gross external debt position 17624.2 34.9 Reserves excludinggold ($US millions) 4,182 3,061 2,650 Total long-term 8740.5 17.3 Reserves cover of merchandise imports (months) 1.6 0.9 1.0 General Government 4497.6 8.9 Reserves to M2 (%) 38.5 22.4 23.7 Monetary Authorities 882.8 1.8 Reserves to AmttShort term debt (%) 50.5 37.7 .. Banks 1799.1 3.6 Other sectors 1560.1 3.1 Short term debt to total debt (%) 63 54.6 50.4 8883.7 17.6 Total short-term External debt to exports (%) 45.9 40.9 .. Monetary Authorities 202.1 0.4 External debt service to exports (%) 3.1 0.5 Banks 1349.1 2.7 Amortization (US$ millions) 414 173 ,. Other sectors 6617.4 13.1 Itercompany lending 715.1 1.4 Foreignbank loan commitments ($US millions) 233 330 ,. Forex Reserves as % o f short-term debt 29.8 IBRD debt outstanding ($USmillions) 42 42 44 Source: Belstat; NBRB; Bank Staff calculations Source: Belstat; NBRB; Bank Staff calculations 13. The crisis was transmitted to Belarus in the fall o f 2008 through lower export revenues and reduced access to international borrowing. The impact o f the crisis was heightened by external payment difficulties arising from two main transmission channels. First, access to external finance, trade credit and foreign bank loans tightened whilst foreign reserves cover was very limited. Second, there was a sharp negative shock to export demand and prices as the crisis hit the economies o f major trading partners, in particular Russia, and contributed to reversals o f recent gains in world prices o f major exports, such as fertilizers, o i l products, and food products. The terms o f trade were also adversely impacted by the further increase in the cost o f imported gas from Russia from January 2009. Lower export receipts and increased delays in their payment led to reduced foreign exchange inflows. External demand and financing difficulties prompted the authorities to request financing from Russia, the IMF and the World Bank as well as to undertake measures to help close the financing gap in the balance o f payments through a combination o f expenditure reduction and switching. 14. Economic growth has stalled in 2009, as the real sector adjusted to the sharp deterioration in the global environment, GDP growth, which stood at double-digits through the third quarter o f 2008, slowed down to 7.5 percent in the fourth quarter o f 2008 (see Figure 2.2). In the first 9 months o f 2009 the economy experienced a 0.3 percent decline. Industrial production was down 5.8 percent year on year in January-July 2009 and it i s increasingly going to inventories (the ratio o f the stock o f inventories to monthly output reached 95 percent in the first half o f 2009 compared with 50 percent in the first half o f 2008). The machine building sector has been hit hard, posting a decline o f 39 percent over 7 months (see Figure 2.3). The growth o f real wages followed the dynamics of the economy and fell from over 10 percent year on year in 2008 to zero in mid-2009. In addition to lowering real wage growth, enterprises have responded to the crisis by reducing working hours, with forced underemployment rising to about 100 thousands in mid-2009 as compared to 10-20 thousands last year. At the same time, official registered unemployment has barely changed at 0.9 percent in July 2009. As household incomes decelerated, so did retail sales: from a peak o f 24 percent in mid-2008 to zero in the second quarter o f 2009. 6 Figure 2.2: GDP Growth, percent change y/y Figure 2.3: Industrial Production, percent c h a n g e d 40 I---- lo 8 6 4 2 0 Source: Belstat. 15. Exports fell faster than imports in 2009. During the first half o f 2009 the contraction in merchandise exports (48 percent year on year) outstripped the decline in imports (34 percent year on year), leading to a widening trade deficit. The relatively slow decline in imports partly reflected the reluctance o f some SOEs to adequately adjust to substantially weaker demand conditions in the international markets under the pressure to meet production targets whilst keeping levels o f employment. As a result, some imported inputs were used to produce goods for inventory and SOEs continued requesting (and receiving) financing fiom state-owned commercial banks. In the first half o f 2009, the current account deficit reached USD3.7 billion, implying a USD2.3 billion increase year on year. B. THE GOVERNMENT'S MACROECONOMIC RESPONSE AND THE IMF'S SBA 16. The authorities recognized early the negative implications o f a worsening external outlook and requested IMF support in the last quarter o f 2008. The IMF Board approved a 15-month USD 2.5 billion SBA on 12 January 2009, in support o f a macroeconomic program built upon the following pillar^.^ First, the initial devaluation and re-pegging o f the Belarusian ruble to a basket o f USD, EUR and RUR were intended to cope with the worsening terms o f trade, deteriorating trade balance and limited access to market-based external financing. Second, tighter monetary policy was aimed at achieving positive real interest rates on ruble deposits to limit currency substitution and to cool domestic demand. Third, fiscal discipline with a zero deficit target (with some adjusters for local government spending and project financing) and wage restraint in the public sector were to reduce domestic demand f i o m the public sector. These measures were aimed at closing the external financing gap through a combination o f expenditure reduction and switching. Among other measures, the program also calls for refraining from new "directed lending" programs financed with budget deposits, avoiding the establishment in 2010 o f any quantitative targets on output and employment for enterprises (for companies that do not benefit from government's financial support and in which the government has a minority share), and bringing loan classification and provisioning in line with good international practice. To complement these measures on the structural side, the government re- invigorated efforts through the Liberalization Program and Modernization program (both ~ 'An initial disbursement o f US$780 million was made available immediately upon the approval o f the SBA. 7 discussed in detail in Section 3), which contain measures supported by the present Development Policy Loan. 17. While exchange rate depreciation with a subsequent widening of the band and re- pegging to a basket o f currencies helped to ease external imbalances, domestic demand needs to be further contained. As the Belarusian ruble came under pressure in late 2008 with foreign exchange inflows falling, the National Bank of the Republic o f Belarus (NBRB) opted to support the peg to the USD, despite the real effective appreciation o f the ruble as many trade partners' currencies had depreciated (see Figure 2.4). This policy resulted in international reserves dropping by US$1 billion over two last months o f 2008 to USD 3.1 billion as o f 1 January 2009, despite the receipt o f the first U S D 1 billion tranche o f the loan from Russia. At end-2008, reserves covered only around 1 month o f imports or 50 percent o f short-term debt. In January 2009, the currency was devalued by 20 percent relative to the U Dollar (USD) and re- S pegged to a basket o f currencies including the USD, Euro and the Russian ruble with equal weights and with a band o f movement o f +/- 5 percent around parity. Subsequently, in June, the band was widened to +/- 10 percent to allow more flexibility. Reserves stabilized through January and subsequently rose through to end-March reaching US$4 billion but fell over the second quarter to US$2.6 billion. The reserves increased again to over US$3 billion in July after the disbursement o f the second tranche o f the SBA (see Figure 2.5). Figure 2.4: Real Effective Exchange Rate, Figure 2.5: Gross International Reserves, USD \ 2000=100 million I -- on I- 0.6 . 0.6 - - 0.5 I wee: NBRB. 18. The authorities' fiscal response to the shock has been adequate. The slowdown in external trade and the real sector has put pressure on fiscal revenues. Prior to the crisis, the government was redistributing half o f GDP through central and local budgets and the social protection fund (which includes social insurance programs such as pension and unemployment). The government played an important role in investment, contributing around 10 percent o f GDP to gross capital accumulation. With the economic contraction, fiscal revenues dropped from 5 1 percent o f GDP in 2008 to an expected 43.5 percent o f GDP in 2009 (See Tables 2.1 and 2.4). The value added tax, the profit tax, and o i l related duties have been the most affected revenue sources. To adjust to the projected revenue shortfall, the 2009 budget was revised to reduce capital expenditures and the wage bill. 19. Adjusting to reduced energy subsidies from Russia i s a major challenge. In 2003, energy subsidies from Russia were estimated at 6.4 percent o f GDP for gas and o i l due to: (a) 8 natural gas prices below European export parity and (b) an export-duty waiver on crude imports to Belarusian refineries (many with Russian ownership). The implicit subsidies in both sectors become larger between 2006 and 2008 in the context o f energy prices at their peak in international markets6 Given the current o i l prices (in 2009), under-pricing o f o i l has been significantly reduced. Moreover, now there i s a revenue sharing scheme between Russia and Belarus for the expod taxes of o i l products exported from Belarus. In 2009, Bank staff estimations suggest that the gas subsidy would amount to roughly 3.6 percent o f GDP in the context o f lower gas prices in the European market (compared to 2007-8) and higher import prices paid by B e l a r u ~Import prices from Russia are expected to be gradually phased out. This .~ will allow time to adjust, but requires significant gains in efficiency and tighter budget constraints in the SOE sector. The government is already taking action through gradual tariff increases in energy and reduced cross-subsidies (some o f the measures supported by this DPL). The energy increases expected over the medium term are embedded in the macro projections. 20. Monetary policy has been tightened and inflation has subsided, but State "recommended" lending implemented by state owned banks continues to be high. Consumer price inflation started to accelerate in late 2007 and has been in the mid-teens throughout 2008. As demand conditions weakened, inflation started to decelerate by late 2008, but the one-shot ruble depreciation o f 20 percent in January 2009 was partially passed through to inflation. The NBRB responded by tightening monetary conditions in March, increasing the refinancing rate (reference interest rate) which made real interest rates firmly positive. By mid- 2009, consumer inflation slowed down to 13 percent (see Figure 2.6). Directed lending was about 5 percent of GDP in 2008 and i s expected to be around 4 percent o f GDP by end 2009. Mainly due to this factor, the deceleration o f commercial banks lending to the economy i s proceeding slowly and delaying the necessary adjustment. While state banks stopped the practice o f directed lending using government deposits as required by the IMF SBA, they continued the practice o f "recommended" lending to certain SOEs. These activities continued strongly until August 2009, only subsiding gradually toward the end o f the third quarter. From over 60 percent in early 2009, credit growth to the non government sector is down to 45 percent year o n year by August 2009 (see Figure 2.7). 60 -----r----- I II L -. -- -- __- Source: NBRB. The IMF reports energy subsidies in 2006-08 between 10-13 percent o f GDP, as prices had substantially increased. 'Using the prices Ukraine i s paying after switching to market (formula-based) pricing in early 2009. 9 21. The banking sector o f Belarus has managed to withstand the crisis but fragility remains. Total banking system assets accounted for 57 percent o f GDP as o f July 1, 2009. Six banks, four o f which are state-owned, dominate the market with a combined share o f 80 percent o f the assets. During the first half o f 2009, bank assets increased by 15 percent, as the NBRB more than doubled its lending to the system whilst the government's blanket guarantee on household deposits helped to avoid a loss o f confidence. The banks' capital adequacy ratios stood at 19 percent in mid 2009, highlighting their likely ability to absorb the shocks, including ruble devaluation, rate increases, and increases in non-performing loans (NPLs). Small private banks are particularly well capitalized, while the largest state-owned banks have been able to rely for the past several years on new capital injections from the budget. Roll-over rates for commercial banks' external debt are indeed low in 2009, but the commercial bank debt accounts for only about 20 percent o f total external debt. Bank recapitalization costs in 2010 are expected to reach 1.1 percent o f GDP (and below one percent o f GDP in 201 1). 22. Non-performing loans may increase. The NPL provisions marginally increased to 3 percent o f gross loans in mid-2009. However, as reported in the 2009 FSAP report, the loan loss provisioning regime discourages the early recognition and write-offs o f impaired assets, and likely understates the true scale o f problem debts. Loan quality data i s further distorted by a high share o f loans which are guaranteed by the government and classified as standard (Group 1) loans. 23. Following the first review o f the SBA in June 2009, IMF financial support was augmented b US$1 billion to US$3.5 billion to reflect a worse than expected external environment! The I M F Board also granted a waiver o f nonobservance o f end-March performance criteria on net international reserves and supported the authorities' decision to widen the exchange rate target band from 5 to 10 percent around parity. But the program also incorporated important structural measures relating to privatization, particularly the setting of benchmarks for establishing the privatization agency. The review also stressed the compliance with the continuous performance criterion as regards to not approving any new directed lending programs financed with government deposits. 24. On October 21, 2009 the IMF Executive Board approved the second review under the SBA. The government met end-September targets set by the program. This decision enables the disbursement o f SDR 437.93 million (about USD 699.5 million), bringing total disbursements under the program so far to about SDR 1.4 billion (about USD 2.23 billion). As stated in the press release following the Board's approval, it i s critical for Belarus to secure sufficient external financing from the international community. In this context, the authorities would need to be ready to implement contingency measures should a financing gap emerge. C. MEDIUM TERM ECONOMIC PROSPECTS 25. Belarus's external adjustment has remained incomplete and requires further macroeconomic and structural measures. Real GDP i s expected to fall by one percent in 2009, representing an 11 percentage point drop from the growth rate in 2008. Tight fiscal policy, * USD 680 million was made available for disbursement following the fvst review o f the SBA. 10 exchange rate re-alignment and positive real interest rates contributed to the narrowing o f the external financing gap, while the initial low level o f debt made some additional financing affordable to the country. However, high rates o f credit growth have supported domestic demand and imports, thus delaying external adjustment, and state directed credit w i l l need to be curtailed. The recovery commencing in 2010 i s likely to be driven by a gradual upswing o f export demand from Russia and other major trading partners and a moderately improved price outlook for major export commodities. With capital markets likely to remain risk averse and domestic investment growing at a more moderate pace, growth in 2010-2013 i s projected to remain below the pre- crisis level. Structural reforms w i l l be critical to the recovery and to the sustainability of the economy moving forward. 26. The IMF SBA provides an anchor to macroeconomic policies, but its adequate implementation, in tandem with structural reforms, i s crucial for achieving an orderly adjustment and economic recovery. Belarus remains vulnerable to a variety o f shocks. Reducing uncertainty requires consistent signals from the authorities, and the willingness to adjust further should the situation deteriorate beyond original forecasts. Residual risks to the economic and policy outlook remain large even after mitigation measures, as emphasized below. Structural reforms are also o f particular importance for economic recovery and sustainable growth in the medium-term (see Section 3). Table 2.4: Belarus: Medium-Term Economic Prqjections for 2009-2013 2009 2010 2011 2012 2013 Nominal GDP, BRB trillion 140.0 154.8 173.1 196.0 221.4 Real GDP, % growth -1.0 2.0 4.0 6.0 6.0 Consumption, % growth -6.3 4.1 2.9 5.1 5.5 Fixed Investment, % growth 6.2 1.2 6.3 7.1 7.0 Export, % growth -6.1 3 .O 4.0 5 .o 5.1 Import, % growth -8.6 0.7 3.3 4.7 5.2 GDP deflator, % growth 9.8 8.4 7.5 6.8 6.6 CPI, % eop growth 11.8 8.7 7.8 7.1 6.6 Current Account Balance, % GDP -9.2 -6.3 -5.1 -4.7 -3.9 Terms o f Trade, % change -3.4 1.8 0.5 0.6 0.8 Budget Revenues, % GDP 43.5 43.3 42.7 42.4 41.9 Budget Expenditures, % GDP 45.2 45.1 44.7 44.3 43.7 Fiscal Balance, YOGDP -1.7 -1.8 -2.0 -1.9 -1.8 External debt, % GDP 41.4 43.7 42.2 39.5 35.5 PPG debt, % GDP 27.5 29.1 28.2 25.0 20.2 IMF SBA (net credit), % GDP 5.6 1.3 0.0 -1.1 -2.3 E Source: W 3 staff projections. 27. The basic macroeconomicassumptions and parameters described below are broadly consistent with those o f the IMF's SBA. Table 2.4 contains the latest macroeconomic estimates for 2009-2013, and includes the IMF SBA over 2009-2010. Given the macroeconomic anchor provided by the IMF's SBA and our own evaluation, the policy framework i s adequate for the DPL to proceed. Given the continued global and domestic volatility, the assumptions underlying these projections are likely to undergo further revisions and thus are associated with a 11 higher than usual degree o f uncertainty. The key factors underlying these projections are as follows: (i) Progress on structural reforms and a gradual reduction of under-priced energy supplies. The medium term projections assume a gradual but steady increase of private sector activity in the economy through further liberalization and structural reforms (as discussed in Section 3). Continued reforms would gradually attract increased FDI. Energy prices, particularly in the gas sector, will gradually converge to market levels over the medium term. (ii) o reach external equilibrium in 2009, further adjustment of domestic demand i s T needed through the remainder o f the year, The key measure will be a containment of credit growth to the private sector, particularly directed lending b y the state-owned commercial banks. As a result, consumption and investment are expected to contract during the second half o f 2009 leading to a 1 percent annual GDP decline. The reduction o f imports resulting from this will help reduce the current account deficit and will enable an improved level o f coverage o f international reserves. (iii) Growth i s projected at 2 percent growth in 2010, followed by medium-term average growth of 6 percent starting in 2012. The estimated medium-term growth rate is at a lower level than the previous growth episode, owing to less favorable terms- of-trade, assumed protracted high level o f risk aversion in international capital markets, and lower availability o f capital, The growth composition i s expected to stabilize with moderate domestic demand growth. Medium term growth prospects o f Belarus will depend on its ability to improve productivity growth and create an enabling environment for business entry and competitiveness (see Section 3). (iv) The current account deficit i s expected to reach 9 percent of GDP in 2009 and then gradually adjust to below 7 percent of GDP in 2010. Financing will increasingly depend on FDI inflows as the envisioned structural reforms take hold. In the next few years, though, bilateral and private debt financing, as well as financial assistance o f multilateral creditors will play an important role in closing the balance o f payments gap (see Table 2.5). (v) The government i s expected to maintain a tight fiscal stance. The general government deficit is projected to be 1.7 percent o f GDP in 2009 (this reflects spending o f local budget surpluses accumulated in previous years and the implementation o f foreign-financed net lending investment operations approved prior to the crisis). A fiscal deficit in the range o f 1.5-2 percent o f GDP in 2010-13 i s assumed. In 2009, the authorities demonstrated commitment to fiscal discipline and adjusted the expenditure envelope to lower revenues. In the future, this i s expected to continue in line with a fiscal reform aimed at reducing the size o f the government. O n the revenue side, tax policy will be gradually reformed by eliminating remaining distortions and exemptions (to expand the tax base) and reducing marginal rates on direct taxes whist relying more on indirect taxation. 12 (vi) The NBRB will increasingly put inflation at the core of its policymaking. Consumer price inflation is expected to decline to single-digits in 2010, as the credit growth moderates and fiscal spending i s contained. While formal inflation targeting i s not likely to be introduced over the coming years, exchange rate policies are expected to allow for greater flexibility. Table 2.5: Belarus: Financing Requirements and Sources in 2009-2013 2009 2010 2011 2012 2013 Financing Requirements, USD million 13339 12306 12374 12789 13373 Current account deficit 4626 3362 2962 2931 2669 Long term debt amortizations (excl. IMF) 609 690 958 1154 1600 Short term debt amortizations 8304 8204 8404 8704 9104 Other short t e r n capital outflows -200 50 50 0 0 . Financing Sources, USD million 13339 12306 12374 12789 13373 FD and portfolio investment (net) 1225 2313 2542 2923 3505 Capital grants 119 146 170 196 224 Long term debt disbursements (excl. IMF) 3778 2095 1773 1941 2014 Short term debt disbursements 8204 8404 8704 9104 9654 Reserves Changes o f Monetary Auth.l/ -2787 -1353 -816 -675 -448 IMF Credit (net) 2800 700 0 -700 -1575 I/Includes August-September SDR allocation. Source: World Bank staff projections. 28. Public debt levels are projected to remain sustainable. Given the l o w pre-crisis level of public debt (at 13.7 percent of GDP in 2008), the projected economic downturn, fiscal deficit and ruble depreciation, public debt would increase to above 27 percent o f GDP in our base case scenario, before coming down to 20 percent by 2013. Figure 2.8 presents a number o f debt sustainability stress tests. For example, should the exchange rate depreciate significantly more than expected (30 percent beyond the base case), the debt level would temporarily rise to over 37 percent o f GDP. In case the state assumes 50 percent o f its current estimated contingent liabilities, the debt ratio will reach 36 percent o f GDP. These explicit and implicit contingent liabilities are originated by the state guarantee on household deposits in banks (currently at 9.8 percent o f GDP) and by directed lending through state owned banks (expected to be at 5.5 percent o f GDP by the end o f 2009). 13 Figure 2.8: Public Debt SustainabilityAnalysis (percent o f GDP) c i 40 -Base case 35 30 25 -. - Key variables are a t their historical 20 I averages ~ 15 10 - - One time 30 percent real depreciation in 2010 II 0 I --ilc- Recognitionof 50 percent of contingent liabilities in 2010 1 Source: Belstat, NBRB, WB staff projections. 29. The downside risks to the macro and external financing outlook for Belarus are large. Ongoing structural reforms, political considerations and the structural break that the crisis represents with the previous growth model add to the uncertainty o f the outlook. The most important, interrelated, risks to the outlook are: A greater and longer than expected deterioration in the external trade and financing environment. Particular risks are associated with the growth in Russia, international prices o f fertilizers and oil products, and availability o f credit from bilateral donors. An insufficient tightening of domestic credit that would place additional pressure on the exchange rate and delay the external adjustment. The pressures on the balance o f payments due to the lack o f substantial rebalancing could result in a larger. than expected financing gap and would put pressure on the exchange rate. Failure to defend the exchange rate at the band, in the absence o f additional flexibility, could undermine the credibility of the arrangement. Slippages in the IMF SBA implementationcould widen the balance o f payment gap in the presence o f a substantial current account deficit and limited financial assistance from other multilateral creditors. Inadequate progress on the structural reform agenda may negatively affect the timing and magnitude o f the recovery. Failure to address major vulnerabilities and advance structural reforms could undermine new sources o f growth and place Belarus at a competitive disadvantage. Vulnerabilities in the banking sector such as liquidity management and growth in NPLs. A 10-20 percent withdrawal o f deposits from the system would cause a significant deterioration o f liquidity ratios in a number o f banks, including the largest ones. Growth o f NPLs, especially in lending to the agriculture sector, would cause CARSo f the largest banks to go below the regulatory minimum. Furthermore, there i s the risk o f growth in NPLs due 14 to potential, and needed, changes in loan classification, which would place additional fiscal pressures in dealing with the re-capitalization o f the largest state-owned banks. The potential for a further growth in NPL ratios i s high, due to the large share of "recommended" or directed loans. 3. STRUCTURAL REFORM AND THE GOVERNMENT'S SHORT AND MEDIUM TERM PROGRAMS TO ENABLE RECOVERY: REVISITING BELARUS'S GROWTH MODEL A. PROGRESS IN STRUCTURAL REFORMS AND THE GROWTH MODEL 2000- 2007 30. Belarus's progress in implementing structural reforms was slow since the middle of the 1990s until 2007. The country is behind most transition economies in various structural reform areas as measured by the EBRD Transition Indicators (see Figure 3.1). Some market reforms were initiated early in the transition, roughly at the same pace as in other CIS countries but efforts stalled in the second half o f the 1990s. Following the Russian crisis, some additional but modest reforms were undertaken, including in lifting some price controls, making progress toward cost-recovery in utility tariffs, and trade and foreign exchange systems. Yet Belarus continued to lag behind peers in most reform categories, including those where it achieved more progress at the beginning o f the transition. Figure 3.1: EBRD Transition Indicators Source: EBRD; Bank Staff calculations 3 1. Notwithstanding slow reform, the favorable external environment, underpriced energy supplies, and a tightly run economic model allowed the country to achieve high growth rates. The Belarusian economy had a different growth path compared to the neighboring former Soviet Union countries through the transition (see Figure 3.2). Following the collapse o f the Soviet Union, Belarus was able to avoid the larger collapse in output o f neighboring Russia and Ukraine and recovered faster. L i k e in .other former Soviet Union republics, production chains in several industrial sectors were broken as the centrally planned production stages were divided among countries. But Belarus was able to reconstruct internally a large portion o f i t s value added chains, and rebounded quicker from the output fall in early 1990's. The input and output inter-linkages within the state owned enterprise sector remain significant. The country 15 has also been able to achieve higher energy efficiency than several o f i t s neighbors (see Table 3.1). While it relies heavily on trade, it remains crippled by l o w levels o f F6I and technology adoption. --C Latvia *Lithuania +Poland *Belarus -Russia -Ukraine Source: World Bank ECA Regional Tables; Bank staff calculations Table 3.1: Selected Economic-StructuralIndicators: An International Comparison Belarus Lithuania Poland Russia Ukraine GDP pc (current US$) 6,236 14,101 13,779 11,870 3,901 FDI per capita (Stock from 1992-2008) 694.4 2764.3 2953.4 304.2 867.0 Energy Efficiency: GDP per unit o f energy use (constant 2005 PPP $ per k g o f o i l equivalent) 3.2 6.1 5.7 2.7 2.1 High-tech export as % o f manufactured export (2007) 2.7 11.1 3.8 6.9 3.6 Trade openness, % o f GDP (Merchandise Trade data) 120.0 116.3 72.8 43.9 84.5 Source: World Bank ECA Regional Tables; Bank staff caculations 32. Belarus has followed its own economic model. The country's growth model relied on large and sustained public investments and a general government budget that i s roughly half o f the economy (public investments have averaged about 10 percent o f GDP per annum over the last decade). The model has also relied on a number o f export-oriented and highly productive flagship SOEs (although there are also many enterprises that are much less productive). The authorities have made sure these flagship companies had available credit and resources to finance investments and operations, mainly through the state owned banks, but also through production subsidies from the government's budget. Moreover, the authorities emphasized proper management in the state enterprise sector. 33. Growth relies heavily on the manufacturing sector. The manufacturing sector represents 35 percent o f the value added in the economy and, together with agriculture, i s b y far the most heavily supported. This has been at the expense o f the service and related industries, which in fact have declined in their share o f value added over the last years (see Figure 3.3). At 16 the same time, industry has been the driver o f economic growth over the last decade (see Figure 3.4). Productivity figures for the manufacturing sector in Belarus, which i s the core o f the economy, are certainly impressive. But the analysis on the levels and dynamics o f innovation, technology adoption, and structural transformation show that these are not the primary drivers of productivity. This may indicate high levels o f production efficiency and reduced waste and leakage^.^ Moreover, the external environment, particularly higher prices for Belarusian exports, has significantly helped to maintain the level o f investments in the state owned sector. 2001-2008 a Valueadded sharesin GDP, 2008 I corn., 12.3 % w c e : BelStat, Bank Staff calculations. 12.0 Other services 10.0 ~ : & z xTrade and catering 8 .O DTransport and communications 6.0 0Construction 4 .O 1 Industry 11 2 .o Agriculture & Forestry 0 .o - GDP 12001 2002 2003 2004 2005 2006 2007 2008 1 -2.0 - - I . - _ -- 34. At the same time, the country has kept tight control over product and factor markets, introducing market principles only gradually. Labor markets have remained tightly controlled to allow economic gains to be broadly shared in a largely state run economy. Domestic production has been subject to significant price controls with the aim o f achieving a desired equilibrium between profitability of SOEs and price stability. Up to 2007, some modest progress in price liberalization was achieved in tandem with the gradual opening o f trade. This i s being analyzed in depth under the ongoing work on the Belarus Economic Policy Notes (forthcoming). 17 B. PRESSURES ON THE ECONOMIC MODEL AND THE FIRST ROUND OF REFORMS 2007-08 35. A number o f recent trends show that Belarus's growth model has been running out of steam. While real wage growth has been outstripping productivity 'growth over the last decade, the gap has been widening sharply since 2004 (see Figure 3.5). Total factor productivity growth has been dropping steadily since 2004 (see Figure 3.6). Additionally, the decline in the value added share o f the service industry (particularly business services) by more than 10 percent over the last 8 years, may have serious implications for productivity over the medium term, particularly if companies have to invest in servicing themselves at higher costs (see Figure 3.3 above). It may also affect decisions o f prospective foreign investors who often look at the services available in each country before investing. Figure 3.5: Real Wage Growth and Labor - Figure 3.6: GDP Growth Rates and Growth in Productivity, 1995=100 Total Factor Productivity, YOyly I50 -5 . O Y i ! i 100 ---___ .10.0' l G D P growt 0 4 - r - - - f - - - r - - - - ~ T T ~ - +TFP growth 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 ZOOS 45.0' I Source: BelStat and Bank Staff calculations 36. There are a number o f structural weaknesses compromising the sustainability of the country's economic growth model. These weaknesses became evident even prior to the international financial crisis. Mounting competitive pressures in external markets as well as increased prices for imported energy resources led the authorities to begin reevaluating the fiscal and economic costs o f large-scale investments and government subsidies at the end o f 2007. Some o f the key structural weaknesses are the following: High reliance on energy subsidies from Russia. Belarus enjoys relatively l o w gas import prices, even after a threefold increase during 2007-2009. Future expected price increases will put further adjustment pressures on the economy. The planned phase out o f these subsidies will require the hardening o f budget constraints in the SOE sector as well as the gradual reduction o f subsidies to households. High and increasing concentration o output, tax base, and exports. The 10 largest f companies are responsible for almost 40 percent o f total industrial output, 25 percent o f consolidated budget revenues (and 1/3 o f profit tax revenues), and more than 50 percent o f total exports (over 75 percent o f exports to non-CIS countries). Dependence on only a 18 few exports renders an economy vulnerable to external shocks (including those caused by drastic movements in terms o f trade). High tax burden. The average tax burden was about 48 percent o f GDP in 2008, well above most countries in the region and other comparable countries in the world. The tax burden will need to come down gradually to allow more space for private initiative while carefully managing the fiscal implications. Underdevelopment o the services sector, especially business services. The declining f share of services in value added (more than by 10 percentage points over the period 2001-2008) is at odds with the experience o f other countries, showing that once an economy reaches the middle income level o f development, services become an increasingly important source o f GDP growth, productivity and new jobs. Large size o the government and system o state support. The high tax burden supports f f a large tax benefits and subsidies system for enterprises which in many cases are less efficient than the flagship SOEs, undermining competition and productivity improvements. The volume o f government support granted o n an individual basis to companies was reduced from 2.5 percent o f GDP in 2006 to 1.7 percent o f GDP in 2008. However, these figures do not include the full cost o f broader schemes o f state support, for example via directed lending and tax expenditures. . 0 Distortions in the banking system. Government influence continues to constrain Belarusian banks. The large share o f directed (or `recommended') lending and administrative controls reduce incentives for effective risk management and efficient resources reallocation across the economy. 0 Competition Issues. The private sector accounts for 30 percent o f GDP and, despite recent improvements, the playing field between state-owned enterprises (SOEs) and private companies remains far from even, especially regarding access to resources. The lack o f a more vibrant private sector reduces the flexibility o f the economy and i t s capacity to adjust to external shocks. 0 Low and slow technological adaptation and innovation, The share o f high-technology exports in total exports fell from a peak o f 6.3 percent in 2002 to 3.8 percent in 2007 and is much lower than in neighboring countries such as Poland and Lithuania. The WB Economy's Innovation Index also shows that Belarus i s lagging all its neighbors and that the gap has been growing over time. This points to lack o f incentives for domestic f i r m s to innovate and low FDI inflows, which often can facilitate technology transfer. 37. Concerned with sustaining high growth rates, and further delivering on social commitments, the government began to adjust economic policy with the objective of attracting FDI and increasing private domestic investment. Among the measures taken were a number o f asset sales involving strategic foreign investors (including the sale o f 50 percent o f the major national gas pipeline company; the sale o f the second largest mobile phone company; and the sale o f three small banks). Several steps were also undertaken in relation to business deregulation, for example, the declarative principle for business registration was introduced, which included a one stop shop business registry to reduce business registration processing 19 times, the minimum capital requirement for start-ups was reduced by half, and a one-stop-shop was introduced for business liquidation. 38. These reforms efforts intensified in 2008. The government abolished the "golden share" rule that allowed the state veto power on any decision taken by enterprises in which the government had shares (regardless o f the portion o f shares the state held). The government also set a target to improve markedly the ranking o f Belarus in the World Bank's Doing Business (DB) Indicators and adopted an action plan to do so, including in the following areas: (i) improvement in the general conditions for doing business (regulations); (ii) simplification of administrative procedures; (iii) improvements in regulations for importers/exporters; and (iv) financial market development. As a result, Belarus moved from 115 (overall ranking among countries in the DB survey) in 2008 to 82 in 2009 and to 58 in 2010 and was among the top 10 reformers in the last two years. However, it i s unclear to what extent the reforms undertaken up to 2008 alleviated the real binding constraints on private sector development, particularly considering some o f the structural weaknesses described earlier. C. THE GOVERNMENT'S SHORT TERM AND MEDIUM TERM PROGRAMS: RECALIBRATING THE ECONOMIC GROWTH MODEL TO ACHIEVE SUSTAINABILITY 39. I n 2009, partly in response to the global economic crisis, the government launched a one year action plan called the "Liberalization Program". The Liberalization Program contains 52 priority measures aimed at facilitating entry o f new businesses, reducing operation costs for the private sector, further price liberalization, and improving the legal framework for land and property. The dialogue under this Development Policy Loan i s strongly linked to selected key areas o f reform under this program. Section 4B explains specific policy reforms supported by the D P L and their economic significance, in the context o f the broader reform agenda. The measures under the "Liberalization Program" represent a significant and decisive step. 40. The government has also drafted a medium term strategy called "The Modernization of the Economy Program". This program, which i s the basis for the government's five year plans under preparation, builds on the liberalization program. It represents a marked departure from earlier programs in the weight i t places on the development o f market institutions and further economic liberalization. The program envisages the co- existence o f a modernized and more innovation-driven state enterprise sector, with aq expanded private sector led by foreign investment and private small and medium enterprises in the services sector. 41. The key strategic goals and priorities of the draft medium term "modernization o f the economy" program include the following: (i) further liberalization, including in price formation; (ii)reduction in the size o f the government, including subsidies to the economy (and cross-subsidization); (iii)acceleration o f the privatization process; (iv) improvements in the investment climate; (v) development o f capital markets; (vi) reforms to encourage innovation; (vii) expansion in the SME sector; (viii) laying the grounds for the formation o f larger national integrated industrial structures with local and international private participation; (ix) 20 streamlining administrative controls, including a switch from administrative controls and supervision over SOEs towards traditional financial audit; (x) labor market liberalization; (xi) financial market liberalization, including attraction o f additional foreign capital to the banking sector, opening the insurance market for foreign investors, and abolishing the existing restrictions for private insurers'; (xii) foreign trade liberalization, including a gradual decline in the average import tariffs and intensification o f the WTO negotiation process; (xiii) divestiture of social assets, including housing, and non-profitable assets currently on the balance sheets of industrial enterprises to municipalities; (xiv) pension reform; and (xvi) reforms in the power sector. 42. The likely slow global recovery coupled with Belarus's declining productivity growth and diminishing returns on capital investments, underscores the need to consider bold steps. The resources available to the authorities to cushion the impact o f economic adjustment on the less competitive parts o f the economy will be limited by risk aversion in capital markets, higher prices for energy supplies, and only gradual improvements in export demand. The reform agenda i s large and complex and the authorities are likely to proceed gradually in removing the multiple distortions in the economy. 43. The 1arge.reform agenda and its complexities are recognized by the medium term draft "Modernization of the Economy Program". Some o f them are also highlighted in the Letter o f Development Policy attached to this document. The crystallization o f this program into more detailed action plans (such as the 5 year plans) will further lay out some o f the specific actions that need t o be taken. The pace o f the necessary reforms and their precise sequencing will be determined by the authorities; the Bank is providing policy advice through i t s AAA program. 44. I n essence, the challenge facing Belarus i s to move from extensive, public investment driven growth to productivity growth led by the private sector. This will require increased private investment, in particular FDI, to support the transfer o f new technologies, and facilitate the process o f structural transformation. Belarus will need to conquer new markets with new, more sophisticated products, building on the assets accumulated during the last decade. 45. T o address this challenge and secure a sustainable growth path, some o f key reform priorities include the following: 0 The liberalization program initiated will need t o be deepened to encourage a positive supply response. The absence o f deeper reforms in the regulatory and control framework under which businesses operate can act as a deterrent to entry and hence to the development o f a competitive economy. 0 All remaining obstacles for business entry need to be lifted. Price controls should be comprehensively lifted in tandem with introducing regulation for public monopolies and strengthening competition policy. Market based price signals will allow non-traditional sectors o f the economy to expand. The gradual reduction in tariff and non-tariff barriers to trade needs to continue. Fostering competition will be essential to encourage innovation. 21 State support willneed to become better targeted and public investments more efficient. Fiscal reform should be aimed at reducing gradually and in a fiscally prudent way the size o f the government. The government would need to reduce the tax burden and improve the tax structure to make it more resilient to economic shocks. Moreover, it will need to improve the efficiency o f public investments and service provision whilst gradually lifting direct subsidies to the enterprise sector. Privatization, SOEs restructuring, and hardening budget constraints in the SOE sector are central to the expansion o f the private sector and to productivity gains in the economy. Harder budget constraints together with increased competition will generate the needed pressures to achieve increased efficiency and productivity in the context o f phasing out subsidies. As regards to privatization the main priority i s to establish a transparent and well-structured process that assures a fair value to the State assets and attracts quality buyers that contribute to the modernization o f the economy. Experience suggests that this will take time. 46. The timing and sequencing o f reforms will be important to maximize their benefits and mitigate potential costs. The potential benefits o f reform are large, but the authorities are rightly concerned about mitigating the costs o f adjustment as much as possible, bearing in mind the negative liberalization experiences in other transition economies in the 1990s. This may dictate a more gradual approach to prevent disorganization effects leading to an underutilization of existing and economically valuable capacity. This will also require significant investments in training and re-training as well as other labor market reforms. In parallel, automatic stabilizers to absorb changes in unemployment will need to be strengthened. 4. BANK SUPPORT TO THE GOVERNMENT'S PROGRAM A. LINKS TO THE CAS 47. The original FY08-11 CAS did not envision Development Policy Lending, but rather selective assistance based on analytic and advisory work and limited investment lending. The economic and political developments over the past two years, however, have provided the opportunity to enter into a much deeper engagement and reform dialogue with the Belarusian authorities, as explained in detail in the CAS Progress Report accompanying this operation. The CAS Progress Report also expands the lending envelope to include development policy lending together with investment lending to support the country's recovery and sustained growth agenda based on needed structural reforms. B. COLLABORATION W I T H THE IMF AND OTHER DONORS 48. The D P L program has been designed in close collaboration and coordination with other development partners. Throughout the process of preparation o f the operation, from the analytical work that underpins the policy measures through implementation in some areas, the Bank's team worked closely with the IFC and collaborated with a number o f other development partners, including the IMF, EBRD, and UNDP. This operation is the natural structural 22 complement to the macroeconomic framework supported by the IMF's SBA initiated in January 2009. The Bank maintains close coordination with the IMF on issues related to the macroeconomic framework and the structural reform agenda, which i s also partly tackled under the IMF's SBA program (particularly in the financial sector). 49. The collaboration with other development partners i s intensifying. The E C and EBRD are revisiting their assistance frameworks for Belarus, The EC may consider a Macro- Financial Assistance (MFA) for Belarus. EBRD i s proposing an expansion o f the scope and size of their lending. There are on-going discussions on a potential mandate for EIB subject to progress under Eastern Partnership Agreement. The reform dialogue as well as the size and sectoral orientation o f Bank assistance is and will be closely coordinated with all these partners. C. ANALYTICAL UNDERPINNINGS 50. This operation draws heavily on the Bank's AAA work. Given the strong structural nature of the reforms supported by this operation, a significant portion o f the analytical underpinnings came from on-going work on the Belarus Economic Policy Notes (forthcoming) and the 2005 Country Economic Memorandum (CEM). The former focuses on the sources o f recovery and sustained growth, particularly evaluating the drivers o f productivity growth, product diversification, export sophistication, and labor market issues. The latter focused on an analysis o f the Belarusian economic growth model. Tax policy and other fiscal measures were informed by a policy dialogue undertaken through the regular macro monitoring program of Bank. The social assistance and safety net measures were informed by a new technical assistance in the social protection area, begun in the middle o f FY08. Several o f the business climate measures are anchored on the Advisory Services provided by the IFC. The Bank has also provided advice to the government on intergovernmental fiscal relations and capital budgeting, through a recent set o f Fiscal Policy Notes, as well as on debt management and energy efficiency issues. The FSAP (2008) provided valuable insights on the key vulnerabilities in the financial sector (The IMF program has largely relied on this WB-IMF work to approach needed reforms in the sector under the SBA). The recently finalized Public Expenditure and Financial Accountability Assessment (PEFA) has provided the necessary assurance on fiduciary risks for development policy lending. Moving forward, and with the aim o f informing the fiscal and structural challenges, a programmatic public expenditure review will be initiated. 5. THE PROPOSED OPERATION A. OVERALL OPERATION DESCRIPTION 51. This i s the first DPL for Belarus. I t was designed to respond to the window of opportunity that has opened up as a result of the deepening reform effort and commitment of the authorities. Up until now, the Bank has had a very selective engagement with Belarus, based largely on analytic work and limited investment lending. This operation represents an important opportunity to support the government's ongoing reform efforts and engage the authorities in a dialogue on the key medium-term development and reform challenges. The reform agenda is large and the government has confirmed i t s goal to tackle it gradually but 23 decisively. The substantial steps supported by this initial operation are a signal o f this commitment. Consultations with stakeholders 52. The authorities, including the Presidential administration, have undertaken consultations with relevant stakeholders on its reform programs and specific measures supported by this operation. O n the measures related to business entry and competitiveness (Pillar 2), the authorities held discussions with businesses associations, organizing workshops and seminars with open participation. The authorities also organized consultation forums in different regions o f the country. Other stakeholders such as trade unions, NGOs, and other international financial organizations also interacted with the government around the preparation o f the measures supported by this operation. In January 2009, the presidential administration established a "public consultative council" to discuss the liberalization program and other planned economic reforms. All stakeholders above-mentioned were invited to participate. `This council has also organized discussions around regulation and laws supported by this operation. O n the reforms o f the social assistance system, the government consulted with several ,stakeholders, including think thanks, NGOs, trade unions, and international organizations (Pillar 1 o f this operation). 53. A number of comments provided by stakeholders to the proposed reforms were incorporated by the authorities following consultations. Draft regulations and laws were actively revised in tandem with the consultations during the spring and summer o f 2009. These consultations are a relatively new phenomenon in the Belarusian policy making environment. This new dynamic reflects the recognition o f the authorities that a broader process o f consultation i s important to achieve sustainability and credibility in attracting investment. Several comments received by the government were discussed and incorporated into the approved regulations and legislation. In addition, several government agencies and the presidential administration have put forth open internet forums to gather comments on the liberalization and economic reform started and planned. These are encouraging initial efforts that will need to be extended, but are consistent with a gradual opening o f the climate for public participation. 54. The D P L i s designed in line with good practice principles in conditionality (see Box 5.1). 1 Box 5.1: Good Practice Principles on Conditionality The proposed DPL program i s based on the government's own liberalization and modernization programs. The Bank's support to the government's program i s summarized in an agreed policy matrix (see Annex 1). This matrix outlines the key reform measures and outcome goals. This operation has a narrow set o f conditionality, establishing 4 policy prior actions deemed critical to the program and 11 benchmarks. Three o f the prior actions deal with price and regulatory reforms, areas that the government recognizes as essential for further structural reforms. The prior action on scaling up targeted social assistance and improving the targeting power o f the overall system o f social assistance i s seen by the government as an effective way to protect vulnerable groups during the economic downturn and as vehicle for the government's own social cohesion agenda as reforms move forward. Close coordination with the IMF i s helping improve the alignment o f support to the Belarusian reform program. Other development partners, including the EC, the EBRD and the EIB are currently reviewing their engagement strategies. The DPL has also been coordinated with them and Bank staff have attended several coordination meetings in Brussels on support to Belarus. 24 Operation design 55. Given Belarus's limited reform track record the Bank has opted for a single DPL operation as opposed to a programmatic series. Once a successful track-record had been established, the possibility o f a follow-on programmatic engagement can be considered. Yet this operation has provided the Bank with the opportunity to engage in a medium term reform dialogue with the authorities. 56. The proposed DPL recognizes cross-sectoral linkages between structural and fiscal reforms. Core reform areas are organized under two thematic pillars: (i)addressing the impact of the economic slowdown and reforms by strengthening the system o f social assistance; and (ii) laying the foundations for economic recovery and sustainable growth by enabling private sector entry and competitiveness through liberalization and financial discipline. In addition, the maintenance o f an appropriate macroeconomic policy framework is a pre-condition for this operation as for all DPLs. 57. The reform agenda confronting Belarus i s large and complex. Measures supported by this operation have been prioritized to address key structural rigidities. The measures in the first pillar support efforts t o strengthen and broaden existing social safety net programs to deal with the impact o f the crisis and post-crisis restructuring and reform o n vulnerable groups. The measures under the second pillar aim at increasing incentives for private sector development and strengthening financial discipline. 58. Table 5.1 lays out key prior actiondtriggers o f this operation. Table 5.2 lays out other key benchmarks related to hardening o f budget constraints for the SOE sector,. eliminating the most inefficient taxes, creating the institutionalbasis for privatization, and improving the business environment. All these measures and their relevance are described in more detail in section 5B. Table 5.1. Prior Actions under DPL Operation Pillar 1. Addressing the Impact o f the Economic Slowdown and Reforms by Strengthening the System o f Social Assistance 0 Targeted social assistance i s improved and scaled up, by adopting a Presidential decree that contains, inter alia, the following: o Increasing income eligibility threshold for targeted social assistance program above the subsistence minimum, namely up to 150% o f subsistence minimum for lump sum assistance; o Extending the duration o f the targeted social assistance from 3 months to 6 months; o Calculating the total income o f the applicant based on the total income during the year preceding the application; o Integrating Housing and Utility allowance program in the targeted social assistance program; o Incorporating asset test in the eligibility criteria for targeted social assistance. 0 A Presidential Decree reforming the role of control and supervision activities i s enacted which, inter-alia, reduces the burden o f state inspections on business and improves the penalty system. 0 Prices liberalization i s advanced 0 Restrictions on retail trade margins for domestic and imported goods are removed, except for a limited and closed list o f social goods and goods subject to monopoly power. 25 Table 5.2. Other Key Benchmarks Achieved under the DPL on Issues o f Financial Discipline and Hardening Budget Constraints, Tax efficiency, Setting the Basis for Privatization, and Business Environment (under Pillar 2 of the operation) A reduction o f the turnover tax rate in 2009 i s implemented and its elimination i s planned for 20 10 Cost recovery i s advanced with electricity and heating tariffs o f household consumers increasing by 19 percent and 15 percent, respectively in 2009 The cross-subsidization o f energy tariffs within the industrial sector was also streamlined in 2009 (compared to 2008), including by reducing the list o f industrial consumers eligible for preferential energy tariffs. Fiscal transparency i s improved by establishing an integrated and public report on the itemized fiscal costs of state support to the economy The New Budget Code establishes a limit on the stock of local government debt (including guarantees) of 30 percent o f local government revenues (net of transfers) A new Law on "privatization" was drafted A Law that significantly simplifies administrative procedures for businesses was enacted 59. The remainder o f this section explains the DPL operation under the two thematic pillars. Each sub-section details the institutional and policy reforms this operation supports. Annex 1 o f the Program Document contains the economic and social policy reform matrix with details o f the actions agreed under the DPL, the outcome/monitoring indicators, and an indicative future reform agenda as elaborated in the government's Letter o f Development Policy. B. POLICY AREAS Strengthening the Targeting o Social Assistance f 60. The government already spends a substantial amount o f resources on social assistance and social insurance programs (see Box 5.1). Targeting was marginally i,mproved within the social assistance system in 2008 by starting a gradual move away from spending on privileges but remained weak overall. Box 5.1: Social Assistance and Social Protection in Belarus The Belarusian safety net system consists of (1) child benefits; (2) housing and utilities allowance; (3) Chernobyl benefits; (4) categorical privileges; and (5) targeted social assistance. Most programs in Belarus use categorical targeting criteria, with weakly targeted outcomes toward those in need. Starting in 2008 there was a shift away from programs based on privileges towards targeted social assistance and child benefits. Targeted social assistance (TSA) and programs for children channel most o f the resources to the poor population: 44 percent o f the funds o f these programs accrue to households from the poorest 20 percent of the population. In the case o f child-related programs, the success in identifying the (pre-transfer) poor stems from the high correlation between the presence o f children in the households and poverty status. The budget spends above 1.5 percent o f GDP on social assistance (without counting under pricing o f services and other quasi fiscal costs). The system o f social protection (social insurance) runs separate to the safety net or social assistance system, and includes pensions, unemployment, accident and sickness, and disability benefits. The budget spends above 11 percent of GDP on social insurance programs. Almost 80 percent o f the population benefits from some form o f social protection or social assistance. Yet, the overall targeting accuracy o f social assistance spending so far has been modest, with only 15 percent o f the spending reaching the poorest 20 percent o f the population in 2008. 26 61. Improved targeting o f social assistance i s key not only to mitigate the impact of the crisis, but also the social costs of structural reforms going forward. One o f the main concerns o f the authorities i s maintaining social stability, and the chosen gradual reform path and the strong redistribution effects o f its economic model .have reflected this priority. Weak growth prospects for Belarus in 2009 and 2010 will likely increase demand on social safety nets as the number o f poor i s expected to grow (see Section 6A). At the same time, lower fiscal revenues due to lower growth makes it difficult to accommodate these increased demands. One way to create fiscal space to deal with the poverty implications o f the crisis i s to target a larger share of the already sizable expenditure envelope o f social assistance programs to the poorest. 62. A prior action for this operation i s the enactment of a Presidential Decree that strengthens the targeting power of the system whilst scaling up funding for targeted social assistance for the most vulnerable. This Decree has been prepared taking into consideration the advice o f World Bank staff. 63. There are two effects taking place simultaneously under the reform supported by this operation: (i) reallocation effect, by moving the untargeted program o f housing subsidies a to the Targeted Social Assistance program (TSA); and (ii) doubling o f the TSA budget in 2010. a Thus, the overall result is a larger and better targeted social assistance system. 64. There are several significant components to the overall reform supported by this operation. 0 First, access will be expanded under the TSA by raising the eligibility threshold. This automatically will increase the number o f vulnerable beneficiaries. According to the most recent data, in the first 8 months o f 2009 the state targeted social assistance was granted to nearly 136,000 individuals; and it i s expected this number will reach around 200,000 by the end o f 2009. In line with government calculations, the Bank estimates that the benefit will reach more than 300,000 individuals in 2010, with a much improved targeting to the most vulnerable. Most o f the required expansion o f funding in 2010 comes from savings in other parts o f the budget (e.g., investments and subsidies) and through small savings in the housing and utility allowance. In the hture, savings will increasingly be generated through the streamlining o f untargeted social assistance programs. 0 Second, the duration o f the TSA will be expanded from 3 to 6 months. This measure means that verification o f income will be done every six months, as opposed to 3 months as it i s currently done, reducing costs for authorities and beneficiaries alike. Nonetheless, if beneficiaries remain eligible for the program they will continue to receive benefits. 0 Third, the process o f verification o f income will be done using the last 12 months o f income as opposed the shorter period o f verified income currently requested. 0 Fourth, the housing and utility allowance will be moved to the TSA to improve its ability to reach the poor. Due to i t s untargeted nature, this program reaches households in all deciles o f income. Although currently this i s a small program, i t s 27 improvement (by placing it in the TSA) i s quite important as this untargeted allowance may increase rapidly with hrther hikes in energy prices. 0 Fifth, eligibility will be improved by incorporating assets test criteria for the TSA. 65. The reforms supported under the DPL are the first important stage o f a broader reform. The aim i s to move gradually away from subsidies and categorical allowances (although not in all cases) and privileges toward the TSA program that reaches the poor and vulnerable more effectively. Going forward improved administrative mechanisms and a gradual reduction of categorical programs through attrition are envisaged with the objective o f not creating resistance o f any particular group currently receiving those benefits. The Bank will continue to provide T A in this area with the aim o f improving efficiency, targeting, administration, and monitoring of results and performance in social assistance. Enabling Economic Recovery through Private Sector Entry and Competitiveness through Liberalization and Finan cia1 Discipline 66. Belarus faces a large and challenging reform agenda to enable sustained growth through FDI, private sector expansion, and competitiveness o f the economy. The D P L supports further reforms to reduce administrative and regulatory barriers needed to facilitate entry and growth o f new businesses. At the same time, it supports the competitiveness o f the overall economy by reducing the high costs to f i r m s generated by the state inspection system and distortive taxes (which also deter entry). The removal o f price controls will provide signals to private investors and help develop the incipient service sector, which is critical for employment expansion and economic diversification. At the same time, the SOE sector will require hardened budget constraints to improve efficiency and foster competitiveness. The gradual removal o f energy cross-subsidies from industry to households will complement the tightening o f financial discipline as energy import prices rise to market levels. 67. There are three prior actions under this pillar: Reform o f the role o f control and supervision activities. Among other benefits, this reform will reduce the burden and costs o f state inspections to business, improve the penalty system, and encourage businesses entry. The Presidential Decree enacted in this area contains important progressive provisions, such as: (i) use o f check-lists for the inspections (as recommended by best international practice); (ii) introduction o f risk- the management principles for the application o f planned inspections by differentiating i i setting a l i s t o f the responsibilities and rights o f businesses by the degree o f risk; ( i ) inspecting bodies and inspected businesses; and (iv) a reduction in the share o f enterprises undergoing planned inspections in a given year to no more than 15 percent (as compared to 22 percent in 2008). 0 Price reform, by eliminating the requirements for price registration (including for new goods) and removing administrative limits on increases in prices. As part o f this reform the government cancelled the general requirement to register prices for new goods, removed the limits on monthly price changes for individual entrepreneurs, and reduced the number o f price-regulated goods. By not extending the annual Council o f 28 Ministers resolution on price regulation, the government also removed the limits on monthly price changes for all other business (Le., those not classified as individual entrepreneurs). This measure significantly reduced the application o f price regulations, particularly for producers. Removal of retail trade margins for domestic and imported goods '(excluding a limited list of socially important goods and goods subject to monopoly power). This measure implies that the government would no longer be able to establish retail trade mark-ups (or margins). The only exception would be a limited (closed) l i s t of socially sensitive goods and those primarily consumed by low-income households. The list also includes additional categories such as specific prescription drugs and goods subject to monopoly power. Current economic conditions will mute any potential inflation pressures resulting from the removal o f trade margins and price controls. These measures would greatly strengthen the incentives for entry and expand the service sectors. 68. Over the medium term, regulatory and price reforms will need to deepen further. The government, including as highlighted in the Letter o f Development Policy is committed to do so. 69. The DPL supports significant additional reforms under the second pillar, to complement and enhance the impact of the selected prior actions: a. Taxation. Two key measures to reduce the tax burden and distortions in the economy have been achieved: (i) rate o f the highly distortive turnover tax rate was decreased the from 2 percent to 1 percent in 2009, and the draft o f the Special Part o f Tax Code (as well as the draft 2010 budget) envisages its full elimination in 2010; and (ii) local sales tax the rate was unified at 5 percent for imported and domestic goods and the complete abolition o f this tax i s planned from 2010. In the presence o f a solid Value Added Tax (VAT), the sales tax increased the tax burden, tax compliance costs and represented an inefficient duplication. b. Energy Subsidies-Hardening Budget Constraints. A gradual reduction o f the cross- subsidization o f tariffs from industrial consumers to households in the utilities sector was initiated. In January 2009, electricity and heat tariffs o f household consumers were increased by 19 percent and 15 percent, respectively. This measure is already leading to higher cost recovery ratios (79 percent for electricity and 49 percent for district heating, in the first half o f 2009). The cross-subsidization o f energy tariffs within the industrial sector was also streamlined in 2009 (compared to 2008): the list o f industrial consumers eligible for preferential energy tariffs was reduced (by 14 percent) as was the overall volume o f this state support. This will level the playing field and improve energy efficiency. c. Fiscal Transparency in State Support to SOEs. The Ministry o f Finance has placed on their website an integrated report on the itemized fiscal costs o f state support to the economy (and will continue to do so on a quarterly basis). This i s an important step toward increased transparency and a basis for the needed comprehensive reform o f the state support system. d. Fiscal Discipline. The N e w Budget Code establishes a limit on the stock o f local government debt (including guarantees) o f 30 percent o f local government revenues (net 29 o f transfers). During the first eight months of 2009 the Ministry o f Finance together with all local governments worked out and approved Action Plans to bring local governments' debt into compliance. By imposing fiscal discipline on local governments, the government will be winding down an important channel for softening enterprise and local government budget constraints. e. Foundations for the Privatization Process, A new Law on "privatization" was drafted. The Draft Law, inter alia: (i) establishes clear procedures for privatization o f state-owned enterprises in an open, competitive and transparent manner; and (ii) clarifies the division o f power between different state bodies involved in the privatization process. Moreover, a new L a w on "objects in exclusive state property" was drafted. This Draft Law reduces the l i s t o f enterprises not subject to privatization. Future DPLs could support the enactment and implementation o f this important agenda. f. Regulatory Issues. The government drafted and discussed with the business community a Decree on the licensing regime to (i) reduce the number o f economic areas and i) activities subject to licensing requirements; and ( i simplify licensing procedures and requirements. These reforms will shorten the time required for acquisition and renewal o f licenses as well as the l i s t o f documents required. In the medium-term the government plans to fbrther reduce the l i s t o f activities subject to licensing requirements. These measures will be central in encouraging business entry. The government had intensive discussions with the business community on this issue and improvements expected on the draft decree are primarily the result o f these consultations. g. Administrative Procedures. A Law that significantly simplifies administrative procedures for businesses was enacted. h. Price and product market reforms. In addition to the prior actions highlighted earlier on price reforms, the Council o f Ministers approved a resolution reducing the l i s t of "socially-important goods and services subject to administrative controls". The government plans to further work on the gradual reduction o f the list. 6. OPERATION IMPLEMENTATION A. POVERTY AND SOCIAL IMPACT ANALYSIS Impact o the Economic Downturn on Poverty f 70. The recent financial crisis and the global economic slowdown are likely to increase poverty in the country. The transmission channels o f the crisis to the population are multiple. They include adverse labor market outcomes (mainly underemployment) and reductions in real wages as a result o f the contraction. The crisis in Belarus has been milder than in other former Soviet Union countries in terms o f output decline and unemployment growth. Nonetheless, there are income and underemployment effects that account for the largest share o f the poverty effect. In 2009, and consistent with Bank staff macroeconomic parameters (as presented in Section 2), it i s estimated that at least 94 thousand people will fall into poverty. This i s equivalent to a 0.8 percentage point increase in the poverty rate due to the economic downturn (see Figure 6.1). 30 Figure 6.1. The Impact of the Crisis on Poverty Poverty Rates Projection Projected Number of Poor (in thousands) 48.4 gO . O O 6 .. I 7 61 8 700.0 600.00- 500.00. \ o o , 7 ~ 400.00 'Y 378.3 31 2007 2008 2009 2010 2007 2008 2009 2010 Poverty Rates t Pre Crisis Projections 1 +P o p u l a t i o r r t Pre Crisis Projections Source: Bank staff projections based on the Belarus HBS 2008. 71. Some particular groups are more vulnerable to the crisis. These are predominantly rural households, unemployed, households with 3 or more members, and families with children (particularly those with more than 2 children) (see Figure 6.2). Pensioners, families without children and urban households show lower risks o f poverty as a result o f the crisis. gure 6.2. Population Groups Most Vulnerable to the Crisis Poverty risk of crisis Chi I d ro n OLF Studrnt Rotlrrd Unrmployrd Solf-Em ployod Employro Eduoatlon NonolcPrimary Eduoatlon T r r t l a r y Eduoatlon Spoo S r o Eduoatlon G o n 8 6 0 Eduoatlon B a r l o Rural Urban Family w i t h ehlldron F a m i l y without o h l l d r r n F a m i l y of 3+ Family I O M than 3 0 1 2 Ratio o f group povrrty Inorealrs to a v r r a g r p o v r r t y l n o r r a w w c e : Bank staff projections based on Belarus H B S 2008. Poverty and Social Impact Assessment o this Operation f 72. Price and regulatory reforms aimed at strengthening the incentives for private sector development, in the medium term, would be expected to have an indirect positive impact on poverty reduction, through creating an environment for sustainable growth. The 31 measures to lift price controls and retail trade margins could lead to higher prices for consumers but socially sensitive food items and goods primarily consumed by low-income households will remain protected, thus mitigating the impact o f the price increase for the poor. In addition, low aggregate demand will reduce inflation pressures resulting from price liberalization. The government i s committed to contain domestic demand (through fiscal and monetary policies) to allow the external adjustment and assure price stability. In the medium to long term, improved competition and entry in the private sector would lead to lower prices, including in the retail sector. 73. There will be only a moderate distributional impact as a consequence of the gradual increase in energy tariffs. The Bank and the authorities support a gradual approach in this area. Initial efforts are focused on arresting the declining trend in the cost recovery levels o f household tariffs. However, the adjustment o f import energy prices will continue throughout the next few years, requiring consistent domestic tariff adjustments. 74. The energy tariff increase enacted in January 2009 has only a marginal effect on poverty. Moreover, this effect will be offset by the social assistance measures also supported by this operation. The resources spent by households on utility tariffs as a share o f their total consumption was l o w before the increase in tariffs. Moreover, the tariff adjustment (which took place earlier in the year) had only a very moderate effect on that share (see Figure 6.3). Even when looking at households by quintile, only a marginal loss in consumption i s observed as a consequence o f the tariff increase. Figure 6.4 shows the cumulative consumption loss to households due to the increase in energy tariffs (by 20 percent), with a total loss o f consumption (as proxy for the disposable income) o f 0.16 percent for the poorest 40 percent o f the population. The overall increase in tariffs would potentially increase poverty rates by 0.2 percentage points. But this does not count the savings for households that could arise from greater energy saving. Moreover, households with larger shares o f expenditures on utilities will receive additional subsidies from the social assistance system. The additional support i s expected to help offset the disposable income decline generated by the tariff increase to the poorer households (see discussion on measures on safety nets supported below). 32 Figure 6.3: Utility Tariffs in Households' Total Consumption: InternationalComparison and By Consumption Quintiles for Belarus I I Average Share of Utilities Expenditures .... Bulgaria ~ Poland Bosnia , Estonia Moldova Romania ! Albania Macedonia Turkev Kir hiz Belarus (2809) Russia Ukraine Belarus (2008) Georgia Azerbaijan Montenegro Uzbekistan Tajikistan 0 5 10 15 20 25 I Source: WB ECA poverty data base; Bank staff projections based on the Belarus HBS 2008. igure 6.4: Cumulative Households' Consumption Loss Due to the Energy Tariff increase 0.700% 0.600% n v1 v) 3 0.500% z P c.l 0.400% m ao) 0.300% .2 c.l I 2 0.200% e 0.100% 0.000% 1 2 3 4 5 6 7 8 9 10 Decile of consumption ote: The numbers on the graph represent the cumulative consumption loss to households as a consequence o f the increase in energy tariffs (by 20 percent). Source: Bank staff projections based on the Belarus HBS 2008. 75. The decree (prior action) supported by this DPL that scales up targeted social assistance will have a positive distributional impact. The reform supported b y this operation effectively redistributes fiscal resources from other parts o f the budget and from weakly targeted programs to programs that reach the poor and the most vulnerable, namely the Targeted Social Assistance (TSA) program (see Section 5B for a detailed explanation o f the social assistance 33 reform supported by this D P L and advised by Bank staff). The program i s expected to reach 300,000 low income individuals in 2010 (compared to the expected 200,000 beneficiaries by end 2009). 76. Bank staff estimations suggest that the social assistance measures approved would help offset the impact o f higher energy costs and help offset the impact o f the economic downturn on the poor. The estimations suggest less than 0.1 percent o f GDP o f additional funding (that is, on top o f the existing regular funding) for the social assistance programs would be enough to offset the energy price increase. The most disadvantaged groups and the ones most vulnerable to the crisis (as shown in Figure 6.2) are the ones primarily targeted b y the TSA (through specific income verification and other eligibility parameters). B. ENVIRONMENTAL ASPECTS 77. Specific actions under the proposed DPL operation are not expected to have any significant negative effect on the environment. In sectors that have a close link with the environment and that are supported by this operation (such as energy tariffs), the actions laid out by this D P L might improve environmental conditions in the long run as they are geared to improving energy efficiency. There i s a possibility that fuel substitution toward greater reliance o f fuel wood and coal in rural areas might lead to greater carbon emissions. There could also be some risk o f deforestation if reliance on fuel wood increases. However, rural households already rely to a significant extent on fuel wood for cooking and heating. Moreover, substitution possibilities in urban households, where the majority o f the population resides, are limited due to the predominance o f central district heating. Moreover, as showed in the poverty analysis, households only spend a small part o f their income on utilities, so a change in behavior through energy sources substitution is less likely. Price, regulatory, and other reforms under the second pillar o f this operation are not expected to have any significant impact on the environment. C. FIDUCIARY ASPECTS 78. I n 2009, the Bank prepared a Public Expenditure and Financial Accountability Assessment (PEFA) for Belarus. The PEFA assessment concluded that Belarus has an effectively functioning fiscal and budget management system, which has enabled the government to finance and execute a budget delivering public services to the general population. Furthermore, the government has launched a number o f reforms aimed at increasing transparency o f public finance. Belarus scores relatively well on budget credibility, comprehensiveness and classification. While the budget does not have a particularly strong policy or strategic focus, the strong control framework ensures a high degree o f compliance with prevailing laws and regulations. Weaknesses exist in such areas as extra-budgetary expenditure, public access to key fiscal information, public procurement, and internal and external audits. 79. The budget calendar i s well understood and generally followed and budget documentation i s comprehensive and complete. The emphasis in the presentation o f the budget has moved from the central government toward integrated presentation o f the consolidated budget including local governments as well as off-budget funds. While the government has also introduced elements o f program budgeting, the budget has only recently 34 included a multi-year perspective; however the realism o f the outlying years has yet to be demonstrated. 80. Annual planning, quarterly allocations and regular monitoring o f tax receipts and expenditure projections ensure that expenditures do not exceed the availability o f cash, and thus the consolidated budget arrears have been below 1 percent of total budget expenditures. While extra-budgetary funds are declining and represent less than 5 percent of consolidated budget expenditures, there are weaknesses in monitoring and reporting o f "own- source" revenue for subordinate budgetary institutions, as this source o f financing s t i l l remains outside the treasury system. 81. While the treasury system i s strong and the PFM system generally produces complete and comprehensive information, areas for improvement still remain. These include clearer assignment o f responsibilities for lower tier governments, stronger monitoring systems for identifying and managing fiscal risks (particularly with regard to guarantees of domestic borrowing by lower tier governments) and most significantly, greater public access to all key budget and budget execution documents. 82. Basic systems for accounting, recording transactions and financial reporting are in place. There are regular reconciliations between transactions data in the Treasury systems, central and local, and accounting data provided by Ministries and lower tier governments. There are accounting records for every service delivery unit (schools, hospitals, cultural centers, etc.), although these are not published, and the internal auditkontrol system has not reviewed the accuracy o f accounting records for these front-line users. Consolidated government statements are prepared covering all expenditure, but coverage o f financial assets and liabilities i s not complete. National standards for accounting and financial reporting are largely based on compliance with tax legislation and are not compatible with international standards and practices. 83. There i s a heavy apparatus o f compliance controls at central and local levels. In addition to the procedures operated by and within spending Ministries or lower tier authorities to ensure correctness, there are periodic inspections by MoF central and/or local inspectorates (KRU), sometimes in conjunction with the State Control Committee (SCC). The main focus o f these inspections i s comprehensive ex-post checking o f transactions, with a view to the discovery and correction o f errors. Internal audit, in the sense o f an operation reporting to management on the performance o f the systems for which it i s responsible, hardly exists in Belarus, although there are indications o f recent KRU inspections identifying improvements in systems needed to prevent errors from recurring, Audit as a tool to increase efficiency i s currently not the focus o f attention. 84. Expenditure by all government levels i s subject to detailed rules and procedures, and the discipline i s further reinforced by strong ex-post control, resulting in a high degree o f compliance with rules for processing and recording transactions. Revenues and expenditures from all levels o f government are executed through the State Treasury system, and starting from 2010, off-budget funds will also be included. Most central government revenue and expenditure transactions are executed through the Treasury Single Account and the majority 35 o f local government revenue collections and expenditures are executed through regional Treasury branches. 85. External Audit in Belarus does not follow international standards, with the State Control Committee's (SCC) reporting to the President rather than Parliament. The SCC audit focuses mainly on the compliance o f transactions with all applicable legislation. Furthermore, when the SCC performs their "external audit" they very often do so in association with MoF, KRU and other bodies that usually performs internal control/audit; thus there i s no clear boundary between external audit and internal control/audit. The SCC annual reports on budget execution do not include any comprehensive financial audit, or any opinions on the overall accuracy or reliability o f the financial statements provided by MoF. 86. The IMF Safeguards Assessment of the NBRB was updated in M a y 2009. The assessment identified significant weaknesses and risks in the NBRB's safeguards framework, with particular regard to the legal, financial reporting, and control areas. Additionally transparency o f NBRB operations and the arrangements for external audit require further strengthening. The accounting framework o f NBRB also requires strengthening as the use of Belarusian Accounting Standards lags far behind International Financial Reporting Standards (IFRS) and results in fragmented and less than comprehensive reconciliation o f key economic, financial and statistical data. The NBRB agreed with the report's findings and recommendations and i s executing an action plan to address these weaknesses and implement reforms. 87. The fiduciary risk for this development policy operation was initially -assessed as substantial, but with the mitigating measures the residual risk i s moderate. The fiduciary risk i s based on two dimensions: (i) the overall P F M environment in Belarus and (ii) the safeguards assessment o f the NBRB. While the government's core P F M systems (budget management, treasury, etc.) function well, the weak oversight functions diminish the quality of the overall P F M environment. The Bank i s working with the government to follow-up on the PEFA report recommendations to further improve the performance and strengthen the country's P F M systems. Additionally, the weak control framework o f the NBRB (as noted above) and issues noted by the IMF contribute to the higher overall risk for this operation. The NBRB has agreed to an action plan and i s implementing the reforms recommended by the IMF. As elaborated further below, measures have been taken to mitigate this risk. D. DISBURSEMENT AND AUDITING 88. Given the serious risks identified in the 2009 IMF safeguards assessments, two additional mitigating measures will be required for this development policy operation. The government will maintain accounts and records showing that loan disbursements were made in accordance with the provisions o f the Loan Agreement. Within 15 days o f remittance o f funds by the Bank, the government will provide confirmation (including a treasury report) to the Bank that the funds have been received by the NBRB and that these funds are available for financing budget expenditures. 89. Disbursement. This operation i s a single-tranche loan o f US$200 million. Upon approval o f the loan and notification by the Bank o f Loan effectiveness, the'government will submit a 36 withdrawal application. The Bank will disburse the proceeds of the loan into a dedicated deposit account at the NBRB. The government will transfer an amount (in local currency but equivalent to amount disbursed by the Bank) to the budget (the general fund). If after deposit in the NBRB account, the proceeds o f the loan are used for ineligible purposes (e.g., to finance goods or services on the Bank's standard negative list), the Bank will require the government to return that amount to the Loan account. Amounts refunded to the Bank upon request shall be cancelled. 90. The two mitigating measures are meant to ensure that the proceeds o f this operation will be transparently maintained by the Central Bank and be made available to the budget. As previously noted the central PFM systems, including treasury systems, are strong and provide accurate and reliable information on budget execution and government operations. As this operation already includes two mitigating measures (the treasury report and dedicated account), and as the performance o f the Belarus's core P F M systems is strong, there i s no need to require an audit o f the deposit account." E. R I S K S AND MITIGATION 91. The proposed DPL operation faces high risks associated with the macro-economic outlook and the sustained implementation o f the structural reform agenda. This remains the case even with the potential risk mitigants coming from adherence to the macroeconomic policy framework o f the IMF's SBA, the Bank's structural reform engagement, and other donors increased interaction and support (including EC and EBRD). 92. Economic Risks. The primary risks to the program from a macro-economic perspective include: i)a deeper and more prolonged deterioration in the external trade and financing i environment o f Belarus, particularly in relation to export demand from Russia; i ) inappropriate macro policy responses, for example, through deviations from the IMF's SBA supported program, particularly as regard to the NIR and NDA performance criteria; and (iii) unfilled gaps in financing in the context o f significant external imbalances and constrained access to capital markets. For example, additional "recommended" credits to the economy may delay the needed external rebalancing with the authorities unable to support the exchange rate within the current band. Moreover, external bi-lateral financing could be further constrained due to different factors, including political developments in the country. Finally, the uncertainty associated with the nature o f the recovery remains considerable. Many o f the macro policy choices that Belarus faces involve trade-offs, but the authorities should be encouraged to tackle squarely the current imbalances on the balance o f payments. 93. Adherence to a consistent macro policy framework, progress on structural reforms to attract FDI and appropriate measures to address "recommended" lending in the financial sector are the primary mitigation measures for the above economic risks. O f particular importance, therefore, i s progress on the IMF's SBA supported program which sets out the key macro policies to adjust to the shock in terms o f expenditure compression and switching. Movement loThe Treasury Report i s regarded to be a reliable resource which would make the requirement for an audit superfluous. 37 away from the IMF program or delays in i t s implementation may exacerbate the risks o f a more abrupt adjustment, for example via a disorderly exchange rate correction. 94. This operation supports structural measures to enhance competitiveness which are expected to facilitate economic recovery, including through incentives for the expansion of the private sector and FDI. In addition, the planned strengthening o f the system o f social protection helps to mitigate the impact o f the necessary adjustment on vulnerable households. In building up a track record, with respect to both the IMF's SBA and proposed D P L operation, the government's actions may increase the confidence o f domestic private investors and other donor partners. 95. Medium-term implementation and governance risks. The proposed DPL operation i s based on reform measures that are achieved prior to its approval. Nevertheless, there are clearly risks that the medium-term reform agenda may not be sustained or may be slower than anticipated. Given the concentration o f political decision-making, the risk o f reversibility of reforms i s high. Belarus ranks l o w in cross-country rankings on the control o f corruption and the level o f voice and accountability, highlighting associated governance risks. 96. The government's publication o f its short-term liberalization program has provided visibility to i t s reform efforts in the area o f the business entry. The elaboration o f the medium- t e r m strategy through the draft modernization o f the economy program and in the Letter o f Development Policy provides greater clarity on the wider economic reform agenda planned by the government. Moreover, Belarus's external economic conditions are likely to remain sufficiently tight to help mitigate against the risk o f a full-scale reversal o f reforms in the near to medium-term. Some o f the reform measures may, o f course, be subject to opposition from vested interests. The risk o f these political pressures leading to a reversal in the reform progress remains strong but may be viewed to be offset somewhat as the authorities o f Belarus build up their track record o f reform. Moreover, the rationale for this operation is based on the conviction that medium-term implementation risks are best mitigated through deepened engagement making use o f the window o f opportunity that has opened for an intensified dialogue in Belarus. A medium term programmatic engagement o f the Bank in the structural reform agenda would help mitigate implementation risks in future years should this approach be successful. 97. As the Bank's engagement with Belarus deepens, the dialogue on Governance i s expected to intensify (see CASPR accompanying this operation). The approach to governance issues in the CAS consisted o f (a) advocacy for reforms on governance and measures to address corruption, (b) deepened engagement in areas such as public finance management (PFM) in which the government and Bank have common goals, and (c) ensuring that appropriate fiduciary oversight is applied to proposed resource transfers from the Bank. This approach remains appropriate but will be extended in line with the broader engagement proposed to mitigate related risks. Follow-up work on the PEFA and on public procurement is planned to strengthen public financial management systems, the IMF is leading work to strengthen the independence o f the National Bank o f Belarus, and the Bank's presence in the country has been strengthened to support a stronger advocacy role but also intensified dialogue with the authorities. 38 0 d 3 d- a a B ANNEX 2: Letter o f Development Policy CABET M I H I C T P A V COBET MHHHCTPOB P3CIIYEJIIKI BEJIAPYCL PECIIYEJIHKH BEJIAPYCL 11,220010, r. MHHCK yn. COB~T~KIM, n n . 222 63 55,i$arcc (017) 222 66 65 m.222 63 55, @wc (017) 222 66 65 E-mail: contact@govenunent.by E-mail: contact@govemment.by MHHCK, 20 OKTX6pII 2009 rOAa F 31/577-221 nucbflo 0 nonumuKe 8 o6nacmu pa3eumm 43 44 45 46 47 48 49 50 51 (Unofficial translation) Council o f Ministers o f the Republic o f Belarus 11 Sovetskaya st. 220010, Minsk Minsk, October 20,2009 # 31/577-221 Letter o f Development Policy Mr. Robert Zoellick World Bank President Washington D.C. Dear Mr. Zoellick: L e t u express our deep respect to the World Bank and to you personally, and inform you s about the following. The Government o f the Republic o f Belarus attaches great importance to the cooperation with the World Bank and i s interested in its deepening in the framework o f the revised Country Assistance Strategy o f the World Bank for the Republic o f Belarus for the period of 2008 - 201 1 fiscal years by requesting a Development Policy Loan. Belarus has being building a model o f socially-oriented market economy, which aims at raising the wellbeing o f the population based on the fast growth o f gross domestic product and implementation o f market reforms. The Development Policy Loan would support the medium-term reform agenda o f the Government o f the Republic o f Belarus to liberalize economic activities, mitigate the negative impact o f the global financial crisis on vulnerable sectors o f the economy, and create the necessary prerequisites to foster sustainable economic growth. Maintaining macroeconomic stability From mid-October 2008, the impact o f the global financial crisis on Belarus became strongly evident. In the environment o f continued gas price growth for the Republic o f Belarus, declining demand for exports and falling international prices for Belarus's exports are having a significant impact on the real sector and trade deficit. In 2008, the rate o f real gross domestic product growth was still 10 percent. Besides, the global trends o f increasing prices on energy, raw materials, and food impacted the pattern o f inflation, which increased to 13.3 percent in 2008. 52 The impact of the crisis on the real sector intensified in 2009. In 2009, the January- September year on year rate o f real gross domestic product decline was 0.3 percent. During the first three quarters o f 2009, the country continued to feel the impact o f worsening terms o f trade. In January-August 2009, the volume o f foreign trade in goods and services was 61.9 percent o f the volume for the corresponding period o f 2008, while exports were 57.6 percent, imports - 65.8 percent, and the deficit amounted to US$3,595.9 million. The unfavorable developments had a significant impact on the country's industrial output performance. In January-September 2009, the industrial output dropped by 4.5 percent compared to same period o f 2008. In January-September 2009, the overall consumer price index was by 7.9 percent and the real wage growth reached 1.7 percent. Since the beginning o f the global financial crisis, efforts o f the Government o f the Republic o f Belarus have been geared to mitigating i t s negative effects and maintaining economic and financial stability. Belarus has undertaken a range o f systemic measures aimed at implementing satisfactory macroeconomic policies, first o f all, those to stabilize the banking system (the state has undertakento guarantee household deposits). Resources have been allocated from the budget to support banks' liquidity. Public expenditures were reviewed in 2009 to have a balanced budget, maximize resource savings and tighten the fiscal sphere. With the IMF support (a 15-month Stand-By Arrangement for Belarus, involving financing o f SDR 1.62 billion or about US$2.46 billion was approved in January 2009). Due to the deterioration o f the external environment in 2009, the IMF Executive Board took a decision to augment the financing. The Government o f the Republic o f Belarus and the National Bank are taking steps to ensure macroeconomic stabilization and minimize the impact o f the global economic and financial crises o n the country's economy. The major objectives o f the IMF-supported program are to promote an orderly adjustment to external shocks and overcome major vulnerabilities o f the economy. Under the program: a from January 1, 2009, a new regime was introduced and the exchange rate was devalued to a new parity to the US dollar with a simultaneous switch to a peg to a currency basket to better reflect the structure o f Belarus's trade and financial flows; 0 tight fiscal policy has been implemented to contain domestic demand growth. Budget consolidation measures were explicitly aimed at reducing the rate o f investment and consumption growth. In 2009, a deficit-free state budget was approved, with limited growth in public investments and wages in the budget and state enterprise sectors; a it i s stipulated to continue privatization efforts and reducing distortions in the economy and financial sector. Since the Stand-By Arrangement approval, the Republic o f Belarus has been implementing policies consistent with the commitments undertaken under this program and it intends to continue doing so. 53 At the same time, we see the need to complement the macroeconomic program with key fiscal and structural reforms that will ensure economic recovery through liberalization whilst helping strengthen automatic stabilizers to protect the vulnerable in a more targeted way. We envisage reforms that will allow the country to open avenues for a sustainable recovery and medium term growth, including: further abolishing barriers for business, further liberalizing prices, reducing tax distortions, reducing operational costs o f business activity, and undertaking gradual and transparent privatization process. In parallel, we envisage reforms to further strengthen fiscal discipline and transparency as regards to cross-subsidies in the energy sector, local budget debt management, and timely budget reporting. Several key measures and reforms under the above areas would be supported by the World Bank's Development Policy Loan. Below we provide a more detailed account on their current progress, Progress in the Reform Agenda Supported by the Development Policy Loan O n the onset o f the economic crisis, a key concern for us was to mitigate the negative impact o f the crisis on the most vulnerable groups o f the population by improving the system o f targeted social assistance. The system o f state targeted social assistance was created in the Republic of Belarus in 2001 with grant support from the World Bank and aims at providing temporary welfare assistance to low-income citizens and families, and helping to overcome difficult life situations. In order to improve the system and the mechanism o f its provision, a Decree e o f the President o f the Republic o f Belarus N 458 On State Targeted Social Assistance has been enacted on September 14'h 2009. The Decree expanded the state targeted social s assistance and improved i t s targeting, as well as replaced non-cash housing subsidies with targeted assistance. All these measures have been discussed in consultations with the World Bank experts. These improvements have been coordinated with all ministries concerned and local authorities. The Government o f the Republic o f Belarus will continue efforts to liberalize the economy and strengthen financial discipline to lay foundation for post-crisis development based on private sector growth and improved competitiveness. Significant reforms have been and are being undertaken under the advice o f the World Bank Group to reduce regulatory and administrative costs in business. In 2008, about 40 regulatory legal acts were adopted to create a favorable business climate in the country. 54 Reforms are expected to stimulate entrepreneurship development in the real sector of the economy, attract foreign investment, and expand Belarus's export potential. In 2008, Belarus also implemented a number o f reforms in the area o f business regulation that facilitated access to credit resources by abolishing the minimum threshold for submitting reports on a loan to the State Loan Register. New business entry was eased by introducing a single registration data base and halving the minimum requirement to capital adequacy. In 2009, we made a number o f important reforms in the area o f company registration and certification. The L a w o f the Republic o f Belarus On Administrative Procedures came into force on M a y 12, 2009 and an Action plan for simplification o f administrative procedures for doing businesses till the end o f 2009 was approved on June 11, 2009. T o simplify licensing procedures and reduce the l i s t o f licensed activities, the Government o f the Republic o f Belarus drafted the Decree o f the President o f the Republic o f Belarus On Licensing Individual Types ofdctivities, stipulating a 40-percent reduction o f licenses issued. The version o f the Decree, which has been revised to lay out even more radical reform o f licensing requirements, will be presented to the Head o f the State in November 2009. Decree o f the President o f the Republic o f Belarus On Improving Control (Supervision) Activity in the Republic o Belarus # 510 was enacted on October 16, 2009 to reduce f control burden on businesses and improve transparency and efficiency o f control activities. We expect that introduction o f the progressive provisions o f the Decree will reduce the number o f inspections o f small enterprises, which are generally characterized by a l o w level o f risk and the overall duration o f all inspections o f any enterprise; ensure consistency between the materiality o f errors and the severity o f penalties, and support new firms' growth by exempting them from inspections during the first three years since opening the business. The drafts o f the above-mentioned Decrees had been discussed with experts o f the World Bank and the International Finance Corporation, as well as with the business community, and recommendations o f all the parties concerned have been incorporated therein. Decreasing tax distortions and tax burden on enterprises Over the last few years, 22 tax payments have been abolished in Belarus, the procedure o f calculating the majority o f applicable taxes and fees has been significantly simplified, tax system stability has been increased, and the number o f administrative procedures performed by tax authorities has been significantly reduced. Starting from January 1, 2009, the rate o f the fee paid to the Republican Fund to Support Producers o f Agricultural Produce, Food Stuffs, and Agrarian Science (turnover tax) was reduced from two to one percent o f proceeds from sales o f goods (work, services). The active part o f basic production assets was removed from the object o f real estate taxation. The local sales tax rates for retail goods trade and the local service tax rates were unified and set at 5 55 percent, and the rate o f tax on automobile vehicle purchases was also reduced from 5 to 3 percent. A flat (unified) personal income tax rate was introduced in the amount o f 12 percent, and the standard tax deduction for each employee was raised. As to incomes of individual entrepreneurs, a flat (unified) income tax rate o f 15 percent was introduced. These measures will reduce the tax burden on the economy by 1.3 percent o f gross domestic product in 2009. The draft annual Law o f the Republic o f Belarus on the 2010 budget was prepared by the Ministry o f Finance in parallel with the draft Specific Part o f the Tax Code, which had been submitted to the President o f the Republic o f Belarus on October 1, 2009. The Tax Code envisages the abolition o f a number o f taxes from January 1, 2010 and, in particular, complete abolition o f the turnover and local sales taxes. It will raise the transparency and efficiency o f the tax system o f the country, significantly reduce the tax burden on enterprises, and ultimately raise the competitiveness o f Belarusian economic agents. To follow the chosen course o f economic liberalization, phased efforts are being made in the Republic o f Belarus to reduce the scope o f state regulation o f prices (tariffs) by amending the legislation and regulations on pricing establishing limits in this sphere. From January 1, 2009, price registration was abolished and no administrative limits on producer price increases are applied. The list o f socially important goods and services subject to administrative price regulations had been reduced, with the range o f service categories being cut by half. In August 2009, the Government o f the Republic o f Belarus lifted restrictions on retail trade margins except for an approved l i s t o f socially important goods and goods subject to monopoly power. In parallel to measures aimed at stimulating new private business growth, the Government o f the Republic o f Belarus has been taking steps since 2008 to develop the basis for quality privatization. The golden share rule has been abolished, the moratorium on selling shares held by individuals has been lifted, and the requirement to sell shares to employees has been removed. In July 2008, a new Privatization Program was approved for 2008 - 2010. In 2008, about 200 state-owned enterprises were corporatized, and in 2009 and 2010, it i s planned to corporatize 301 and 382 state-owned enterprises (of republican and communal ownership respectively). Under the program it i s planned to privatize shares o f 160 joint- stock companies during 2008 - 2010. In order to improve the legislative and institutional base for privatization, the Liberalization Program for 2009 stipulates measures to improve the legal base for privatization, corporatization procedure, state property management, and to raise the transparency o f the privatization process. We are interested in gradual, consistent, and transparent privatization using international best-practice experience in this area. We have. presented to the Parliament and the 56 President o f the Republic o f Belarus new draft Laws On Privatization and On Objects in Exclusive State Ownership developed taking into account the World Bank's recommendations. The Government o f the Republic o f Belarus i s taking significant steps to strengthen fiscal discipline. In the area of energy efficiency and energy saving, the country i s implementing consistent state policies on efficient energy use. In 2001 - 2005, the energy intensity o f gross domestic product was reduced by 25.3 percent. However, the energy saving potential remains quite high. In future, the Government o f the Republic o f Belarus plans to ensure a reduction in the energy intensity o f gross domestic product by at least 31 percent in 2010, by 50 percent in 2015, and by at least 60 percent in 2020 compared to the level o f 2005. Even with the sharp decline o f the rate o f gross domestic product growth, we manage to continue energy savings efforts and ensure a reduction in the energy intensity o f gross domestic product in January-August 2009 by 4.2 percent compared to the corresponding period of 2008. We have set the task to produce in 2012 at least 25 percent o f electricity and heat energy output using local fuels, waste energy, and alternative sources o f energy. In 2008, the share o f own energy sources in the boiler and stove fuel balance was 18.3 percent. To reduce cross-subsidization through prices (tariffs) on natural gas, electricity and heat energy for enterprises o f the real sector o f the economy, raise the level o f cost recovery for utilities provided to households, Resolution o f the Council o f Ministers o f the Republic o f Belarus # 1942 dated December 16, 2008 raised electricity and heat energy tariffs for households by 19.3 and 15.64 percent respectively from January 1, 2009. Taking into account the need to reduce cross-subsidization through energy prices (tariffs) for enterprises o f the real sector o f the economy, the level o f utility cost-recovery will be increased in 2009-2010 by stages. In 2010, for electricity and heat energy it is planned to reach respectively at least 80 percent and at least 45 percent cost recovery by households. In recent years, the Government o f the Republic o f Belarus has been paying a lot of attention to streamlining and improving the efficiency o f state support to the real sector of the economy. A register o f state support has been put in place, and the eligibility criteria of i t s recipients as well as reporting requirements o n the efficiency o f its use have been hardened. I t i s also planned to phase out extension o f state support to economic entities on an individual requests' basis and move to redistribution of state resources in predetermined volumes under priority state programs. However, in the environment o f the global financial crisis a quick solution o f the task deems impossible. Improving transparency o f state support i s treated as a priority measure. So, a decision has been taken to place information on the volume and directions o f state support on the website o f the Ministry o f Finance on a regular basis (quarterly, 57 starting from the first quarter o f 2009. Dissemination o f this information is seen as an important step toward further medium- and long-term restructuring o f state support, gradual reduction of i t s scope, and bringing the system o f state support in accordance with the W T O rules. One o f the forms o f state support is the provision o f budget guarantees on loans extended to enterprises o f the real sector. The Government o f the Republic o f Belarus is concerned about rapid growth o f guarantees issued by local executive and administrative authorities. The new Budget Code (came into force on January 1, 2009) sets a limit on the stock of local executive and administrative authorities' debt (including guarantees) o f 30 percent of local budget revenues (less intergovernmental fiscal transfers received from other budgets). Oblast Executive Committees, on agreement with the Ministry o f Finance, approved action plans to make their debt level consistent with the established parameter. Government Priorities Going Forward The country's authorities are committed to ,further gradual liberalization o f the economy in order to increase i t s efficiency and competitiveness and create a solid basis for the post-crisis recovery and growth. In the medium-term, we will continue and intensify our efforts for: maintaining external and internal balance by pursuing a sound economic policies' mix; improving system o f targeted social assistance to bring it closer to the OECD countries' standards with budget financing o f the targeted social assistance being further expanded; easing barriers to entry and reducing regulatory and administrative costs o f business regulations. This will be achieved through the increased transparency o f the control process and application o f its modern methods, including audit, further reduction in the number o f activities subject to licensing, creation o f a register o f all administrative procedures in relation to legal entities and individual entrepreneurs, and setting clear and strict rules for the introduction o f new administrative procedures; increasing the efficiency and predictability o f the tax system and reducing the tax burden by enacting and enforcing the Specific Part o f the Tax Code; advancing price liberalization by refraining from setting limits on price increases and further reducing the l i s t o f goods and services subject to administrative price regulation; accelerating and deepening privatization, ensuring transparency, predictability, and efficiency o f the process by setting a proper legal and institutional basis for privatization; ensuring full cost recovery through energy tariffs for all categories o f consumers by gradually eliminating cross-subsidization and budget subsidies; and increasing transparency and efficiency o f the state support system by making public the integrated report on state support on regular basis and improving i t s 58 presentation and contents and bringing the state support in compliance with the WTO requirements. The Government o f the Republic o f Belarus requests the World Bank to provide a Development Policy Loan in the amount of US$ 200 million which would promote continued market reforms. Sincerely yours, Vladimir Semashko, First Deputy Prime-Minister o f the Republic of Belarus 59 ANNEX 3: IMF Stand-By-Arrangement Progress Press Release Press Release No.09/363 International Monetary Fund FOR IMMEDIATE RELEASE Washington, D.C. 2043 1 USA October 21,2009 IMF Executive Board Completes Second Review Under Stand-By Arrangement, Concludes 2009 Article I V Consultationwith Belarus The Executive Board o f the International Monetary Fund (IMF) today completed the second review o f Belarus's performance under an economic program supported by a Stand-By Arrangement (SBA). This decision enables the disbursement o f SDR 437.93 million (about US$699.5 million), bringing total disbursements under the program so far to about SDR 1.4 billion (about US$2.23 billion). The original 15-month SBA was approved on January 12,2009 (see Press Release No. 09/05). Financial support was subsequently increased to SDR 2.27 billion (about US$3.63 billion) on June 29,2009 (see Press Release 09/241). The Executive Board also concluded the 2009 Article I V consultation with Belarus. A Public Information Notice and the staff report will be published in due course. Following the Executive Board's discussion on Belarus, Mr. Takatoshi Kato, Deputy Managing Director and Acting Chair, stated: "Belarus has made good progress in adjusting i t s policies in response to the global crisis. Despite a substantial decline in exports, the economic contraction has been modest relative to other crisis-hit countries. Exchange rate adjustment has helped reduce external vulnerabilities, with the present exchange regime providing a buffer against external shocks. The adjustment has been supported by a tight fiscal policy, with revenue shortfalls offset by spending cuts, and by an interest rate policy that has kept market rates high in real terms. "Nevertheless, the strategy o f expanding credit under various government programs, while helping to cushion the impact o f the crisis on output, put pressure on the external position. The authorities are committed to a tight credit policy, with a view to reducing the current account deficit and pressure on international reserves. The decision to limit 60 lending under government programs in the remainder o f 2009 will help contain domestic demand and support the stabilization efforts. "The authorities have made important progress in their structural reform agenda aimed at improving the business climate and facilitating private sector development. Privatization will play an important part in easing external financing constraints and promoting technological development. The planned setting-up o f a Privatization Agency i s on track. Reducing the burden o f regulation and quantitative targets on the private sector, as well as increasing the commercial orientation o f banks, will promote more efficient allocation o f resources. I t will be important to protect vulnerable groups and enhance the effectiveness o f the social safety net. "The authorities have also progressed well on financial sector reforms, including bringing loan classification and provisioning requirements in line with international practice and improving the framework for crisis preparedness. The commitments to disengage the central bank from non-core business and to enhance its independence are welcome. "Securing sufficient financial resources from the international community i s essential for Belarus' reform efforts. In this context, the authorities stand ready to implement contingency measures should a financing gap emerge." 61 ANNEX 4: Belarus at a Glance r r Belarus a t a glance 9/14/09 Europe 8 upper Key Development I n d l c a t o r r Central middle Belarus Asia income Age dlstrlbutlon, 2007 72008, Female Population, mid-year (millions) 9.7 446 824 75-79 Surface area (thousand sq. km) 208 23,972 41497 60-54 Population growth (%) -0.2 0.2 0.7 Urbanpopuiation(%of total population) 73 64 75 45-49 30-34 GNI(Atlas method.US$ billions) 519 2,697 5,854 15-18 GNlper capita (Atlas method. US$) 5,370 6,052 7,137 GNlper capita (PPP, international 8 ) 0,750 11262 P,072 0-4 e 4 2 0 2 4 6 GDP growth(%) 0.0 6.9 5.8 percent d total papIa11on GDP per capita growth (%) 0.2 6.7 5.0 ( m o r t r e c e n t e&timate, 2003-2008) 7 Povertyheadcountratio at $125aday(PPP,%) <2 4 Under4,mortnllty rate (per 1,000) Poverty headcount ratio et $2.00 e day (PP P, %) <2 9 L t e expectancy at birth (years) 70 70 71 Infant mortality(per1OOOlive births) 5 21 21 Child malnutrition (%of children under 5) 50 40 Adult literacy, male (%of ages 15 and older) 00 99 95 30 Adult literacy,female (%of ages 1 and o Ider) 5 00 a 93 Gross primaryenrollment, male (%of age group) 98 112 20 Gross primaryenroilment,femaie (%of age group) a 09 10 0 Access to an improvedwatersource (%of population) 00 95 95 I Access to improved sanitation facilities (%of population) 89 83 1090 2995 2000 2007 N e t A l d Flowr 1980 1990 2000 2008 ' (US% millions) Net ODA and official aid w7 40 83 Growth of GDP and GDP per caplta (K) Top 3 donors (In 2007): Germany w4 4 19 25 T Sweden 0 3 0 United States 0 4 8 Aid(%of GNI) 10 0.3 0.2 Aid per capita (US$) a 4 9 Long-Term E c o n o m l o Trends -1s 1 95 05 Consumer prices (annual %change) .. 88.6 14.8 GDP implicit deflator (annual %change) 03.6 85.3 20.5 --t W P - W P psi capila Exchange rate (annual average. local per US$) 0.0 717.1 2,06.0 Terms of trade Index (2000 = UO) XK) u5 1980-90 1990-2000 2000-08 (average annualgrovdh ss) Population, mid-year(millions) 9.8 0.2 0.0 9.7 0.8 -0.2 -0.4 GDP (US$ millions) 17.370 P.737 60.3U -16 8.6 (%olGDP) Agricullure 23.5 14.2 9.8 -4.0 5.5 Industry 47.1 39.2 44.4 -18 12.6 Manufacturing 39.2 316 32.9 -0.7 116 Services 29.4 46.7 45.8 -0.4 6.0 Household final consumption expenditure 47.4 58.6 54.2 -0.7 110 General gov't final consumption expenditure 23.8 19.5 8.7 -19 0.1 Gross capital formation 26.5 25.4 36.4 -7.5 19.2 Exports of goods and services 46.0 69.2 618 -4.8 6.9 Imports of goods and services 43.6 72.4 69.2 -8.7 119 Gross savings 28.8 22.8 28.1 Note Figures in italics are for years other than those specified 2W8data are preliminary indicates data are not available 'a Aiddataarefor2007 Development Economics, Development Data Group (DECDG) r j Belarus B a l a n o e o f P a y m e n t s and T r a d e 2000 2008 Governance indloatorm, 2000 and 2007 (US$ millions) Total merchandiseeqorts (fob) 7,331 33,043 Total merchandise imports (cif) Net trade in goods and services 8,646 -446 39,155 I I -4,451 Current account balance -338 -5,049 es a % o f GDP -2.7 -8.4 Workers' remittances and compensation o f employees (receipts) Q9 354 Conbd d cotrupam I I Reserves, includinggold 357 3,061 General Government Finance ( % o f GDP) Current revenue (including grants) 44.2 51.0 Taxrevenue 40.8 47.6 CUmnt expenditure 35.3 37.4 T e c h n o l o g y and I n f r a s t r u c t u r e 2000 2007 Overall surplusldeficit 0.2 1.4 Paved roads (%of total) 95.6 88.6 Highest marginal taxrale (%) Fixed Ilne and mobile phone Individual subscribers (per 00people) 28 10 Corporate High technology everts (%of manufactured e q o r t s ) 3.8 2.7 External D e b t and Resource Flows Envlronment (US%millions) Total debt outstanding and disbursed 2,MO l4,760 Agricultural land (%of land area) 45 43 Total debt servica 369 1,509 Forest area (%of land area) 40.6 40.2 Debt relief (HIPC, M DRI) - - Nationally protected areas (%of land area) .. 6.3 Toteldebt ( % o f G D P ) 8.8 24.5 Freshwaterresources per capita (cu. meters) 3,748 3.834 Totaldebt service(%of e v o r t s ) 4.7 4.0 Freshwslarvrithdrawal(billio n cubic meters) 2.8 Foreign direct investment (net inflows) 19 351 C 0 2 emissions per capita (mt) 5.9 6.5 Portfolio equity(net inflows) 44 -26 GDP per unit of energyuse ( 2 0 0 5 P P P $ perkgof oilequivalent) 2.4 3.2 Composition oftotai axtemal debt, 2008 Energyuse per capita (kg of 0 il equivalent) 2,468 2,939 (US$ millions) IBRD Total debt outstanding and disbursed 05 35 Disbursements 8 3 Principal repayments l4 8 Interest payments 8 3 US$ rnlllioM IDA Total debt outstanding end disbursed Disbursements - - - - P r l v i t e Sactor Developmant 2000 2008 Total debt servlce - - Time required to start a business (deys) - 31 IFC (fiscalpar) Cost to start a business (%of GNIpercapila) - 7.8 Total disbursed andoutstanding pOrtfolI0 0 58 Time required to registerproperty(days) - 21 ofwhich IFC omaccount 0 56 Disbursements for IFC o m account 0 5 Ranked as a major constraint to business 2000 2007 Portfolio sales,prepayments and (%of managers surveyed W o egreed) repayments for IFC o m account 0 9 Access to/cosI of financing .. 29.5 Economic and regulatorypolicyuncertainty .. 23.3 M IGA Gross exposure Stock market capitalization (%of GDP) Bank capital to asset ratio (%) 15.1 %.S Note: Figures In italics are forysars otherthan those speclfisd. 2008 deta are preliminary. ..indicates data are not available. -indicates o bsarvation is not applicable. --.----I." Development Economics. Development Data Group (DECOG). ^._--.-I)..____" " l _ _ _ " I_ ._.....".I......-.---... "."-" -.- Millennium Development Goals Belarus i with selected targets to achieve behveen f 990 and 201 5 (estimate closest to date show, 6'- 2years) rates f o r extreme poverty and malnutrlt!on 1990 IS96 2000. 2007 Poverty headcount ratio at $125 a day(PP P, %of population) <2 2.7 c2 c2 Poverty headcount ratio at national poverty line (%of population) 32.1 419 7.7 Shareof incomeor consumption to the poorest qunitile(%) 9.6 9.3 9.3 Prevalenceof malnutrition (%of children under 5) G o a l 2: ensure that c h l l d p n are able" llment (net, %) ' I Pnmarycornpletion rate (%of relevant age group) 94 94 a2 92 Secondary school enrollment (gross, %) 98 93 87 95 Youth literacyrate (%of people ages 15-24) DO DO DO wo I. ;? . " 1 1 R W m e n employed in the nonagriculturalsector (%of nonagriculturalemployment) 56 56 56 56 Proportion of seats held bywomen in national parliament (%) 4 14 30 G O E I4: reduce u n d e r 4 mortality by two-thirds Under-5mortaiityrate (per 1,000) n B I7 R Infant mortalityrate(per 1000 live births) t2 13 9 5 Measles immunization (proportionof one-yearolds immunized,%) 94 93 98 99 G o a l 6: reduce maternal mortality by three-fourths M atemal mortaiityratio (modeled estimate, per 00,000 live births) 14 21 Births attended by skilled health staff (%of total) wo Contraceptive prevalence (%of w m e n ages 15-49) 50 G o a l 6: halt and begin t o reverse the spread o f H I V / A I D S and other major dlseases Prevalence of HiV(%of population ages 15-49) 01 02 02 Incidenceof tuberculosis (per M).OOO people) 38 54 73 48 Tuberculosis cases detected under DOTS (%) 44 G o a l 7 r halye the p r o p o r t ( o n o f people wl?hout s-ustalnable a c c r ? p t o b a s k npeds Access to animprovedwatersource(%of population) DO Access to improved sanitation facilities (%of populallon) Forest area (%of total land area) 39 9 40 6 40 2 Nationally protected areas (%of total land area) 63 CO2 emissions (metric tons per capita) 0.6 62 59 65 GOP per unit of energyuse (constant 2005 PPP $ par kg of oil equlvalent) 15 t7 24 32 G o a l 8: develop a global partnership f o r development Telephone mainlines (per D people) O 154 8 3 27 5 31 8 Mobile phone subscribers (per D people) O 00 01 0.5 7 17 O Internet users (per D people) 00 00 19 29 0 O Personal computers (per D people) 08 Education indicators (%) Measles lmmunlzation (X of I - y r r r I C 1 Indicators (per 100 people) 1 olds) L 100 120 I :25 75 50 too 80 60 40 I I 1 25 ~ 20 2000 2002 2004 20082007 0 0 1980 I995 2000 2007 2000 2002 2004 20062007 -CPrimmy net enrollment ratio OFixed t mobile aubscribem +Ratio olgiria io boyr in prirnaly 6 6eeondmry education miniernat u i e n I Nota:Figures in italics arefor years otherthan thosespecified. ..indicates dataarenot available. 9/14/09 i - Deve!%?me n ~ E ~ ~ o m ~ ~ ~ o a v r ? ! ~ p ~ e ~ D ~ ~ ~ p ~ D ~ c D G ) . _ . _ _ I_.____.._-._______---. . .-J I