DOCUMENT OF The World Bank Report No. 23401-BY MEMORANDUM OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT AND OF THE INTERNATIONAL FINANCE CORPORATION TO THE EXECUTIVE DIRECTORS ON A COUNTRY ASSISTANCE STRATEGY FOR BELARUS February 21, 2002 Currency Equivalents Currency Unit = Ruble (BYR) January 2002: US$1=BYRI,600 Abbreviations and Acronyms AIDS Acquired Immune Deficiency Syndrome BoP Balance of Payments CAS Country Assistance Strategy CAB Current Account Balance CEM Country Economic Memorandum CIDA Canadian International Development Agency CSO Civil Society Organizations CY Calendar Year DFI Direct Foreign Investment DOD Debt Outstanding and Disbursed EBRD European Bank for Reconstruction and Development ESW Economic and Sector Work EU-TACIS European Union - Technical Assistance for the CIS Countries FSU Former Soviet Union FY Fiscal Year GDP Gross Domestic Product GEF Global Environment Facility HIV Human Immune Deficiency Virus IBRD International Bank for Reconstruction and Development IDF Institutional Development Fund IFC International Finance Corporation IFI Intemational Finance Institution IMF International Monetary Fund LIL Learning Innovation Loan MIGA Multilateral Investment Guarantee Agency MOJ Ministry of Justice NGO Non-Governmental Organization NBB National Bank of Belarus ODS Ozone Depleting Substances OSCE Organization for Security and Cooperation in Europe PER Public Expenditure Review PSD Private Sector Development SME Small and Medium Size Enterprise SMP Staff Monitored Program SOE State Owned Enterprise TA Technical Assistance TACIS Technical Assistance for the CIS (EU Technical Assistance program) TB Tuberculosis WTO World Trade Organization UK DFID United Kingdom Department for International Development UNDP United Nations Development Program USAID United States Agency for International Development Fiscal Year Government: January 1 - December 31 The World Bank Group Team IBRD IFC Vice President: Johannes F. Linn Vice President: Assaad J. Jabre Country Director: Luca Barbone Director: Edward Nassim Task Team: Luca Barbone, Lilia Burunciuc, Eugenia Marinova, Sergiy Kulyk, Irina Oleinick, Konstantyn Senyut, Luis-Alvaro Sanchez, Kutlay Ebiri, Carl Dagenbart TABLE OF CONTENTS EXECUTIVE SUMMARY ......................................................................... . 1. ECONOMIC AND POLITICAL BACKGROUND ..........................................................................1 II. SOCIAL OUTCOMES AND POVERTY IN BELARUS ......................................................................... 3 W1. BELARIJS'S DEVELOPMENT AGENDA: IS CONTINUED GRADUAL REFORM FEASIBLE? ................... 6 A. Macroeconomic Stability and Growth .................................................................. ........ 7 B. Creating Opportunities for Job Growth .......................................................................... 8 C. Improving Management and Efficiency of Public Expenditure ............................................. 10 D. Dealing with Environmental Challenges and the Legacy of Chernobyl ................................. 11 E. Facilitating the Emergence of Civil Society Voices and Organizations ........... ...................... 12 IV. THE GOVERNMENT PROGRAM .............................. ...................................... 12 V. MEDIUM-TERM MACROECONOMIC SCENARIOS ......................................................................... 13 A. A Most Likely Scenario ......................................................................... 13 B. Stagnation ......................................................................... 14 C. A High Case ......................................................................... 15 VI. BANK ASSISTANCE AND LESSONS LEARNED ......................................................................... 15 VII. Tm BANK ASSISTANCE STRATEGY FOR 2002-2004 ...................................................................... 16 The Low Case Lending Program .................................................................. 1 9 The Base Case Lending Program ............. ..................................................... 20 A. Global Public Goods .2................................ _ ...... ........................... 20 B. Mitigation of Social Risks ......................................................................... 21 C. Fostering Private Sector Development ......................................................................... 22 A Potential High Case ................................................................... 23 The CAS and Civil Society ................................................................. .23 Partnerships ................. ................................................. 24 Financial Management and Fiduciary Responsibility . ................................................................ 24 Monitoring and Evaluation .. ................................................................. 24 VIII. COUNTRY CREDITWORTHI-NESS AND RISKS ......................................................................... 25 ATTACHMENT I - CONSULTATIONS WITH STAKEHOLDERS ............................................................ 27 Boxes: Tables: Box I: Recent Macro-Economic Developments Table 1: Main Economic Indicators Box II: Poverty in Belarus Table 2: Key Economic Indicators during the Box III: Civil Society in Belarus Next CAS Period Box IV: Constraints to Business Development Table 3: Triggers anid Lending Levels and History of Privatization Table 4: Proposed Lending Program 2002/04 Graphs: Graph 1: Employment by Ownership Annexes: Annex A2: Belarus at a Glance Annex B2: Selected Indicators of Bank Portfolio Performance and Management Annex B3: Bank Group IBRD/IDA Program Summnary Annex B3: IFC& MIGA Program Summary Annex B4: Summary of Non-Lending Services Annex B5: Social Indicators Annex B6: Key Economic Indicators Annex B7: Key Exposure Indicators Annex B8: Status of Bank Group Operations Annex B8: (IFC) Annex B9: Country Program Matrix Annex B10: CAS Summary of Development Priorities i I EXECUTIVE SUMMARY i. In the past six years Belarus has recorded substantial economic growth, accompanied by strict controls over the political system and centralization of decision-making. The theme of the implicit economic strategy espoused by the Government has been very cautious reform with great concem for social welfare and stability. As such, it resembles the strategy followed by the China and Vietnam modernizations. But the similarities end there: the lack of protection of property rights and the unfavorable business environment have led to little SME growth, insignificant foreign direct investment, and little reformn in agriculture. The growth of the past few years has been led by SOE-based increases in production, and social outcomes have been disappointing. While the emergence of flagrant corruption and bad economic govemance has been largely avoided, indicators of social development have not substantially improved, and poverty, by Belarus national standards, remains high. The legacy of the Chemobyl catastrophe continues to affect many aspects of Belarus's life. ii. In shaping these developments, the economic and political relationship with Russia has been of paramount and increasing importance. Belarus has enjoyed very large subsidies chiefly through below- market price gas sales, and an open market for its products and barter practices. But this relationship is undergoing changes that are putting pressure on Belarus's leadership. Russia now offers Belarus financial assistance in hard cash conditioned on improved macroeconomic management and structural reform. The political agreement for monetary unification and economic integration will add pressure to improve the management of public finances and allow greater private sector activity. In sum, the over- cautious strategy of the past few years seems less and less tenable. iii. In part in reaction to these developments, Belarus has recently introduced some important changes in key economic policies (beginning from the exchange rate unification, and proceeding with partial price liberalization and initial measures to reduce business harassment). But for the "gradual" Belarus model to function, the country needs to substantially improve the business environment by increasing certainty over property rights, reducing business harassment, introducing harder budget constraints on SOEs and diminishing the constraints on their use of resources, and, critically, reforming its inefficient system of social expenditures. iv. The government program for the next few years sets a number of ambitious targets on the macroeconomic front, while re-iterating the cautious approach to reforms in pricing and property rights. As such, it still falls below the requirements for Belarus to enter on a growth path that will favor increased employment and protection of the most vulnerable segments of society. In particular, macroeconomic stabilization, still not yet achieved, was partially set back due to the election-driven wage increases in late 2001. It is important that responsible economic management again receive priority to avoid a reversal of the gains achieved in the past two years. v. The Bank group strategy for 2002-04 acknowledges these challenges and aims to address poverty concerns through a combination of: * Advisory activities to provide "state-of-the-art" advice on reform, particularly with regard to the business environment and social policies, and to nurture growth and involvement of civil society; • Support to reform and to resolution of issues of social and global concerns, through lending in three areas: (i) Global Public Goods that are also high on Belarus' agenda: (ii) Mitigation of social risks, including the consequences of the Chernobyl disaster; and (iii) Fostering private sector development through a better business and investment environment. vi. Under the low case scenario (which prevails at present), lending would be concentrated on Global Public Goods areas and projects directly targeted to the poorest segments of society, and limited to US$140 million (excluding GEF). Under the base case (predicated on substantial progress in reform of the business environment and in transparency of public sector accounts) lending could reach up to US$270 million for the three-year period. Lending under the base case would only commence after the Government has accumulated a one-year track record in improvements in business conditions, and when transparency of public sector accounts (including the Presidential Fund) is suitably ensured. A high case is not envisaged at present. Such a case would be presented to the Board of Directors in a CAS update if circumstances warrant it. Issues for Board Discussion vii. Executive Directors may wish to address the following questions: * Is the strategy of limited engagement to allow government to build a track record before widening the scope of Bank assistance adequate at this point? * Are the triggers for the base case, focused on fiscal transparency, macroeconomic stabilization and business environment, suitable? * Are the public goods and social sector operations appropriate areas for the low case Bank assistance? MEMORANDUM OF THE PRESIDENT OF TH1E INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT AND OF THE INTERNATIONAL FINANCE CORPORATION TO TBUE EXECUTIVE DIRECTORS ON A COUNTRY ASSISTANCE STRATEGY FOR BELARUS 1. The Belarus CAS for 2002-2004 (the third CAS since the countrv gained independence ten years ago) has been prepared jointly by an IBRD-IFC team. The strategy fully integrates Bank and IFC interventions, particularly in the key area of private sector development. World Bank Group assistance to Belarus has been limited in the last seven years, and the previous FY99 CAS set a strict trigger for resumption of IBRD lending to Belarus. This trigger (exchange rate unification) was met in September 2000. Since that time, quality and intensity of dialogue betwecn the country and the Bank have improved. This proposed strategy seeks to advance cooperation with Belarus in critical areas to help the country open up its economy and society, minimize social and environmental risks, and address global public goods concerns. This document reflects the results of extensive consultations with the Government and civil society held across Belarus during March-December 2001, a first for this country, as well as in-depth discussions with other partners in development. I. Economic and Political Background 2. Early Years of Independence. At independence, in 1991, Belarus inherited one of the highest standards of living in the former Soviet Union (FSU), as it was its industrial park for consumer goods, with a relatively better capital stock than other republics. But the economy was verv vulnerable, as it was dependent on the FSU for 90 percent of energy and 70 percent of raw materials imports, with its exports almost exclusively going to the former republics. In the late 1980s the country had suffered a major setback due to the Chernobyl accident and its human and financial consequcnces. 3. Belarus, with the support of international organizations, initiated preliminary reforms towards a market economy, including price liberalization and small-scale privatization. But the combination of inadequate macroeconomic management, lack of establishment and protection of clear property rights and the disruptions caused by the breakdown of the FSU, led to simultaneous acceleration of inflation and collapse of GDP, as well as the emergence of serious governance problems. 4. After President Lukashenka was elected on an anti-corruption platform in 1994, the new Government adopted an approach to economic policy based on emphasis on production, price controls, and directed credit. It also instituted tough anti-corruption provisions. The state retained control of most productive resources and a significant share of GDP was allocated to social expenditures and subsidies. Market-oriented reforms were very limited. 5. The new policy orientation of the Government produced some tangible results. Economic targets set in 1995 were met by the year 2000 (with the exception of the capital investment and agricultural production targets), despite the effects of the 1998 Russia crisis. As a result, Belarus's official GDP level is closer to its 1991 level than most FSU countries.' However, perhaps uniquely among the more advanced former socialist economies of Europe, GDP growth has not been accompanied by private sector growth: "true" private sector economic entities now account for about 10 percent of employment (and a lower share of GDP), slightly less than in 1994. The economic recovery of the past few years has been led by SOEs (or the "joint stock" successors to many of them, which behave as in earlier times2). It should ' There are some concerns regarding the methods and accuracy of GDP data. However, it is believed that these statistical problems are not sufficient to radically change the reported trend of real GDP. 2 While about 20 percent of employment is now accounted by "corporatized" SOEs, the change in legal structure has not led to any change in governance and behavior. A typical case is the Atlant refrigerator company, which has 2 Table 1: Main Economic Indicators 1991 1995 1997 1998 1999 2000 .s GDP growth (percent) -1.2 -10.4 11 4 8.4 3.4 5.8 4.1 | (percent of 1990 level) 100 65.3 74.8 81.1 83.9 88.7 91.4 Inflation (CPI percent p.a) 94.1 709 64 73 294 169 61 Inflation (CPI percent e-o-p) 147.5 240 63 182 251 108 42 Current Account Balance, (percent of GDP) -4.4 -5.8 -6.1 -2.2 -1.3 1.6 Central Government Balance. (percent of GDP) 1.7 -2.7 -2 2 -1.4 -2.9 -0.6 -0.5 General Government Balance (percent GDP) -1.9 -1.2 -0.5 -1.8 -1 -1.8 Trade wilh non-CIS countries (percent) 37 26.3 27 38 7 39.7 34.7 Poverty Incidence (national definition) 38.5 32.1 33.3 46.7 41.9 30.1 also be noted that the Belarus economy has received substantial economic benefits from Russia. 6. Political Developments. Since 1994, state power has been consolidated in the executive branch of government. This process began with the Presidential election of July 1994 and was reinforced with the 1996 amendments to the Constitution, which de facto extended the current presidential term of office from 5 to 7 years and also granted the President the power to issue decrees with the force of law. To protest these tendencies, the opposition (which remains weak and fragmented, as well as subject to harassment by police and the judiciary) boycotted the parliamentary elections held in October 2000. 7. The tight presidential grip on the country has been supported by an internal security apparatus that restricts personal freedoms and raises concerns abroad amongst governments and international human rights organizations alike. These developments have isolated the country and limited the assistance and support of the international community. The recent presidential elections, held in September 2001, led to the re-election of president Lukashenka for a further 5-year term, but were criticized by OSCE and other international observers as "free but not fair." Relations with OSCE, which has a mandate to facilitate democratization, are tense. 8. Russia/BelarusAgreements. Economic developments in Belarus (see Box I) are deeply linked to Belarus's political and economic relationship with Russia, which has provided the country with substantial economic benefits. Belarus has received very large energy subsidies, which according to some estimates amount to 10 percent of GDP, and it has enjoyed an open border providing easy access to the Russian markets together with generous provisions for barter trading. The agreement on eventual political unification of Russia and Belarus provided a political and psychological backing for the leadership's desire and belief in a "third way" model of social and political development. 9. In the past two years, however, some re-thinking has occurred on both sides. Much stricter signals, both on the economic and political front, have been sent to Belarus regarding the required changes for implementation of economic and political unification. For instance, the Union State treaty with Russia signed in 1999 includes detailed provisions on important common issues, such as Union State budget, ecological safety, single border control policy, etc. Most importantly, the protocol puts foith a plan for achieving a monetary union (by 2005) and harmonizing civil and economic legislation, including: (a) price regulations; (b) tax code; (c) foreign trade and customs regime; and, (d) harmonization of transport, energy, and telecommunications. Since the beginning of the year 2000, clear signals have emerged with regard to the need to move relations with Russia onto a cash basis (particularly with regard to gas imports), and on the need to improve public finance management in view of the challenge posed by a good market in Belarus, Russia and even Western Europe. The factory's ownership structure is roughly dixided between state (35 percent), municipality (25 percent) and employees. The stock is not tradable, no dividends are paid, management style has not changed in recent times, and no shedding of social assets has occurred. Box I: Recent Macro-Economic Developments Overall Economic Activity. After the 1998 Russian crisis, Belarusian economic growvth slowed down in 1999, when real GDP grew by 3.4 percent compared to 8.4 percent in 1998 and 11.4 percent in 1997. With Russia's recovery, economic growth increased to 5.8 percent in the year 2000. Since then, however, economic activity has weakened, as suggested by the rising level of inventories, non-cash transactions and domestic arrears, and the low level of profits and investments. This has affected mainly industrial production - the mainstay of economic performance. Agriculture output fluctuates with weather conditions. The economic growth for 2001 is reported to be 4.1 percent, Public Financev. The general government deficit was low at 2.9 percent of GDP in 1999, 0.6 percent in 2000, and in 2001 is at 0.5 percent. The deficit is financed mostly with intenal resources. Quasi-fiscal operations related to directed lending to preferred sectors were estimated at around 1.4 percent of GDP in 2000. In 2001, however, the Government eliminated directed credits from the National Bank of Belarus (NBB), including support for housing, and shifted the support for agriculture to commercial banks. Monetary Policy. Monetary policy has considerably tightened over the years, shifting from an expansionary stance in 1999 (the result of large quasi-fiscal expenditures) to tighter provision of credit to government in 2000 and 2001. Monetary, credit and banking sector targets under the IMF's Staff Monitored Program (SMP) were met. Inflation. Inflation rose in the aftermath of the Russia crisis from 182 percent in 1998 to 251 percent in 1999. Since then, the end-of-period rate of inflation has come down to 108 percent in 2000 and around 42 percent in 2001 due to tighter monetary policies. It should be noted that price liberalization measures throughout 2001 have kept the inflation level at a moderately elevated level. Exchange Rate. In September 1999, the Government decided to unify the exchange rates by the third quarter of 2000. To prepare for the implementation of this measure, beginning in January 2000, the pace of depreciation of the official exchange rate quickened, while the various parallel market rates converged to within five percent of each other and remained stable in nominal terms. On September 14, 2000, the unification of exchange rates became official. Since then, the foreign exchange market has been relatively stable. The currency revalued by around 6 percent in 2001. External Trade. Foreign trade and services contracted sharply following the Russian crisis, as the real appreciation of the Belarusian ruble eroded Belarus' competitive position. Exports and imports declined by 17 and 23 percent, respectively, cutting the trade deficit in half and the current account deficit by more than two-thirds (2.2 percent of GDP). This trade contraction was reversed in late 1999 and trade grew rapidly in 2000. The merchandise trade deficit increased from US$570 million in 1999 to US$838.1 million in 2000 and has come down in 2001 to U$580 million. Due to the positive balances in services' trade and net transfers, the current account deficit remained stable at US$193.7 million in 1999 and US$161.9 million in 2000. A current account surplus of around US$193 million is expected for 2001 partly due to sluggish domestic demand for imported goods that year. Some reorientation of external trade has taken place, but Russia still accounts for over 50 percent of export and 65 percent of import shares. the eventual monetary unification, Finally, Russian economic interests have renewed their attention to Belarusian industrial assets, and some instances of debt-equity swaps or outright buyouts of important enterprises have already occurred. 10. It is with regard to these developments, as well as to the deterioration in the financial performance of state enterprises, that the changes in economic management and attitude towards IFIs over the past year should be read. These external pressures are likely to continue to hold over the next few years, and provide the backdrop for the Government's announced intention to proceed with reforms at a somewhat accelerated pace. II. Social Outcomes and Poverty in Belarus 11. Poverty. With a relatively high per-capita income relative to former CIS countries, and with little 4 Box I: Poverty in Belarus By a US$4.3/day yardstick, commonly used, Belarus has the lowest level of poverty among FSU countries. Hence, it does not appear that there is any significant poverty problem in Belarus, at least not as measured with the yardsticks used in other countries. However, the Government is concerned about the elevated level of poverty as measured by its national yardstick. A good household tracking system has been developed with Bank help, which allows to understand the characteristics of the least advantaged in the country. The profile that emerges from this system shares the general characteristics found in recent studies in other CIS countries. As in other countries, children run a particularly high risk of poverty, especially in families with mmy children (3+) and in single parent households. Poverty incidence is nmuch higher in rural areas, and among population with low education level. Pensioner households are less likely to be poor than other households. Gender differences in poverty rates are generally not significant. Key facts are as follows: . There is a strong correlation between the size of households and poverty risk. Poor households have, on average, more members, especially children, than non-poor households. Single provider households which are generally headed by single mothers, are particularly vulnerable (58 percent: of such families with 2+ children are poor). . The poverty rate for retirees is lower than the average for the country - 33 percent. Poverty among pensioners is tempered by the fact that most of them keep working, including on private plots. In addition, the real value of pension benefits is a better protected budgetary item than other social payments and wages. . The highest poverty incidence rates are among households with working members engaged in agriculture: 55 percent of them are poor, followed by those employed in education - 37 percent. . Poverty rates vary significantly by regions and between urban and rural areas - the respective poverty rates are 33 percent and 43 percent. At the same time, poverty is higher in Brest, Vitebsk, Grodno and Mogilev oblasts (41-44 percent of population), and the lowest in Minsk city (19 percent). Although rural households have greater access to arable land and thus more in-kind income than urban resident, their earnings from formal employment are significantly lower. * There appears to be a strong relationship between education of able-bodied population and poverty status of households. Only 20.6 percent of citizens who received university degree are below the national poverty line whereas for those with incomplete or secondary education the figure stands at 50.1 percent. . The temporarily unemployed are also among the most vulnerable groups - 52 percent among households with unemployed member(s) are poor. . Frequency of poverty spells, average duration of poverty and severity of poverty also tend to deteriorate. The average duration of poverty over the course of a year has increased from 4 months in 1998 to 6 months in 1999. Source: World Bank; Ministry Labor and Social Protection; Ministry of Statistics and Analysis economic restructuring having taken place, Belarus shows comparatively little poverty when using the international yardstick of an equivalent consumption of $4.3/day. At this rate, only about 10 percent of the Belarusian population was to be considered poor in 1999, compared to, say 50.3 percent in Russia or 18.4 percent in Poland3. Yet the perception in Belarus is one of continuing large poverty by local standards, despite considerable amounts that are spent on social protection (about 45 percent of budget expenditures, not including pensions, are classified as "social," with 5 percent going to direct social assistance schemes). The incidence of poverty, measured as the share of population having incomes below 60 percent of Minimum Consumption Budget, has shown an erratic trend, despite the GDP growth recorded in the official statistics. Following the adjustrnent to the external shock brought by the Russia 3 There are serious statistical problems in using the US$4.3 poverty line in Belarus, owing to the fact thal PPP estimates for 1996 (the base year for such computations) have been updated using a highly distorted CPI index, which does not reflect accurately the price dynamics of the consumption basket of poor households. crisis of 1998, officiallv estimated poverty rose to over 40 percent of the population in 1999; it declined sharply, however, in the two subsequent years. During the first nine months of 2001, poverty measured by this yardstick fell to 30 percent of the population (helped in part by the generous but not necessarily sustainable policies of wage and pension increases decreed by the Government in 2001). The behavior of this poverty indicator reflects in part the fact that income inequality has remained low, with a Gini coefficient of 0.258 and 0.270 in 1997 and 2000, respectively. These patterns also indicate the "shallowness" of poverty in Belarus, at least as measured by the minimum consumption basket, and that small changes in per-capita expenditures can lead to large numbers of people falling below the poverty threshold. At the same time, the duration of poverty spells has been rising over the recent years and families with children have been affected disproportionately (families with children and particularly those with more than 2 children have much higher poverty rates, they tend to stay in poverty longer and show higher poverty depth coefficients). In addition, as discussed in Box II, poverty appears to be a rural phenomenon, with large regional influences, and one that affects families with many children. 12. This poverty picture is posing important questions for social support policies and the understanding of the labor market. Moreover, perhaps equally important to the perception of current poverty is the concem within government of the potential for a substantial increase in poverty, with the attendant threat of social unrest, if economic reforms were to accelerate. The Government and the Bank have already begun exploring options for reforming the system of social assistance that could serve as the basis for better targeting social assistance programs to those most affected. The Government is also considering working with the Bank on the improvement of labor market data and analysis to provide deeper insights into poverty developments and possible poverty reduction strategies. But a lesson that emerges is that the growth path of the past few years, with little if any employment generation in the SME sector and no agricultural reform, has not served well the least privileged segments of society, as it is less likely to create income opportunities to prevent increases in poverty in the future. 13. Civil Society. Belarus, like other FSU countries, inherited weak civil society institutions, where the community, trade, sports and other organizations were tightly linked to the state apparatus. The tight control over civil society organizations influenced the slow transition process in Belarus.4 The old civil institutions have continued to operate. However, in parallel, new non-government organizations have emerged, focused mainly on critical areas that do not receive enough attention from the state, such as: (a) TB/AIDS; (b) environmental and other consequences of Chernobyl; (c) assistance to small businesses; (d) health problems, especiallv for children, and (e) providing support to the poor, veterans, and other vulnerable groups. Although the number of these civil society organizations is small, the difficult circumstances under which they operate have led to the emergence of highly professional, committed and resilient organizations, which have acquired the skills and know-how for a productive partnership in development and implementation of social priority programs that seek to reach marginalized members of society (See Box III for details). 14. Gender Issues. Gender-related problems in Belarus seem to be less pronounced mainly due to the slow pace of reform and tight state control. However, some problems do exist. Young people have increasing difficulties in finding jobs. Women have fewer possibilities for retraining after losing their jobs, and limited access to credits makes it almost impossible for women and young people to engage in entrepreneurial activities. On the other hand, some of the more dramatic problems that have hit young women in other neighboring countries (such as increasing prostitution and trafficking), although not unknown, are less pronounced due to the less permissive atmosphere. Special attention should be paid to the worrisome trend in life expectancy, where the gap between men and women is one of the highest in According to an opinion poll conducted in April 2000, the majority of Belarusians (57 percent) support democracy, while 20 percent still believe that dictatorship can be better in some situations; over one third (35 percent) indicate their willingness to emigrate. This statistic illustrates the different perceptions and uncertainties about the future of a society 10 years after independence. (Belarus: Choices for the Future, National Human Development Report, 2000, UNDP). 6 Box III: Civil Society in Belarus. Belarus, like other post Soviet countries, is in the process of "re-inventing" civil society with new forms of institutions and functions (political parties, trade unions, religious organizations, non-governmental organizations (NGOs), etc.). Though freedom of citizens' association is guaranteed by the Constitution, since 1995 the state has imposed a complex regulatory framework for civil society organizations. Some activists openly question the existence of civil society, and feel that currently there are only emerging entities trying to define themselves and get recognition. Activity of non-registered organizations, including initiative groups (which are often the only from of citizens' cooperation in small settlements) is prohibited. This situation was further complicated with the introduction of NGO re-registration requirements in 1999 which drastically reduced the number of operating entities. The Presidential Decree #8 "On Certain Regulatory Measures and Procedures on the Receipt and Use of Foreign Aid," which came into force in April 2001, introduced another serious obstacle to civil society organizations. It strictly regulates the receipt of foreign humanitarian assistance and the establishment of networks with international institutions and with counterparts in other countries. Finally, civil society organizations face difficulties in raising money for their activity, as there are no tax incentives for donations by organizations or citizens. After the presidential elections, the attitude toward civil society organizations has worsened further because authorities identify NGOs with political structures and do not separate the purely development-oriented organizations from the political ones. Despite this difficult enviromnent, meetings with representatives from the non-governmental sectors reveal the existence of genuine development organizations set up by dedicated professionals, committed to their work and willing to make a difference. In the absence of substantial donor support and grant money, NGOs have managed to organize themselves and serve large communities. It is important to note that many Belarusian NGOs are grass-root organizations that rely on voluntary work. Altlhough legal arrangements exist, no efficient mechanism is in place for cooperation between the govermment and society. Some NGOs have managed to establish good relations with local authorities and are recognized as valuable partners. For instance, the Ministry of Natural Resources has created an advisory group of civil society organizations to cooperate in areas of common concem. Currently, about 2500 (one per 4000 people) non-govemmental organizations are officially on record and active, including the structures inherited from the Soviet era, such as the Belarus Federation of Trade Unions, with a membership of 4.5 million, or 54 percent of the population over 14. NGOs and initiative groups test broad spectrum of approaches to identify and address key community issues. The majority of organizations (about 60 percent) are concentrated in Minsk and regional cities, with a small number of non-registered organizations at community level where population is often unaware of opportunities for self-realization and promotion of their interests through NGOs. Lack of information exchange and coordination among and within different constituencies and absence of basic communication equipment in small communities hampers Belarusian NGO development. Political parties are undeveloped, thus compelling NGOs to fill the gap in an attempt to address issues that normally belong to the political province. At the same time, the emerging business community, a vital part of civil society, is playing an increasing role in the country's development. The main areas of NGO work include cultural activities; the future of children, their health and education; problems of the handicapped and invalids; gender issues; and Chemobyl matters. Membership is wide-ranging, however, it is worrisome that not many young people are attracted to voluntary work. the world - 63.4 years for men and 74.7 years from women. This is because of the serious male-related problems, largely due to unhealthy lifestyles, including an increase in drinking problems. III. Belarus's Development Agenda: Is Continued Gradual Reform Feasible? 15. Belarus has tried to follow, since 1995, a model of economic reform similar to that of other successful transition economies in Asia (China, Vietnam). Slow liberalization of key economic parameters (though not free of reversals and changes of course) is coupled with maintenance of a strict apparatus of political control, and great attention is paid to social peace and consensus. As discussed, the Belarus model has been relatively successful (certainly in the eyes of its proponents), avoiding some undesirable consequences of reforms in other FSU countries, particularly in the area of SOE governance. 7 Can this model continue to provide positive economic results in the years to come'? The answer has to be negative, unless substantial changes are introduced in key areas of economic policv-making and the business environment. There are important differences between the Belarus reform way and that of successful formerly centrally-planned Asian reformers, like China and Vietnam that lead to this assessment. Four clements have been key to the success of the Asian transforming economies: (i) a strong supply response in agriculture, based on price liberalization and reform of land use rights, that has permitted the lifting of millions of peasants out of poverty; (ii) a large inflow of FDI, which has been key for growth and creation of modem industrial and service sectors; (iii) high saving rates; and (iv) strong growth of urban private sector and SMEs in particular, which have provided the engine for growth while the SOE sector has generally languished. 16. In Belarus these four elements are neither present nor likely to materialize, unless substantial changes to the business environment and to the institutions that protect private property and activity are introduced. In the absence of progress in these key areas, the country is likely to see its margins for maneuver reduced over time as enterprise profitability continues to decline, and as the subsidies from Russia are reduced. A slowing economy, and the absence of job creation in the private sector, could end up straining the social fabric of the country. Thus, even to effectively implement a gradual approach to reform, Belarus needs to embrace a program predicated on5: * Continued improvements in its macroeconomic situation and introduction of hard budget constraints, while granting more operating flexibility to SOEs. * Bringing substantial improvements to the business environment to allow the creation of economic opportunities by reducing price controls and other complementary measures. * Increased transparency and efficiency in the management of the budget, particularly with regard to the social protection system, which is oversized and inefficient, and performs poorly in many areas. * Dealing with the important environmental agenda, and in particular with the continuing legacy of the Chemobyl catastrophe, which has had important economic, fiscal and social consequences which continue to this day. * Facilitate emergence of civil society voices and organizations that will enrich the social fabric, facilitating attention to social problems and the emergence of a strong SME sector. A. Macroeconomic Stability and Growth 17. Since the year 2000, Belarus has made some progress in macroeconomic reform and stabilization as well as, more recently, in some areas of structural policies. Already the economy is fairly open to intemational trade, and the share of exports to non-CIS countries has increased. Through stricter fiscal and monetary policies, inflation was sharply reduced, while the growth rate stayed high. Internal tariff adjustments, which reduced the energy subsidies directed to domestic consumers, made it possible to re- unify the exchange rate in September 2000. Subsequently, an understanding with the IMF was reached on a Staff Monitored Program (SMP) which ran between April-September 2001. The program was only partly successful. Most macroeconomic targets were attained, use of directed credit was curbed, and several of the small but important reforms in price setting, business legislation, and small scale privatization were introduced. However, the fiscal target was not met. The major reason for this was the implementation of wage increase to US$ 100/month, which resulted in further deterioration of enterprise profitability and a revenue shortfall. The Government needs to reconsider its policy of targeting wages in 5 These reform proposals are consistent with the lessons emerging from the more advanced transition countries described in Transition: The First Ten Years: Analysis and Lessons for Eastern Europe and The Former Soviet Union, World Bank, 2002. 8 dollar terms and move in the direction of productivity-oriented wage policies, allowing enterprises to set wages independent of budgetary wage policies. 18. The country has been holding talks with both the IMF and the Russian Government regarding the macroeconomic outlook for 2002 and beyond. In the absence of major shocks, it is reasonable to expect that the target of monetary unification with Russia will become more realistic over time and will drive improvements in fiscal and monetary policies. Still, wage polices and the situation in the SOE sector and agriculture threaten macroeconomic stabilization. It will be necessary to reduce direct and indirect subsidies to enterprises, conduct a prudent wage policy, and introduce hard budget constraints for SOEs, while providing greater flexibility in their management. Although much progress has been registered in the elimination of off-budget subsidies, one of the main reasons for the run-away inflation of the past, the budget is likely to remain under severe pressure, and with it the macroeconomic framework, if wage policies are not made consistent with the economic realities of Belarus. Failure to subject enterprises to hard budget constraints, while providing needed managerial flexibility, can lead to substantial inter- enterprise arrears as has been the case in other CIS countries. Graph 1. 19. Hard budget constraints Belarus: Employment by Ownership for SOEs are needed to manage the expected reduction in gas .. .-...- ..-. subsidies and to lower the direct 1 00°o1, s 3 . 51 5and indirect transfers to the productive sectors. Phasing out cross subsidies, especially in 60 ' 0O Private energy and communal utilities, -1 11 |= lilthr will facilitate introduction of hard 40c,'.r', 11 IIL LS budget constraints. The country StE1|1 Eate will also need to tackle current restrictions on wage setting, hiring and firing, maintenance of social 1990 1994 1999 assets, that limit the ability of SOEs to respond to changing Note: The "other" category includes companiies that have been transformed into conditions, and could prove a joint stock, but where govenument retains control. hindrance in the years ahead as the economy struggles to adapt to a changing external environment. 20. Governance. Institutional developments in Belarus appear to have prevented the emergence of the level and types of corruption and other governance problems found in other FSU countries. Belarus kept in place the old institutions, which follow established practices. This has allowed public institutions to function more effectively than other FSU countries. Relatively high levels of remuneration as well as the lack of alternatives in the private sector have permitted the public institutions (at all levels) to retain high quality specialists. But most of new market friendly institutions are yet to be built. The legal system has not changed and would have to be radically modified if a market-based economy is to emerge. B. Creating Opportunities for Job Growth 21. The environment for the "true" private sector remains unfavorable. It is estimated that private sector employment accounts for no more than 11 percent (see Graph 1). With privatization proceeding slowly and sporadically (basically on hold since 1998 except for few sales of mostly individual assets), most productive assets are in the hands of the state and potential private entrepreneurs find it difficult to get access to land and real estate and other basic inputs to undertake production. Small-scale privatization has not been completed. 9 Box IV: Constraints to Business Development and History of Privatization Constraints to Business Development. The level of development of private businesses in Belarus considerably lags behiind all neighboring counitries both in their nmibers as well as in tlhcir sustainability. Belarus witlh approximately 2.6 private small and medium enterprises (SMEs) per 1000 population has the smallest number of SMEs in comparison with its FSU ncighbors', and is the only transitional economy in which the number of private SMEs decreased in 2000 and 2001. Surveys show that unfavorable business environment is the main reason for slow entry and low growNth of SMEs. Excessive state regulations, close management of private business affairs by state agencies. formal anid informal preferential treatment of state enterprises, all contribute to the current situation. Registration of new SMEs in Belarus takes twvo to four times longer (57 days) and costs two to three times more (US$ 223) than in other FSU countries. Similar is the situation with licensing, where cntrcprenieurs in Belarus (5.5 licenses per SME) have to obtain three to five more licenses than tlhcir colleagues in Ukraine (1.6) or Georgia (0.9). The clearance of import and export documents takes on average 3-4 days in Belarus compared to 1-2 days in Georgia or 2.6 days in Ukraine. Over the last hvo years, the state has increased its interventions including monitorinig, control and active management of private business affairs by the line ministries and state control organs. This includes widespread control of contracts as well as price controls. Businesses in Belarus are muclh morc rigorously inspected than anywhere else in the region -- average nvumber of days someone is inspecting an SME in Belarus is threce times higher than in Ukraine, namuely 68 versus 24 days in Ukraine. Only individual entrepreneurs in Belarus enjoy significantly lower inspection burden, which is actually comparable to the inspection burden of enterprises in Ukraine. The Goveriment's policies with respect to the private sector have shown some improvements lately. For example, the Presidential Decree No. 40, issucd in November 1999, which had provisions for out-of-court confiscation of property, was revoked on November 2001. The Govermnent has committed itself to some improvements in conditions for entreprencurship, such as, for instance, a new law on licensing and a reduction of the golden share provisions in privatization. So far, the most important measure that has brought about benefits to the private sector has been liberalization of the currency regime. However, much more needs to be done in order to build a conducive environtment to private sector growth. But even a simple reduction of activities such as urnecessary licenses and price controls or elimination of state institutions that hinder business development (state control body) and reduction of inspections to one per year. would have a major positive impact on SME. Privatization in Belarus. Consistent with the Government's strategy to maintain the status-quo as far as ownership of means of production is concemed. privatization in Belarus has not yet taken place. In 1991, state ownership restructuiring began in 40 enterprises. In 1993, Belanis adopted the Program of Dcnationalization and Privatization, which allowed the privatization of two thirds of major public assets and stipulated that 50 percent of privatized assets of state companies would be granted to the Belarusian citizens. However, in 1997 the privatization process was suspended, and as a result the share of private sector in the economy has remained virtually constant at about 10 percent (employment-based) since then. It should also be noted that none of the supporting institutions for a market economy are in place. and therefore, it is important to focus on building the necessary preconditions for privatization at this stage. 'Ukraine has 4 SMEs per 1000 people. Russia - 6 and Poland - 35. 22. In Belarus. certainty over property rights is strongly diminished through informal but powerful measures taken bv the executive that result in arbitrary dispossessions, economic losses and forced "voluntary" contributions to sectors of the economy that may be enjoying a favorite position (such as, for instance, housing). Transaction costs are also very high, as little certainty exists as to the application of laws that can be overruled by presidential decree and by other administrative fiat. Businesses are often subject to registration drives and the overall macroeconomic environment has not been nurturing of new economic activity. The result, not surprisingly, is that Belarus ranks very low in terms of creation of SMEs, and has had one of the worst records of FDI in the FSU. And, yet, the limited experience in Belarus shows that there is good potential for private sector development and that investing existing 10 resources in private rather than SOE sector can bring greater incomes and employment. (See Box IV on Constraints to Business Development). 23. Constraints to growth are particularly significant in the agriculture sector, where very little progress has been made in introducing market forces and creating property rights. As a result, the sector has been declining steadily and suffers from a very poor financial situation (with notable exceptions provided by the few private farms and by farms that have been allowed to restructure). The Bank has provided considerable knowledge transfer on the experience of other economies in transition and on options for reform in this area. So far, however, little progress has been seen in developing a strategy to move forward, although the Government announced its willingness to experiment with several possible models in the future. 24. Finally, the general consensus is that the financial sector does not fulfill a role of encouraging savings and distributing resources towards the most productive uses, but rather that it has been influenced by the Government to direct credit to favorite sectors (particularly agriculture and housing) and to selected enterprises. While the Central Bank has been recently granted an independent status, there are serious questions on its de facto independence. Equally, because property rights are not firmly guaranteed the health of the portfolio of major banks is likely to be at least questionable. While this subordinate role has been possible in the past few years, adoption of harder budget constraints and of the Russia treaty are likely to exert substantial pressure on the system that will need to be addressed in the years to come. There is need to improve the understanding of the status and operation of the financial sector. C. Improving Management and Efficiency of Public Expenditure 25. The public sector budget absorbs close to 47 percent of GDP, putting a high fiscal burden oin the productive sectors. In addition, a significant amount of public resources continues to be managed off budget by the government or subordinate agencies, which can use discretionary powers to draw resources out of enterprises. This discretionary power drains resources from enterprises, now in a difficult financial situation, and reduces the transparency in the management of public resources. The Government needs to improve reporting of public expenditure and reduce expenses to improve effectiveness and lessen the fiscal burden on the enterprise sector, which increasingly cannot comply with existing tax legislation. 26. This is especially true for the social sectors which today receive some 25 percent of GDP. Despite this significant allocation of resources, poverty continues to be an important problem in the country and delivery of health and education services need significant improvement. Most notably: * With respect to Social assistance, the problem consists of the existence of a myriad of privileges for different classes of beneficiaries that would, if funded, require multiples of what is actually spent. A productive dialogue has taken place between the Bank and the Government (with the participation of other donors). Bank assistance has led to the implementation of a pilot Targeted Social Assistance Scheme, which has provided satisfactory results so far. The challenge now is to extend the pilot nationwide, while introducing measures to reduce untargeted, untested benefits that are too expensive. * With regard to Health, Belarus faces multiple challenges - in prevention, treatment, policies, and effective resource use. Natural population growth turned negative between 1990 and 1999, as the falling crude birth rate dropped below the rising crude death rate mainly due to economic hardships. Non-communicable diseases lead the causes of death, with alcohol playing the largest role and adult male mortality well above rates in other countries. But communicable diseases - led by MV/AIDS, TB and sexually transmitted diseases - threaten a sharp resurgence. Inherited policies allocated resources ineffectively among many competing claims and caused their use to be highly inefficient. Both policy makers and consumers have judged the sector's performance to be unsatisfactory, but the Government is also unimpressed by health reform experiences in other 11 formerly Soviet republics, and has so far responded by: (i) launching a number of pilot initiatives that begin to address the problems, including initiatives on health care financing and communicable disease strategies; (ii) planning for further reforms in financing, service delivery, and oversight within the health sector, and (iii) working with the Bank to prepare both a TB/AIDS project and a health policy note. This has created a constructive and productive policy dialogue on all aspects of health between the Government and the Bank. D. Dealing with Environmental Challenges and the Legacy of Chernobyl 27. Belarus has made good progress in the protection of its environment, especially in energy conservation and protection of natural resources. Energy intensity declined by 44 percent from 1990 to 1999 as a result of the change in the structure of production and of active energy efficiency measures taken by the Government. Emissions of air pollutants have also declined as a result of the increased use of natural gas. Most measures of air and water quality in Belarus have either remained stable or improved over the last decade. The areas under protection, mostly wetlands, have increased by 30 percent since 1991 and are now close to 12 percent of the national territory. High collection rates of environmental fees and fines and successful use of international environmental funds have resulted in higher overall levels of funding to the environment than in some neighboring countries. 28. Nevertheless, Belarus is still facing many environmental problems. The forestry resources of Belarus are growing in volume terms but the present management system encourages inefficient use of raw materials and does not generate the maximum benefit in terms of income and employment. In the water and energy sectors, government policies directed to promote social protection have led to a system of complex price controls and low utility tariffs that did not generate sufficient resources for long-term environmental friendly investments. 29. The required reforms to improve the environment include further improvements in energy efficiency, relying more on locally based management to improve rural and small town water supplies and introducing demand driven management of utilities such as water. One area of high priority for action is the preservation of unique ecosystems and biodiversity present in Belarus. Finally, increases in forested land can contribute to carbon sequestration. 30. A problem of key significance concerns the legacy of the Chernobyl catastrophe, which in addition to environmental has economic, human and fiscal consequences. After the explosion at the Chemobyl Nuclear power plant in 1986, over 70 percent of the radioactive fall-out landed on Belarusian soil, contaminating almost 23 percent of its territory. As a result, economic activity on the 261,000 hectares of arable land (about 3 percent of the total arable land) and on 36,000 hectares of forests has been banned due to the high degree of contamination. Chernobyl also has an enormous human dimension - about 137,000 people were evacuated from the highly contaminated areas. As of January 1, 2001, about 1.6 million people in Belarus lived in areas with radioactive contamination. Although the precise health effects of the Chernobyl catastrophe are yet to be determined, the link of significant increase in childhood thyroid cancer to the accident has been proven. 31. The Government has been allocating significant, although declining, resources to address the consequences of Chernobyl (1.6% of GDP in 2000) which has put significant pressure on the budget. However, the effectiveness of some programs is questionable, and the sustainability of current programs is unclear due to the projected further decline in resource allocation to this area. A new State Program to deal with the aftermath of the Chernobyl disaster for 2001-2005 and up to 2010 was adopted in January 2001. The program is based on extensive assistance programs, which create dependency and diminish people's own initiative in resolving their problems. There is a need to move away from this approach and encourage people to take a more active role in re-building their lives. 12 E. Facilitating the Emergence of Civil Society Voices and Organizations 32. Civil society can play a central role in smoothening economic transition in Belarus. Active civil society organizations identify emerging economic and social problems and contribute with imaginative solutions, which in many cases complement or even substitute for government actions. Belarus, like other FSU countries, does not have a strong civil society tradition; but, the limited experience in areas such as HIV/AIDS prevention and the development of SMEs shows that, in Belarus too, civil society organizations can be quite effective. Their further development, though, will require a nurturing institutional environment. Thus, there is need to assure an adequate legal framework and guarantee an ample scope for their operation without undue external interference. IV. The Government Program 33. The leadership of the country is aware that the strategy that has supported economic growth in the past has been largely exhausted and seeks to set a new course of gradual transition to a "socially oriented market economy." The Government's long-term commitment to social policies would be complemented by an acceleration of structural reforms, and tight fiscal and monetary policies to maintain macroeconomic stability. In the fiscal area, the Government has announced its intent to maintain a budget deficit of no more than 1.5% yearly. It plans to ease the tax burden (from 36.2% of GDP in 2001 to 33.9% in 2002, with a further 5-6% reduction by 2005) and broaden the tax base by cutting individual exemptions and privileges. It also plans to continue limiting credit from the National Bank to the Budget. 34. The Government also intends to reduce the impediments to growth of small and medium enterprises (SME) by simplifying registration procedures; reduce the number of entrepreneurial activities subject to licensing (from 165 to 42 in 2002 and to 10-12 in the next couple of years); streamline the SMEs taxation procedures; and significantly reduce the burden of inspections and unwarranted controls. The Government has already made initial progress in some of these areas. 35. A significant streamlining of the public administration was initiated in September 2001. This has resulted in a reduction in half of the number of ministries (from 44 to 28) as well as in the number of Cabinet members (from 60 to 38) and in the number of Vice-Prime-Ministerial positions (from 8 to 4). The total bureaucracy headcount is to be cut by up to 10%. 36. The Government has been liberalizing, under the recently expired IMF Staff Monitored Program, the extensive system of price controls and is planning to limit the controls to fuel, energy, natural monopolies and some "socially significant" goods and services. Keeping price controls on selected goods, as proposed, would still require pricing consistent with the cost of production. The Government will also develop a strategy to phase out the cross-subsidy system in housing and communal services. Likewise, it plans to pursue WTO accession which implies institutional changes, guaranteeing equal treatment for domestic and foreign enterprises and trade reform. The Government expects that these measures will help bring in foreign investment. 37. The unification agreement with Russia, currently under implementation, is likely to play an important role in shaping Belarus's future macroeconomic and structural policies. Thus, the planned common currency area by 2005 will constrain the use of fiscal and monetary instruments to subsidize the productive sectors. The Governments of Belarus and Russia have already created a joint working group for the development of common economic policies and defined a priority legislative agenda needed for harmonization. The Central Bank of Russia has allocated funds in 2002 for the stabilization of Belarus' currency and to facilitate procurement of energy resources. 38. Regarding social policy, the Government is planning to shift to a targeted system of public assistance, which will reduce the fiscal burden and assure attention to the poor and needy. In this regard, it has already initiated pilot programs with Bank support. It is also considering reforming the health care system to reduce fiscal cost by increasing the number of paid-in services, propping the share of non- budgetary financing from 30% in 2002 to 50% by 2005. 39. As a result of these policies the Government hopes to meet the targets set in its Work Program fol 2001-2005 approved by Parliament in December 2001, which sets numerical goals for economic development, defines the role of the government structures and local administrations in the attainment of the goals. It projects the following growth numbers for the 2002-2005 period: GDP -- 35-40 percent, industrial production - 30 percent, agriculture - 25 percent, real wages - 80-85 percent up to the average monthly level of US$250 by the year 2005. 40. Bank assessment. The overall direction of the Government's program is a gradual reform course. which is aligned with meeting the requirement of the unification agreement with Russia, However, there are several concerns that would need to be addressed. Despite the positive policy changes in the past two years, including the exchange rate unification and stricter monetary policy, macroeconomic stabilization is not vet secured. Late last year a set-back to economic stabilization was caused bv the decision to increase wages in the budgetary, and enterprise sectors to the equivalent of US$100/month. This measure, unaccompanied by corresponding increases in productivity, has resulted, predictablv in (i) a substantively higher wage bill in the government sector, and in (ii) increased difficulties for enterprises, an increasing number of which are falling into arrears to other enterprises or the tax authorities. This was the maill reason for Belarus's inability to fulfill the IMF's Staff Monitored Program benchmarks. What is more worrisome, the Government's program calls for further increases in wages in dollar equivalent, which, if implemented, would most likely lead the country towards a new spiral of hyperinflation and external insolvency. Therefore, wage policies should reflect the economic realities of the economv and not political and unrealistic objectives. 41. Thus the quantitative targets of the program, appear over-optimistic. and are above the estimates of the Bank given the marked inconsistencies among proposed policies, including wag,e setting, fiscal balance and enterprise profitability. In these circumstances, it is important that the GovernmenL adheres to more realistic forecasts in its macroeconomic program and eliminates inconsisteincies among p . to prevent shortfalls in revenue projections and the emergence of budgetary arrears. Lastly, there remain areas of concern which are not properly addressed in the Government's program, as is the case of agnculture and privatization. V. Medium-Term Macroeconomic Scenarios A. A Most Likely Scenario 42. A probable scenario for Belarus over the 2002-04 CAS period would be driven by the p.olicy convergence needed for monetary union with Russia in 2005. Achieving this objective is complicated by differences in economic structures and economic policies in both countries, but the process of integration with Russia will likely encourage market reforms. In this scenario, the Government would partiallv remove price controls aDd introduce partial reforns in the business environment consistent with the slowly changing politico-economic environment and with social priorities. Despite likely advances in small-scale privatization and growth in new SMEs, the private sector would stav limited in size and scope and have only a relatively smiall impact on GDP growth and employment. The Govermment would continue to make progress towards achieving a sound macro-frameveork by observing progressively sound monetary policy and a reasonable fiscal policy. As a result, the inflation rate is projected to drop from 61 percent in 2001 to around 10 percent in 2004. Furthermore, it is assumed that the exchange rate will remain unified and that the Government would phase out the use of direct methodls to induce production and exports and control quasi-fiscal expenditure. It is also assumed that the external environment would remain favorable, especially the continued growth of the Russia's market. 43. Under this scenario, economic growth wouid slow down since capital utilizatiolu has already reached a point where new investment and technological innovation are necessary for conatinued robust 14 growth, and the Russian market would be becoming increasingly more competitive. Taking account of a slower export drive, it is expected that economic growth will drop to 1.5 percent in 2002. Thereafter, economic growth would pick to reach above 3 percent by 2004. Given the decreasing population trend, the rate of economic growth per capita would exceed 3 percent. 44. As indicated above, this base case scenario assumes that exports would grow at a rate slightly lower than GDP due to (a) capacity constraint restrictions; (b) higher costs of energy and other imported inputs; and (c) stronger competition in the FSU markets. Hence, adjustments in energy prices to intemational levels and the general deterioration in the terms of trade would lead to a gradual worsening of the current account deficit6, which would go from an estimated surplus of 1.6 percent of GDP in 2001 to a deficit of slightly above 2.0 in 2004. In the past, current account deficits were typically financed through a combination of accumulation of arrears, debt forgiveness and debt/asset swaps with Russia. This scenario assumes that these gap-filling mechanisms would continue to operate during the next CAS period and that additional finance from Russia would come to fill part of the incremental current account deficit. Already Russia is providing assistance for U$250 million over 2001-2003. 45. Belarus's official public external debt stands at around 7 percent of GDP, among the lowest of all Table 2: Belarus: Key Macroeconomic Indicators during the Next CAS Period 2001 2002 2003 2004 Estimate Projections GrowthRate of GDP (percentp/a) 4.1% 1.5% 2.1% 3.4% Total Debt / GDP 7.4% 7.4% 7.3% 6.9% Debt Service / Total Exports 3.0% 2.9% 2.7% 2.3% Government Deficit / GDP 1.8% -0.7% 0.0% 0.0% CAB (incl official transfers) / GDP 1.6% -0.5% -0.6% -2.1% Memo: CAB in US $ Million 193 -62 -77 -271 transition economies7. The relatively limited projected current account deficits under this scenario would imply a slight decline in public external debt, to less than 7 percent of GDP by 2005. Even if reforms proceed at a slower pace than needed for monetary unification with Russia, the mid-term scenario. presented here would not be expected to change significantly. B. Stagnation 46. If the Government fails to carry out the main elements of the base case reform package, a significant slowdown in economic activity would be possible, with return to high levels of inflation and general tightness on the external front. As seen in the past, under these circumstances it could be expected that the authorities would resort to arrears and increased administrative controls on the exchange 6 Thus far, however, the recent agreement between Russia and Belarus has lowered gas prices even further to $25 per 1,000 cubic meters. Also, increases in oil prices may be more limited than thought due to the fact that 40 percent of imported oil is re-exported. 7 It is likely that the effective external debt of the country is higher once account is taken of the external debt of SOE without government guarantee. But, this type of non-guaranteed debt is not likely to burden the balance of payments, as it would have to be settled through individual arrangements between lenders and debtors, mainly through debt/asset swaps. 15 rate. 47. While this development would be the result of economic behaviors not consistent with present agreements with Russia and with the IFIs, it cannot be considered improbable at the present time. In that case a number of alternative scenarios could present themselves, either leading to prolonged depression for the Belarus economy, or to the emergence of open political conflict over the fundamental directions of the country. In either case, the Bank would limit its assistance to global goods or poverty-related activities. C. A High Case 48. During CAS implementation reforms could possibly accelerate, leading to what could be called a high case scenario. An accelerated reform scenario, though, is not likely to have a considerable positive impact on the rate of economic growth over the next three years. Rather these reforms are likely to have a significant impact on the rate and the quality of economic growth beyond this CAS. A scenario of accelerated reforms, though not yet quantified, would likely require additional external financing to sustain the reform drive. The Bank Group would prepare a CAS update if such a scenario were to arise. VI. Bank Assistance and Lessons Learned 49. Belarus joined the Bank in 1992. Soon after, the Government embraced a stabilization program and requested World Bank and IMF assistance. The Bank's response followed the sequence similar to other interventions in the FSU countries. An Institution Building Loan (US$8.3 million) was approved in July 1993 to assist in building new market institutions and to enhance the Government's ability to design and implement economic reforms, followed by a Rehabilitation Loan (US$120 million, November 1993), to facilitate adoption of key reform measures and provide foreign exchange for critical imports. The IMF approved a Systemic Transformation Facility (STF) in July 1993. 50. The Bank prepared a limited CAS for Belarus in 1993, which was followed by the preparation of a full CAS in 1995. This was withdrawn from consideration by the Executive Directors at the Government's request. 51. Since 1995 lack of agreement on reform prevented further Bank lending. The only operation approved between FY95 - FY00 was a GEF Ozone Depleting Substances (ODS) grant (FY97, US$6.9 million). Bank efforts focused on developing the basis for a stronger dialogue on economic reform. A number of pieces of ESW were carried out, including a poverty assessment (FY96), two CEMs (FY93, FY97) and sector studies in agriculture, energy, environment, transport, finance, and enterpnrse development. The Bank also remained active in carrying out public education programs and facilitating discussions on pressing reform issues with government agencies, research institutions, NGOs, and civil society. IFC continued to carry out its program of technical assistance to SMEs and to small-scale prvatization. 52. Discussions of the FY97 Country Economic Memorandum (CEM) ("Belarus: Prices, Markets and Enterprise Reform") led to a Memorandum of Understanding (MOU) between the Bank and the Government in July 1997. In retrospect, it became clear that the Government was not interested, or did not have a mandate, to implement the provisions of the MOU. In parallel, discussions with the IMF on a possible program did not progress either. With the August 1998 crisis in Russia, the Belarus Govermment came under strong pressure on the external front, and resorted to stricter currency controls. This led to a cooling down in relations with IFIs. When the Government of Belarus requested the preparation of a new CAS for FY99, the lack of progress in MOU implementation led the Bank to set a single but strict condition-exchange rate unification - as trigger for any future lending. The Bank, however, continued to provide technical assistance in limited areas where there were opportunities for dialogue, like environment and social protection. It also continued economic and sector work and prepared, in addition to the CEM, a policy note on agriculture policies and a report on farm restructuring. 16 53. Recent Developments. Bank relations with Belarus have been improving since 2000 with a successful dialogue on social protection, environment and on conditions for improvement of the business environment. The unification of the exchange rate in September 2000, meeting the 1999 CAS trigger, allowed the Bank to proceed with the preparation of the US$22.6 million Social Infrastructure Retrofitting Project (retrofitting of 600 schools and hospitals), approved on June 5, 2001. 54. Main Lessons. Previous Bank experience in Belarus shows that (as in other countries) there is little to be gained by pushing the policy dialogue (and conditionality) envelope beyond what the Government can consider part of its own program. In addition, while setting "all-or-nothing" conditions for lending relationships may protect the Bank's financial position from any risks as well as reduce the risk of unsatisfactory development effectiveness outcomes, a strategy of non-engagement also has its downsides. It makes it difficult to help address the basic social needs of Belarusian people, and does not help in promoting and building the future basis for a more open economy. Moreover, it does not allow addressing the risks of a global nature - environment, HIV/AIDS, tuberculosis, etc. 55. The positive experiences with the implementation of the ODS grant and with social safety-nets and health reform programs provide evidence that the Bank can make a difference in areas of common policy agreement. For these reasons, the present CAS takes a pragmatic approach on areas where there can be collaboration based on shared objectives between Government, country's development needs and global public goods. 56. A second important lesson is that the decision to maintain a presence on the ground despite the poor state of relations between Bank and Belarus was in retrospect strategically correct, as it allowed the Bank to maintain one of the few avenues for dissemination of international experience and opening a bridge to the nascent civil society. Maintaining this open contact and window on the outside world is expected to continue to provide high payoffs in the future. 57. IFC Relations. Currently, IFC's activity in Belarus mainly consists of a donor-funded technical assistance8. To date, IFC has completed two TA projects: a USAID-financed Small-Scale Privatization Project and a Post-Privatization Project with funding from the British Know-How Fund. IFC is presently implementing a USAID-funded Small and Medium Enterprise Development Project. 58. IFC's technical assistance projects have helped set up the practice of small-scale privatization., and created the core of a local business consulting industry organized through business centers. Under its Small and Medium Enterprise Development Project, IFC has assisted the national and local business- associations to expand their coverage and consolidate their role in the civil society; and provided public education programs. 59. IBRD Portfolio Overview. The Belarus portfolio currently consists of two projects - the Forestry Development (FY94, US$33.9 million, closing in April 2002) and the Social Infrastructure Retrofitting Project (FY0 1, US$22.6 million), which has just recently become effective. An ODS project (GEF grant, FY97, US$6.9 million) has fully disbursed and has been closed ahead of schedule. This project was rated highly satisfactory and represents a model project in the region. VII. The Bank Assistance Strategy for 2002-2004 60. Objective. The objective of the Country Assistance Strategy for 2002-04, is to help Belarus in increasing the living standards of its people. This is to be accomplished by (i) addressing social and environmental risks that affect or could affect the welfare of its population, particularly its weakest 8 In the Spring of 1998, IFC approved and signed an equity investment in a joint-venture steel coating project. However, legal uncertainty surrounding the agreed site lease stalled the project, and the foreign partner lost interest following protracted negotiations. The project was subsequently cancelled. 17 members, and by (ii) helping government and civil society overcome the constraints that have prevented a more balanced and job-intensive growth. In addition, the strategy will support Belarus's efforts in areas involving Global Public Goods considerations, where benefits can accrue not only to the Belarusian population, but to the rest of the world as Nvell. The stated objective is fully in line with the Millennium Development Goals for alleviating poverty and creating an environment conductive of development in the 2 1' century. While compared with other countries Belarus fares better in most of the categories under the Millennium Development Goals, the CAS would seek to help the Government in furthering these achievements. 61. The Bank Strategy. The CAS is tailored to the challenges posed by the gradual reform approach that the present Government is likely to follow. The Bank will provide advice, technical assistance and good practice dissemination, particularly in the critical areas of business environment, social protection and reform of social services. A key objective of the strategy is to help the nascent civil society of Belarus grow by supporting capacity building and by offering opportunities for collaboration in Bank projects. The strategy will capitalize on the already-extensive dialogue and common work with Belarusian small and medium entrepreneurs, while reinforcing third sector organizations that are active in social and environmental causes. Modest amounts of lending will be targeted to meeting the most urgent needs of the population in those areas where there is coincidence between the Government program anid the Bank agenda. In addition, the Bank will concentrate on areas of action where global public goods considerations are part of the country's agenda. 62. The strategy supports work in these three key areas: (i) Global Public Goods that are also high on Belarus's agenda; (ii) Mitigation of social risks, including the consequences of Chemobyl disaster; and (iii) Fostering private sector development through a better business and investment environment. 63. In each area the CAS would seek to develop effective partnerships with government, civil society, other donors and stakeholders. Bank support would come in the form of lending operations, economic and sector work and technical assistance, and, possibly, grants (e.g., GEF). 64. Advisory and AnalyticalActivities. The Bank group intends to use its economic and sector work as a major vehicle for spreading knowledge, developing ideas, disseminating information and sharing the experiences of other countries. This has been a very important mainstay of our activity over the past few years, and has led to a well-regarded standing of the Bank in Belarusian society, provided useful policy information to policy-makers, and has resulted in some changes on the ground. The involvement of local experts in this work will continue and be expanded. 65. The Bank intends to address the lack of information concerning many aspects of the Belarus economy and society that has resulted from the low level of activity of the past. A Poverty Update and an Environmental Update are close to completion and will be complemented early in the CAS period by a study on the Aftermath of Chemobyl (2002) and a key study on Obstacles to Business and Investment (focusing on the environment for private business and issues of corporate govemance, SOEs included). Several due-diligence activities are being planned in 2003 to assess the country's fiscal, financial and procurement systems -- Country Financial Accountability Assessment (CFAA), Public Expenditure Review (PER), and a Financial Sector Assessment. The PER will seek to provide the analytical basis to assist Government's effort to increase control and transparency over all forms of public expenditures, streamline public expenditure and set a new institutional basis for the delivery of social services. It will also review the energy subsidy structure and its impact on the economy and the budget. The Financial Sector Assessment would analyze the current challenges of the financial sector, and those likely to obtain with the currency unification with Russia. A Country Procurement Assessment Review (CPAR) (2004) will be prepared as a contribution to improvement of budgetary practices and public sector accountability. 66. Later in the CAS period, the Bank will prepare a Development Policy Review (2004), to analyze 18 Table 3: Triggers and Lending Levels Proposed Lending Scenarios Triggers Low Case Exclusive concentration on activities that 1. No deterioration in portfolio performance address issues of global and social nature 2. Strict adherence to financial and fiduciary obligations. (AIDS, tuberculosis, environment, social 3. No re-introduction of multiple exchange rates, or equivalent protection). 2002-04 lending to total up to restrictions. US$140 million. Base Case 1. Same as above. Activities extended to support reform efforts 2. Sustainable macroeconomic situation, as evidenced by the in the areas where Bank and Government following indicative targets: (a) reducing and maintaining goals coincide - (such as SME support, farm the level of inflation below 40 percent, (b) maintaining the restructuring). 2002-04 lending up to a total of current account balance greater than -4 percent of GDP, US$270 million. No adjustment lending is and (c) maintaining a fiscal deficit below 3 percent of GDP. envisaged. 3. Continued liberalization of price controls on goods and services. 4. Positive track record in the implementation of a credible plan to significantly improve business and investment climate, covering (a) registration, (b) licensing, (c) inspections and control, (d) exit, and (e) other relevant areas. (See section on Triggers below). 5. Satisfactory progress in increasing the accountability in the use of public resources. The 2003 budget to quantify the size of quasi fiscal accounts and to eliminate of-budget resources for line ministries, including the innovation funds. the economic and institutional implications of a gradual transformation of the economy, including the consequences deriving from the integration agreements with Russia and efforts to join the WTO. In addition, during the CAS period the Bank will undertake a series of Civil Society Building Activities (2002-04) to facilitate greater participation of citizens and civic organizations in determining the country's future. The Bank will also seek donor support to undertake a joint Social and Gender Analysis (2003) to identify additional areas in need of action. To enhance communication and information sharing between various segments of civil society, an E-Development program is planned in 2003. The IFC technical assistance to SMEs would continue providing support to business community throughout the CAS period, subject to continued donor funding. 67. Lending scenarios and triggers. Bank assistance will revolve around two lending case seenarios: a base case and a low case. At present Belarus is in the low case scenario - the country has adopted a unified exchange rate and the Bank has resumed lending operations according to the 1999 CAS. Given that the country's Bank portfolio is performing adequately and there have been no issues of concern with financial and fiduciary obligations in the use of Bank resources, the country meets the conditions for the low case scenario as detailed in Table 3. Maintenance of the low case would be predicated on no reversals with regard to exchange rate unification. The lending envelope will be limited to US$140million over the CAS period under this case. 68. Triggers for the Base Case. The base case would be triggered by (i) maintaining a satisfactory macroeconomic environment; (ii) an adequate track record in improving the business environment, according to a program elaborated jointly with the Bank (see triggers), and (iii) implementing the agreed measures to improve accountability of public finances. The base case lending envelope would reach US$270 million for the three-year period. 19 69. In the absencc of an IMF supported program, the macro situation will be assessed by the Bank based on the soundness of the overall macroeconomic framework. The following indicative indicators will be specifically considered: (a) achievement of reduced inflation and its maintenance at below 40 percent level, (b) keeping the current account balance above -4 percent of GDP, and (c) maintenance of a sound fiscal position as evidences by a consolidated fiscal deficit below 3 percent of GDP. The numerical targets would be re-aligned with those of an IMF supported program if such a program were put in place. Finally, a thorough assessment of the soundness of the overall macro situation would be carried out if the base case lending scenario were imminent. 70. Regarding private sector development, it would be expected (a) a gradual shrinkage in the system of price controls9, limiting it to natural monopolies and a few social goods'"; and (b) satisfactory progress in removing the main obstacles to businesses. On the former, consumer goods and services subject to price controls will be reduced to a weighted 20 percent of the CPI basket. On the latter, it is expected that the President would enact an Action Plan on streamlining business registration, substantially streamlining business licensing, eliminating excessive inspections and control of business activity by state agencies, facilitating enterprise exit, removing internal trade restrictions, facilitating access to land and real estate, and eliminating other limitations to doing business. The plan would include a clear timetable and progress indicators. The trigger for the base case would be a positive track record (minimum six months) in the implementation of this plan. Thereafter, the Bank and Govemment would access the effectiveness of these actions through notable improvements in business environment measured by increase in the number of registered new private businesses and through regular business surveys. Positive developments in the business environment would be needed to remain in the base case. 71. Actions to improve the transparency in the use of public resources would initially focus on enhancing budget coverage, beginning with the (a) identification of quasi-fiscal accounts and extra- budgetary funds, (b) periodic reporting and auditing of all off-budget accounts, and, (b) when possible, routing of these operations through the national treasury. It is expected that the Government would present to Parliament a 2003 budget that would include a quantification of the effects of the quasi-fiscal accounts and elimination of all off-budget resources in the line-ministries, including the innovation funds, as well as adequate provision for full accountability to Parliament of the Presidential Fund. An action plan for the reform, including a specific timetable and monitorable indicators, would be developed jointly by the Bank and Government. The adherence to the provisions of the action plan will be a base case trigger. 72. Given past experience, this CAS proposes a period of one year, after the elimination of the Presidential Decree #40 last November, for the country to build a track record and access the base case. The track record will be built around improvements in Belarus's approach to private sector development and the transparency in the use of public resources. The Low Case Lending Program 73. Under the low case scenario, which is in effect at present, efforts would be made to maintain high levels of non-lending assistance, including support to meet the country's commitments under international environmental agreements, and to increase involvement with civil society, particularly in areas of greatest social concern. Under this case, lending would include: a project to help fight the spread of TB and AIDS (2002); a LIL to pilot the implementation of a system of targeted social assistance (2002); an operation to help alleviate the human and economic consequences of the Chernobyl catastrophe (2003); a project (co- financed with GEF) to address urgent environmental priorities, including climate change mitigation; and a Social Investment Fund (2004). The lending envelope would be limited to US$140 million over the three- ' The current system controls both the price levels and the rate of increase. Both of these would have to be removed to meet the price control liberalization trigger. 10 This will require amendment of the Presidential Decree N285 dated May 19,1999. 20 year period. A detailed description of the above mentioned projects is presented in the section on the base case lending program. The Base Case Lending Program 74. The base case lending envisages three areas of activity: (i) Global Public Goods; (ii) Mitigation of social risks, including the aftermath of Chernobyl; and (iii) Fostering private sector development through a better business and investment environment. A. Global Public Goods 75. Both in the base and in the low cases a number of activities are envisaged that address some of the global public goods concerns and that also coincide with the country program and government priorities. 76. TB/AIDS. The first lending operation envisaged under the CAS is a project to help Belarus meet the challenge posed by the spread of HIV/AIDS and the increase in the incidence of Tuberculosis. The Government has already put in place or facilitated several programs for HIV prevention, and has shown great interest in adopting WHO-recommended procedures (DOTS) for dealing with prevention and treatment of tuberculosis. The project will seek to involve NGOs dealing with these problems in project implementation, as they are the most appropriate vehicles for reaching communities at risk. TABLE 4-PROPOSED LENDING PROGRAM-2002/04 (MILLION US$) CV02 CY03 CY04 Low Case Low Case Low Case TB/AIDS 40 Chemobyl 45 Social Investment Fund 30 Social Assistance LU. 5 Environment/Climate 20 Change (GEF/IBRD) Subtotal 45 Subtotal 65 Subtotal 30 Base Case Base Case Base Case Low Case lending 45 Low Case lending 65 Low Case lending 30 Private Sector 30 Rural Development 40 Development 30 Social Assistance Reform 30 Health Policy Reform Tota1 45 Total (excl. GEF) 125 Total l00 77. Environment. The Bank has been active in supporting Belarus with its environmental challenges. This support included two GEF grants: a Biodiversity project (2003; US$1 million) and an Ozone Depleting Substances grant (FY97, US$6.9 million), and a Forestry Loan (FY94, US$ 42 million) that included support for pollution monitoring and fire management. The Bank also conducted several environmental studies, including an ongoing Environment Sector Review. This ongoing study shows that environmental issues continue to represent a high risk for the population and the overall development effort. The study also shows that the Government has a high degree of commitment to address environmental challenges and has been effective in developing and implementing programs. 21 78. A GEF operation (2003) would assist Belarus in dealing with environmental issues on greenhouse gas (GHG) emission reductions and carbon sequestration. This operation will be developed in conjunction with the Social Infrastructure retrofitting Project already in place. It is expected that GEF resources would be complemented by an IBRD loan. Also, a Chernobyl project (2003) would focus on mitigating the environmental impact of Chernobyl, in addition to the social, fiscal and economic development issues related to the Chernobyl aftermath. The Chernobyl Review currently underway would provide the underpinning for this operation. 79. Financial Sector. While Belarus's financial sector does not pose grave systemic threats to the international financial architecture, little is known regarding its present status and the potentials for a crisis spillover, were it to occur. For this reason, the Bank will conduct a financial sector review (2003), which might provide the basis for further policy advice, particularly in the context of the envisaged currency unification with Russia. Under the improvements stipulated in the base case, IFC may be able to attract foreign banks to partner with Belarusian financial institutions, especially in the area of trade financing. B. Mitigation of Social Risks 80. The Bank will provide advice and resources to mitigate the social risks of reform, to support the poorest segments of the population and to deal with the human consequences of the Chernobyl catastrophe. 81. Chernobyl. The Bank will cooperate with other international agencies in supporting the Government in addressing direct and indirect lingering effects of the Chernobyl accident through the investment operation mentioned above (2003). Chernobyl still continues to affect Belarus through a variety of different channels: economic and social consequences of displaced people, need for special techniques for keeping consumer and other products radiation-free, environment contamination, health effects, absorption of public resources, and an overall negative stigma on the country. The Bank, through the current Environment Study now being completed and an ongoing Chernobyl Study, will take stock of the lingering effects of the Chernobyl catastrophe, and design the proposed operation. It is expected that this operation would attract other donors' interest. Interventions could include: * Streamlining Chernobyl-related benefits under the targeted Social Assistance Prograni * Helping develop economic activity and improve delivery of social services in the Chernobyl- affected areas * Deepening the understanding of health and other consequences of radiation * Building community support to healthier lifestyles in the contaminated territories * Improving the radiation monitoring systems * Undertaking investments to maintain and upgrade equipment needed to monitor and control radiation impact. 82. The project would also contribute to strengthening of civil society's participation in the mitigation of the Chernobyl aftermath through collaboration with NGOs (small grants, contracting out), and involvement of local communities in project implementation. 83. Social Safety Nets. The Bank has had an active dialogue and technical assistance with the Government to develop a better system of social safety nets. A new targeted system is being designed and several pilots are currently under implementation to test the new system. The first results are encouraging-they showed that through better targeting the assistance reaches the most needy while reducing overall fiscal costs. The Government is keen to proceed with the introduction of a fully targeted system of social assistance and the Bank is planning to provide continued support in this area through technical assistance and training, as well as through a Social Assistance LIL (CY02). Building on the lessons learned from the LIL the Bank would develop a Social Assistance Reform Project in CY04. Based on the results of the PER, the Bank will assist government efforts to streamline social expenditure, 22 with the objective to target social assistance to the poorest members of society, to ensure effective functioning of safety nets as structural reforrns are implemented, and to develop mechanisms to involving civil society in program design and implementation. 84. Social Investment Fund. The Bank has accumulated positive experiences in the Region in setting up Social Investment Funds that can serve to reach directly to the poorest communities and allow them to improve the social infrastructure and create job opportunities. Capitalizing on the nascent dialogue with civil society, as well as on Government's desire to relieve poverty, a SIF could be proposed for Belarus as well (2004). This would require, in a complex political and social environment, finding sufficiently credible mechanisms for independence and accountability of the SIF, and for ensuring that poverty relief is the criterion used in allocating funds to communities. 85. Health Reform. Building on the dialogue opened under the preparation of the TB/HIV project, the Bank has begun to discuss options for more general reform in the health sector. A Health Sector Review is now underway and preliminary results show that, despite the large amount of resources provided to the sector, there are a number of reforms (particularly in the hospital sector) which could greatly increase the efficiency of the system. The Government has been interested in discussing options for reform, and has introduced important changes to the financing system in the region of Vitebsk. If this dialogue proves fruitful and the Government is in a position to commit to a clear path of reform, an operation could be considered in 2003. C. Fostering Private Sector Development 86. The Bank Group (particularly IFC) would seek to improve the general environment for the creation and operation of private business in Belarus, through technical assistance, policy dialogue, ESW and lending, if warranted. The International Finance Corporation (IFC) would play a leading role in developing this agenda, based on the existing service network to provide technical and legal support to small and medium enterprises (SMEs) that it has already developed. The IFC has learned through its TA activity in Belarus that SMEs are able to survive even in a less than friendly environment. To do so, however, they require information and legal support. 87. Targeted grassroots efforts through the IFC's TA (funded by USAID and British Know How Fund) have contributed significantly to strengthening civil society through building two business centers, and conducting regular seminars to improve SME efficiency. More importantly, it helped small and micro enterprises to organize themselves in associations to improve the business environment. 88. Continuation of IFC's existing TA and any new TA is entirely dependent on donor support. There is an urgent need for post-privatization support, specifically in the areas of information and legal support, strengthening of business associations, leasing, development of micro-credit institutions and other forms of services to small and medium businesses. 89. Rural business is another area in strong need for TA identified by the IFC team. Among the reasons that prevent farmers from exiting the state and collective farm system is the lack of private distribution/marketing and agricultural service companies, and finance and support services. Therefore, IFC is preparing a project to: (i) stimulate the development of SMEs in rural areas to foster rural diversification and create an alternative to the collapsing state and collective farm system; (ii) encourage investment in rural SMEs; (iii) spur entrepreneurship among the rural population; and (iv) promote cross- border business relationships between Belarus and neighboring countries. 90. Were the sources of donor support to dry up, and provided that credible mechanisms could be found to prevent government interference in business decisions, an IBRD operation (CY03) to support PSD development could be prepared based on similar models developed in Ukraine, Moldova and Georgia. The operation would draw heavily on the lessons of IFC involvement, as well as on the indications of the already-mentioned study on Impediments to Business. A prerequisite for this operation would be the development of a regulatory environment that supports the emergence of private sector 23 activities and a commitment to its continuing improvement, as lessons from program implementation are gathered. It is expected that this project would cover the following areas: (i) training of potential entrepreneurs; (1i) improving regulatory framework; (iii) special SME programs for one-company towsns, and (iv) developing complementary private economic activity in agriculture. 91. An important partner in the area of private sector development is EBRD, which focuses on support to SME developmcnt through the SME Line of Credit and is also planning to provide selective investments in larger private enterprises. In the financial sector, the EBRD is planning to expand the trade facilitation program with local banks and the development of a micro-lending facilitv. 92. Provided that the Government acts on its stated intent to allow experimentation in agricultural reforms on a regional basis, and that this leads to the strengthening of private operators using market transactions. the Bank would consider a Rural Development operation (CY04). This operation, primarily focused on private farmers and kolkhozes undergoing substantial restructuring, would focus on rural infrastructure, agriculture sectors reforms (farm restructuring, land titling, etc.), and environmentally friendly production methods in crop production and livestock. A Potential High Case 93. The potential reform agenda in Belarus is certainly large enough that it could justify a high case scenario. However, a discussion has yet to take place with the Government on such a case. It is envisaged that such a case could well arise if: (a) significant institutional reforms in public sector accountability arc undertaken; (b) the environment for private business is considerably improved; and (c) an IMF supported program comes into place. It would be expected that under high case scenario assistance would additionally focus on health, education, agriculture, financial, energy, and public sector reform. With an improved business climate, IFC would be able to make use of its intimate knowledge of the country to mobilize foreign investors and financing both for real and financial sectors. A CAS update will be presented to the Board if a high case becomes feasible. The CAS and Civil Society 94. The Bank views civil society as an important partner in the implementation of its strategy. Discussions with representatives of civil society during the CAS consultation process have shown their interest in engaging in dialogue and taking active part in the preparation and implementation of the CAS. The Government has been supportive of these consultations and expressed willingness to recognize civil society and its organizations as important partners in our dialogue. A summary of CAS consultation is presented in Attachment I. 95. The present strategy seeks to involve civil society in all its activities in Belarus. Under our lending program, the Bank will try to work closelv with all stakeholders and to reach out to communities. There has been very positive experience with grass-roots NGO participation in the implementation of pilot programs on targeted social assistance as well as on HIV/AIDS programs. These NGOs have been successful in voicing the concern of affected segments of the society and representing their interests vis-a- vis authorities. The proposed SIF (CY04) would rely on community participation. Civic engagement will also be key for the programs dealing with the distressed territories affected by the Chernobyl catastrophe. 96. The Bank will also continue investing in disseminating knowledge. It has accumulated useful experience in conducting public education activities - round tables, seminars, and discussions on various reform topics in Minsk and in the regions. These discussions, that have brought various segments of the societv to the table, have plaved an important role in debating reform issues. 97. An important role in the implementation of the outreach program is being assigned to the Bank office in Minsk. The Minsk team has established good relations with all stakeholders and will continue to 24 be responsible for the day-to-day contacts with our partners, dissemination of information, development of new ideas, organization of seminars and round-table discussions, as well as cooperation with NGOs and other representatives of the civil society. IFC's country technical assistance teams, who have been working closely with the business and trade associations for half a decade, will also contribute to the efforts on the ground. Partnerships 98. The proposed program is designed to capitalize on the Bank's comparative advantages and maximize synergies with other donors and international financial institutions. The Bank will work in close cooperation with the International Monetary Fund (IMF), European Bank for Reconstruction and Development (EBRD), European Union (EU), United Nations Development Programme (UNDP) and bilateral donors. 99. Most institutions have reduced their activities in Belarus to modest proportions. This may change, depending on conditions in the country. Donors have indicated their interest in issues such as HIV/AIDS, environment, private sector development, and social protection. An important part of donor aid revolves around assistance to post-Chernobyl issues. 100. UNDP is among the most active donor institutions. It has been supporting programs on environment, social assistance, health and development of civil society. It is planning to be active in these areas. For example, the proposed GEF-supported climate change mitigation operation (2003) would be implemented in close collaboration with UNDP, which is pursuing similar objectives through the removal of barriers to the utilization of renewable energy (biomass). UNDP is also interested in promoting education through creating an Internet culture. 101. EBRD is an important partner in the area of private sector development. It is focusing on support to SME development through the SME Line of Credit and is also planning to provide selective investments in larger private enterprises. In the financial sector, EBRD is planning to expand its trade facilitation program with local banks and develop a micro-lending facility. 102. Coordination with the IMF. The Bank and Fund teams work in tandem and excellent relationship has been maintained. The IMF would have a key role focusing on macroeconomic issues, while the World Bank will focus on the structural agenda. The Bank and the Fund teams will continue to work as complements, particularly if a new Staff Monitored Program were to be agreed, and would carry out together other related activities continuing to strengthen both institutions' knowledge base on key fiscal and structural issues. There are several joint activities planned, including work on the PER and FSAP. Financial Management and Fiduciary Responsibility 103. Since Belarus has kept many elements of the command economy in place, it has also kept the old financial management practices, which provide a modicum of order and control. Progress has been made in recent months in identifying sources of lack of transparency in public resources management, chiefly through the existing extrabudgetary funds (including the Presidential Fund). During the CAS period, the Bank will seek to increase its knowledge about financial management practices in Belarus. The PER and CFAA planned in 2003 would help further identify weaknesses of financial management practices and develop recommendations for their improvement. Belarus has been accurate in following the Bank. procedures under Bank-financed projects. The Bank team will continue monitoring the situation in this area and will ensure that the required Bank procedures are followed. Monitoring and Evaluation 104. A monitoring and evaluation system will be put in place to determine if the key objectives of the CAS are being achieved, namely: (i) addressing the global public goods agenda; (ii) mitigation of social 25 risks; and (iii) fostering private sector development through a better business and investment environment. Aimex B9 contains a detailed list of specific benchmarks, which will serve to measure progress in each area covered by the CAS. However, the following key indicators have been selected in order to determine the overall success of the CAS in meeting the abovementioned objectives: (i) improved fiscal transparency measured by enhancing budget coverage, including reporting and auditing of all off-budget funds; (ii) containment of Tuberculosis and AIDS epidemics; (iii) enhanced compliance with international environmental requirements; (iv) introduction of a targeted system of social protection (v) better business and investment environment as evidenced by surveys; (vi) active civil society participation in the countrv's life. The attainment of these key objectives at the end of the CAS period (end-2004) will be monitored against the baseline information at the time of preparation of the present CAS (end-2001). 105. Some useful baseline information on the abovementioned indicators was described in the previous sections of this report. In brief, on fiscal issues, although the Government has been making good progress in increasing the fiscal transparency, there are still off-budget funds that are not properly audited and reported to Parliament. The planned PER will provide additional useful insights as far as the off- budget funds are concerned. On Tuberculosis (TB), there has been an average 8% yearly increase in TB cases over the last ten years. Similarly, on HIV/AIDS, Belarus has a rapidly emerging epidemic with the second worse rate (0.28%) of adult infection in Europe (see also para. 26). On social protection, Belarus has a very generous and inefficient system which does not target those most in need (see also para. 26). On the business environment, a list of baseline indicators in provided in Box IV. Additional information will be gathered through the ongoing survey carried jointly by an IFC/IBRD team. Additional baseline information will be provided through project documentation, especially concerning the benchmarks on targeted social protection and TB and HIV/AIDS epidemics. 106. Monitoring and evaluation will be carried out through several instruments. The primary instrument will be monitoring through key lending operations. The Bank 'will systematically review whether or not the key operations are reaching their objectives and will propose adjustments to specific operations and to the lending program to maximize their contribution to the CAS objectives. Another important instrument is surveys, which will be conducted periodically to assess progress on the ground, especially in the areas of private sector development and civil society participation. Finally, the Bank will conduct regular consultations with civil society to receive first hand feedback on stakeholder perceptions about the effectiveness of Bank activities in Belarus. VIII. Country Creditworthiness and Risks 107. Belarus's creditworthiness for IBRD lending is poor. Thlis reflects the country's weak liquidity position (reserve coverage is currently only about 2 weeks of imports), fairly substantial external payments arrears that could represent contingent claims on the Government, heavy dependence on barter trade, heavy dependence on Russia for trade and finance, and lack of progress on the key reforms required to underpin sustainable growth in the medium term. 108. On the positive side, Belarus's external indebtedness is low (7.4 percent of GDP at end-2001) and the matunrty structure of its debt is favorable (medium- and long-term debt accounts for 94 percent of total debt). However, debt to the IFIs (IBRD, IMF and EBRD) is high as a share of public external debt at 36.8 percent and is expected to remain high throughout the CAS period, reflecting Belarus's dependence on official financing. 109. External payment arrears on official government debt amounted to about US$3.9 million at the end of 2001. However, arrears of Beltransgas to Russia - which formally are not part of the Belarus's official government debt stood at approximately US$194 million at end-September 2001. Belarus has been successful so far in negotiating its energy debt with Russia through debt cancellations, rescheduling, and barter transactions, and thus has avoided using its foreign currency reserves. Moreover, Russia has committed US$250 million in BOP support over 2001-2003 driven by the Union agreement, of which 26 US$100 million has been committed to the National Bank of Belarus and US$150 million to the Ministry of Finance for fuel imports. Belarus has already received the first installment of US$30 million to the National Bank of Belarus and the next US$30 million is expected in early 2002. 110. External balances, and hence debt servicing capacity, are highly vulnerable to changes in trade and financial relations with Russia, and to expansionary domestic macroeconomic policies. Any change that reduced official financing and/or resulted in a reduction in demand for Belarusian products or willingness to accommodate/negotiate arrears on quasi-commercial transactions could result in severe payments difficulties. Similarly, expansionary policies such as the current wage policy could make the balance of payments situation untenable. 111. These risks will be managed by linking the level of Bank lending to macroeconomic performance (see paragraph 70 and Table 3). Severe deterioration in macroeconomic performance and backtracking on reforms that resulted in the resumption of lending (e.g., reintroduction of multiple exchange rates) would lead to a suspension of new IBRD lending. 112. There is also a risk that the governing regime could become excessively rigid, triggering social unrest and/or a new round of macroeconomic instability. A judgment would have to be made at that point, if there is enough room for maneuver and ability to involve civil society to compensate for the financial and reputational risks of even modest interventions, directed to either global public goods or to the poorest segments of the population. 113. As the Bank Group's experience shows, the existence of appropriate policy and institutional frameworks is key for achieving satisfactory development effectiveness. Neither is in place in Belarus at present. This risk is mitigated by the modest low case lending program focused on global public goods (environment, HIV/AIDS) and social/poverty issues. Only those projects that are likely to achieve results in a less than favorable policy environment and that have benefits that extend beyond Belarus's borders were selected for the low case. In case better policies are put in place, as evidenced by attainment of base case triggers, the lending program would be expanded to include additional projects in areas where the Government's and Bank Group's priorities coincide and there is a high chance of reaching development results. Jarnes D. Wolfensohn President By: Shengman Zhang By: Peter Woicke Washington, D.C. February 21, 2002 27 ATTACHMENT I - CONSULTATIONS WITH STAKEHOLDERS 1. The Government of Belarus gave its support to opening the CAS consultation process to civil society. Prior to consultations, the Country Unit prepared an information note for participants, explaining the CAS process, the rationale behind extensive consultations with all stakeholders, timeline, and history of World Bank involvement in the country. A questionnaire was distributed to all participants requesting their feedback on major issues and on priorities and possible ways of cooperation. 2. Consultations, which started in the spring of 2001, were held in 14 towns"' in all regions in the form of information seminars on the overall Bank strategy, thematic round-tables on health, environment, social protection, and private sector development, Internet communications, and media. Consultations were open for all those interested, which is a very new approach for Belarus. Moreover, the meetings were not limited to offices; they were also held in hospitals, educational facilities and even penitentiary institutions. The information and comments received during the first round formed the basis for the first draft of the CAS. The second round of consultations started in June 2001 and was completed through concluding meetings in December 2001. 3. Over 1500 individuals attended meetings representing non-governmental organizations dealing with health, HIV/TB problems, children issues, gender, veterans' affairs, handicapped people, environment, small and medium business, and media. Special attention was paid to problems resulting from the Chernobyl accident. The Country Director met with nearly 400 students at the Vitebsk Technical University as well as with students from the Minsk Polytechnic Academy who were interested to learn about the World Bank and how its involvement would help Belarus. 4. A CAS web-site in Russian and English has been set up where all relevant information has been posted, including minutes from consultations, proposals and comments received from participants. Though Internet is not widely available, this option helped to facilitate the dialogue and ensure the transparency of the process. 5. As a result of the discussions throughout the March-November period, two NGO thematic groups were set up on health and social development issues and working contacts were established with the NGO council on sustainable development. At the last meeting with civil society, held in Minsk in December, participants were provided with drafts of this annex, summary of the proposed CAS, and Box III on Civil Society. Valuable information was received both on the format and the content, as well as concrete suggestions on the CAS. 6. Civil society representatives appreciated the opportunity for discussion of important issues provided by the World Bank through the CAS consultation process. The role of international organizations in facilitating the dialogue between the government and civil society on critical issues was seen as particularly valuable. Some very useful suggestions and ideas were voiced on sustainable development, liberalization of business activity, health sector reform, capacity building, as well as on forms of cooperation, to mention a few. These initial contacts give hopes for building a constituency for reforms in the country by establishing a regular network of collaboration with the government and maximizing on the available human capital. General Comments 7. The theme of social partnerships camne out as a key factor that could affect the future reform and activities identified under the CAS. While a legal mechanism for contracting NGOs under government " Minsk, Vitebsk, Mogilev, Brest, Grodno, Gomel, Polotsk, Novopolotsk, Gorki, Smolevichi, Molodechno, Verhedvinsk, Bobruisk, Smorgon 28 programs was established with the adoption of the "Law on Social Services," there are still very few examples of its practical implementation. The positive experience shared by some organizations, shows that the NGO contracting process is time-consuming but the benefits of the joint NGO/government work are worth the effort. While most organizations have had mostly negative experience on this issue so far, some participants were convinced that a lot more needed to be done by NGOs themselves to make their activities transparent and visible, and to initiate an open dialog with government agencies that would recognize the value of such cooperation. The need for collaboration among NGOs was also acknowledged, taking into consideration the big difference that exists between Minsk-based organizations and those located elsewhere, regarding availability of funding, capacity building, experience, etc. * Civil society representatives wanted to know how exactly their comments and suggestions would be incorporated in the CAS and what kind of involvement they could expect in future Bank projects under the current political situation. * Civil society representatives highlighted the importance of having clear and transparent rules and regulations for all Belarusian NGOs especially with respect to benefits and privileges relating to functioning of public associations. Participants in all meetings stressed the fact that the main activity carried out by NGOs is public awareness and education of civil society at large. NGOs, being flexible, effectively reach vulnerable groups and individuals in addressing complex and delicate issues. The predominant opinion is that legislation ought to differentiate between public awareness activities and core education by providing favorable conditions for the development of public education activities conducted by civil society organizations. There is also need for improvement of the education system in general to provide more training in foreign languages, computer skills, management, etc. * Participants underlined the importance of donor involvement in the ice-breaking process between government and the third sector, and specifically emphasized the significant role played by the Bank in bringing civil society to the negotiating table, stressing that consultations is a three-way process in which they want to be fully involved. Follows a summary of observations, commentaries and suggestions on the main topics. Social Sector, Human Development and Poverty Reduction 8. The discussions centered on the current system of social assistance, development problems during the transition period, and poverty that is acquiring wider dimensions despite the relatively high ranking occupied by Belarus in official human development statistics. In addressing social issues, NGO representatives stressed the fact that people should not rely exclusively on outside help but mobilize all available resources for community self-help. Thus, civic organizations see a big role for themselves in providing social services. Representatives of the Ministry of Labor and Social Protection acknowledged the importance of introducing the targeted social assistance programs and the role that non-government organizations could play, especially in raising public awareness, stressing the inadequacy of local infrastructure and the need for new funding instruments to facilitate local initiatives. A critical remark on the CAS was the lack of mention of education among its issues. Although education problems are not seen as particularly serious, they nevertheless deserve attention in the overall attempt to change popular mentality and introduce new curricula in line with the 21 st century globalization requirements. 9. The specific comments can be summarized as follows: * The social assistance system cannot further provide numerous benefits to all citizens free of charge. Development of targeted social care is absolutely necessary and should be transparent, well- timed and simple, addressing the problems of the most needy, provided under "social contract" conditions that would motivate recipients to make the best use of what is available without abusing the system. 29 * NGOs could play a substantial role in education for disease prevention and establishing relations with government agencies to support the implementation of the targeted social assistance reform. This would require a mass education and advertising campaign. * Worsening of the demographic situation is becoming a major problem and requires in-depth analysis. * There is a need to address the problem of orphans, and their growing numbers, particularly as a result of alcoholism. * Issues of hidden unemployment and finding ways to encourage entrepreneurship. * Deepening social problems (expressed in delinquency, abuse, growing alcoholism and drug use, increasing number of homeless people) in families unable to maintain reasonable living standards due to unemployment. * Insufficient government aid for people with disabilities who cannot provide for themselves. * Social assistance should also look into the pension system and the development of private pension funds. * Children's healthcare, preventive measures and recuperation, as well as protection of children's rights (i.e. invalids, disabled children). * The spread of TB, AIDS and viral hepatitis is seen as a major health problem whose prevention and treatment should be addressed most urgently including, retraining of medical personnel and introduction of new diagnostic methods for early detection and prevention, and development of the local pharmaceutical industry that could provide needed medication. * Free medical care is seen as unsustainable by NGOs, and the healthcare system needs a major reform (need to study the Vitebsk experiment) to avoid the emergence of corruption and illegal payments for treatment. Deterioration of health services is reflected in appalling hospital conditions and need for relatives to provide round-the-clock assistance to the hospitalized. In rural areas medical services are particularly poor with very few qualified personnel, insufficient communications and access to health facilities. 10. Gender-specific problems in Belarus are rising, especially in smaller communities, although some of the dramatic consequences of the economic transformation on gender inequality have been avoided due to the slow pace of reform and tight state control. The overall situation is not considered to be very grave by representatives of civil society organizations, however, several issues have been brought up: * Increasing unemployment hits women and the young the hardest. Women have scarce possibilities for retraining after losing their jobs. * The old system of social guarantees, such as extended maternal leave and child-sick days, is officially still in place, thus making women less attractive on the labor market. At the same time, child-care facilities are not readily accessible, putting women with children in a very vulnerable employment category. * Mothers with handicapped children are in a particular disadvantage and are lacking financial aid. This problem is both acute and extensive given the high number of newly-born diagnosed with some health deficiency, requiring special medical and parental care (according to some non-government organizations this is the case in over 90 percent of births, which is mainly attributed to the effects of Chernobyl). Necessity to establish special houses for disabled children as young families slip out from social life when sick child is born. * The limited access to credits makes it almost impossible for women to engage in entrepreneurial activities. 30 Environment and Sustainable Development 11. Civil society groups expressed their concern with the overall situation of the natural environment and the desire to see a long-term national action plan that would involve both government and NGOs. Participants pointed out that the CAS should pay special attention to the Chernobyl affected regions. The importance of education and raising public awareness on environmental issues and sustainable development, in the broadest sense of the term, was voiced as a prerequisite for successful reforms and change in mentality. The major issues raised are summarized below: * Insufficient information on environmental issues and need for more efficient structure of government agencies. A National Environmental Strategy has been elaborated but it has not been publicized and the population is unaware of its existence; * Priority should be given to projects that would meet the principles of sustainable development, biodiversity protection; natural resources management and development of regional environmental development plans; * Developing eco-tourism; * Involvement of NGOs in the process of project selection and implementation and need for the introduction of special mechanisms to guarantee such participation. The Ministry of Environment and Natural Resources is in the process of setting up an information center charged with dissemination of relevant information and announced the creation of an advisory group of NGOs with the Ministry. The World Bank has been invited to be part of the working group; * Introduction of environmental education early in the school curricula. To that effect the Ministry of Education has been developing a new curriculum for all levels of education that includes environmental subjects, healthy lifestyle, etc.; * Efficient use of cleaner and cheaper environmentally-friendly fuels; * Addressing the issues of climate change and carbon absorption, land reclamation; * Environmental problems should not be limited to Chernobyl consequences only; * A possible project financed by the World Bank could be one on accessibility of clean water to the population. Private Sector Development 12. All representatives of the private sector expressed their appreciation for the assistance that IFC has provided to small and medium enterprises which has been virtually the only source of support for regional entrepreneurs and were hopeful that this trend would continue in the future. The Ministry of Entrepreneurship and Investments announced that steps were being taken in improving the environment for private business, such as modification of the business-related legislation and development of micro- financing system. SME businesses are not protected by the current legislation and centers for legal support were suggested as a form of assistance. All private sector representatives see the presence of the World Bank in Belarus as a sign that would attract foreign investment. Private businesses see themselves as providers of social security programs and generators of employment, and an important contributor to the development of the country and the rehabilitation of the regions, including Chemobyl-affected areas, should the conditions be improved for their growth. Following are the impediments to private business development mentioned by businessmen: * Absence of a political will and economic incentives for private sector development; * Excessive state interference in the operations of privately-owned businesses; 31 * Preferential treatment for state enterprises (unfair competition between private and state enterprises); * Difficult entry procedures for private businesses, e.g. registration requirements, administrative procedures, property rights; * Lack of education in marketing, management, business development; 13. Several issues were pointed out as crucial for the development of the private sector: * Simplification of market entry procedures for private businesses; * Need for training for start-up for would-be businessmen, especially encouraging women and younger people up; * The importance of attracting foreign direct investment; comparative advantages: cheap and highly qualified labor force; * Taxation/licensing and application of the same rules for state and private enterprises; * Credit availability for private businesses and possibilities for development of agribusiness and credit mechanisms (e.g. credit unions). * Need to develop trust and confidence between authorities and the business community; * Raising public awareness on the fundamentals of market economy; * Restructuring of privatized enterprises and regional development. Chernobyl Issues 14. The views expressed on the consequences of Chemobyl cannot be easily summarized. Sometimes the effect of Chernobyl is overblown, while at other times it seems to be underestimated. * One of the major problems for those living on the territories is the decline in agriculture which was the main occupation. The disruption has upset the life style of the population and caused loss of jobs, which coupled with the other negative effects valid for the rest of country has complicated further the situation in some of the Chemobyl-affected areas. * Victim-perception is prevailing and is used by some for enjoying benefits that would otherwise be unavailable. * Chemobyl Committee program is not good enough and does not encourage community development, regional development and civic participation. Current programs aim to address individual concerns rather than looking into the comprehensive picture of social degradation at a family and community level. * Concerns were expressed that donors seem to have created a consumer oriented society quoting as example the fact that some children from Gomel have already been 5-6 times to Western Europe on Tecuperation while others have not had even one chance. * There is a perception that too much money is spent on Chernobyl while other regions are neglected. In this sense, Chernobyl population is considered by some as undeservingly privileged. * Unemployment seems to be a bigger stress factor than radiation. According to a study conducted in 1993-95 people have somehow adapted to the radioactivity which ranks 5th in their concerns, after earnings, social care, unemployment, and crime. * Resettled people feel they are temporarily living at their current locations and are not making an attempt to adjust and improve the environment or their living conditions. 32 * The general ecological culture and radiological awareness is lacking in some of the smaller places where according to representatives of the regional authorities the population has other harmful living habits, e.g., alcoholism. * Parents quite often disregard the safety norms for lack of knowledge on the radiological hazards. Sometimes being sick is beneficial because one can enjoy some privileges. The notion exists that the government should provide and pay for health treatment. * The situation of the agricultural lands was seen as particularly important for the populations living in contaminated zones given that many households grow their own produce which cannot be controlled for radiation and endangers the health of people eating them. Forest produce is especially contaminated in some areas. * Some of the suggestions coming out of the discussions include: * Stricter control over the quality of produce coming from the contaminated areas. * Setting up of modern social and psychological territorial centers that would deal with the most vulnerable categories, such as families with disabled children; resettled families, etc. * Training medical personnel in the field of psychology and in the social sphere, including direct grants to promising specialists, and assistance in improving these research areas is seen as an important step toward addressing issues that are not only Chemobyl specific. * Better healthcare and prevention for the youngest in the Chemobyl areas * Most important for revival of the region and overcoming the Chemobyl effect is seen the development of businesses. Annex A2 Page I of 2 Belarus at a glance 9/6/01 Europe & Lower- POVERTY and SOCIAL Central middle- Befarus Asia income Development diamond* 2000 Population, mid-year (millions) 10.0 475 2,046 Life expectancy GNI per capita (Atlas method, USs) 2,870 2,010 1,140 GNI (Atlas method, US$ billions) 28.7 956 2,327 Average annual growth, 1994-00 Population (%) -0.5 0.1 1.0 Labor force (%) -0.2 0.6 1.3 GNI Gross per primary Most recent estimate (latest year avallable, 1994-00) capita ., enrollment Poverty (% of population below national poverty line) 42 Urban population (% of total population) 70 67 42 Life expectancy at birth (years) 69 69 69 Infant mortality (per 1,000 live births) 11 21 32 Child malnutition (% of children under 5) .. .. I1 Access to improved water source Access to an improved water source (% of population) 100 90 80 Illiteracy (% of population age 15+) 0 3 15 Gross primary enrollment (% of school-age population) 100 100 114 -Belarus Male 100 101 116 Lower-middle-income group Female 100 99 114 KEY ECONOMIC RATIOS and LONG-TERM TRENDS 1980 1990 1999 2000 Econtomic ratios' GDP (US$ billions) .. 35.2 26.8 29.9 Gross domestic investment/GDP . 26.5 23.7 22.8 Trade Exports of goods and services/GDP 46.0 59.2 67.8 Gross domestic savings/GDP .. 28.8 21.3 21.3 Gross national savings/GDP . 28.8 22.4 22.3 Current account balance/GDP . -0.7 -0.5 Domestic Interest payments/GDP . 0.2 0.2 omens Investment Total debt/GDP . 4.2 2.8 Total debt service/exports . 3.1 2.8 Present value of debt/GDP . 4.1 Present value of debt/exports .. 16.9 Indebtedness 1980-90 1990-00 1999 2000 2000-04 (average annual growth) GDP . -1.6 3.4 5.8 2.9 Belarus GOP per capita . -1.4 4.4 6.1 3.7 Lower-middle-income group Exports of goods and services .. -5.1 7.0 4.9 2.7 STRUCTURE of the ECONOMY 1980 1990 1999 2000 Growth of investment and GOP I%) (% of GDP) 20 Agriculture .. 23.5 14.6 15.3 20 Industry .. 47.1 39.2 37.4 Manufacturing 39.2 32.5 30.8 97 98 Services .. 29.4 46.2 47.3 -20 Private consumption .. 47.4 59.2 59.2 -40 General govemment consumption .. 23.8 19.5 19.5 -GD1 GDP Imports of goods and services .. 43.6 61.6 69.3 (averageannualgrowth) 1980-90 1990 00 1999 2000 IGrowth of exports and imports (%) (average annual growth) Agriculture .. -4.1 -7.2 8.0 40 Industry . -1.9 76 6.0 20 Manufacturing . -0.8 8.7 72 Services -0.5 7.3 4.2 o 56 6 57 95 0 Private consumption -0.6 6.5 2.6 20 General government consumption . -1.8 5.8 7.2 .40 Gross domestic investment -7.8 -16.0 6.2 i Exports - Imports Imports of goods and services .. -9.3 -0.2 -2.1 _ Note: 2000 data are preliminary estimates. - The diamonds show four key indicators in the country (in bold) compared with its income-group average. If data are missing, the diamond will be incomplete. Annex 2 Ps-v 2 of 2 Belarus PRICES and GOVERNMENT FINANCE Domesic prices 1980 1990 1999 2000 Inflation (%) (% change) 3,000 Consumer prices .. 4.2 294.0 169.0 2.000 Implicit GDP deflator .. .. 316.8 185.0 Govemment finance 1, (% of GDP, includes current grants) 0 . Current revenue .. .. 45.0 27.9 9s 96 97 9o 99 00 Current budget balance .. .. 5.6 0.4 - GDP deflator *CPI Overall surplus/deficit -1.7 -0.6 TRADE (USS millions) 1980 1990 1999 2000 Export and Import levels (USS mill.) Total exports (fob) .. 38,747 5,646 6,987 10*000 Food 438 1,275 Energy 544 931 7,500 Manufactures .. .. 4,392 3,190 Total imports (cif) .. 25,589 6,674 7,942 s Food .. 2,328 755 483 Fuel and energy .. 3,198 1,420 3,634 Capital goods .. 689 1,282 998 o 94 9s 9o 97 00 00 o Export price index (1995=100) .. .. .. .. Import price index (1995=100) .. .. .. ..0 Exports * Imports Terms of trade (1995=100) .. .. .. .. _ BALANCE of PAYMENTS (US$ millions) 1980 1990 1999 2000 Current account balance to GOP (%) Exports of goods and services .. .. 6,400 7,980 0 - Imports of goods and services .. .. 6,655 8,257 _ _ Resource balance .. .. -256 -277 .- Net income .. .. -42 -42 -2 Net current transfers .. .. 104 157 -3 Current account balance .. .. -194 -162 Financing items (net) .. ., 159 238 Changes in net reserves .. .. 35 -76 < memo: Reserves including gold (US$ millions) .. .. 294 351 Conversion rate (DEC, locallS) .. 1.23E-4 112.9 304.7 EXTERNAL DEBT and RESOURCE FLOWS 1980 1990 1999 2000 (USS millions) ComposItIon of 2000 debt (USS mill.) Total debt outstanding and disbursed .. .. 1,136 851 IBRD . . 122 105 IDA 0 0 G:43 A 105 Total debt service .. .. 202 229 IBRD .. .. 20 20 c: 114 IDA .. .. 0 0 F- 290 Composition of net resource flows . Official grants .. .. 5 Official creditors .. .. -32 -23 Private creditors .. .. 169 32 D: 116 Foreign direct investment .. .. 225 Portfolio equity .. .. 0 .. E. 183 World Bank program Commitments .. .. 0 0 A - IBRD E - Bilateral Disbursements .. .. 13 6 B - IDA D - Other mulblateral F - Private Principal repayments .. .. 11 14 C-IMF G - Short-term Net flows .. .. 1 -9 Interest payments .. .. 8 6 Net transfers .. . -7 -15 Development Economics 9/6/01 Annex B2 Page I of I CAS Annex B2 - Belarus Selected Indicators* of Bank Portfolio Performance and Management As Of Date January 15, 2002 Indicator 1999 2000 2001 2002 Portfolio Assessment Number of Projects Under Implementation a 1 2 2 2 Average Implementation Period (years) b 5.1 4.6 3.6 4.1 Percent of Problem Projects by Number a, c 0 0 0 0 Percent of Problem Projects by Amount a, c 0 0 0 0 Percent of Projects at Risk by Number a,d O O O O Percent of Projects at Risk by Amount a.d O O O O Disbursement Ratio (%) e 12.5 25.4 49.9 12.5 Portfolio Management CPPR during the year (yes/no) no no no no Supervision Resources (total US'000$) 60 107 87 56 Average Supervision ('000US$/project) 60 53 43 28 Memorandum Item Since FY 80 Last Five FYs Proj Eval by OED by Number 4 1 Proj Eval by OED by Amt (US$ millions) 132.4 6.9 % of OED Projects Rated U or HU by Number 25 0 % of OED Projects Rated U or HU by Amt 0 0 a. As shown in the Annual Report on Portfolio Performance (except for current FY). b. Average age of projects in the Bank's country portfolio. c. Percent of projects rated U or HU on development objectives (DO) and/or implementation progress (IP). d. As defined under the Portfolio Improvement Program. e. Ratio of disbursements during the year to the undisbursed balance of the Bank's portfolio at the beginning of the year: Investment projects only. * All indicators are for projects active in the Portfolio, with the exception of Disbursement Ratio, which includes all active projects as well as projects which exited during the fiscal year. Annex B3 CAS Annex B3 - IBRD/IDA Program Summary Belarus Page I of I As Of Date January 15, 2002 Proposed IBRDIIDA Base-Case Lending Program 8 Year Proj ID US$;(M) Strategic Rewards b Implementation b (HIMIL) Risks (HIM/L) 2002 TB/AIDS 40.0 H M Social Assistance LIL 5.0 H L 45.0 2003 Chernobyl 45.0 H M Environment (GEF/IBRD) 20.0 H L Private Sector Development 30.0 H M Health Policy Reform 30.0 H M 125.0 2004 Social Investment Fund 30.0 H M Social Assistance Reform 30.0 H M Rural Development 40.0 M M 100.0 TOTAL 270.0 a. This table presents the proposed program for the next three years. b. For each project, indicate whether the strategic rewards and implementation risks are expected to be high (H), moderate (M), or low (L). Template created on 02120/2002. Annex B3 (IFC MIGA) Page I of 1 CAS Annex B3 (IFC & MIGA) for Belarus Belarus - IFC and MIGA Program, FY 1999-2002 1999 2000 2001 2002 IFC approvals (US$m) Sector (%) 0 0 0 0 Investment instrument(%) MIGA guaranitees (US$m) 0 0 0 0 Annex B4 Page I of I CAS Annex B4 - Summary of Nonlending Services - Belarus As of January 15, 2002 Product Completion Cost (US$000) Audiencea Objectiveb Recent completions (Actual) Farm Restructuring 1999 48.4 B, G, PD KG, PS Farm Restructuring II 2000 68.2 B, G, PD KG, PS Agriculture Sector Review 1999 90 B, G, PD KG, PD Climate Change 2001 25 B, G, PD, CS KG, PS Health Sector Study 2001 60 B, G, PD KG, PS Underway (Budgeted) CAS 2002 240 B, G, PD, CS,D KG, PS, PD Social Sector Dialogue 2002-04 40.0 B, G, PD, CS KG, PS Chernobyl Impact 2002 101.6 B, G, PD, CS, CKG, PS Private Sector Business Asst. 2002 148.0 B, G, PD, D KG, PS Health Policy Dialog 2002 90.0 B, G, PD, D KG, PS Health Policy Note 2002 104.0 B, G, PD, CS KG, PS Environmental Strategy Update 2002 115.0 B, G, PD, CS KG Public Awareness 2002-04 200.0 B, G, PD, CS KG Civil Society Activities 2002-04 100.0 B, G, PD, CS,D KG, PS, PD Poverty Update 2002-03 87.0 B, G, PD, CS KG, PS, PD Macro Monitoring 2001-04 140.0 B, G, PD KG, PS IFC TA to SMEs 2001-04 240.0 B, G, D KG, PS Enterprise Sector Study 2002 140.0 B, G, CS, PD,D KG, PS, PD Planned PER 2003 210.0 B, G, PD, KG, PS, PD CFAA 2003 200.0 B, G, PD,D KG, PS, PD CEM 2003-04 300.0 B, G, PD, CS KG, PS Social and Gender Study 2003 60.0 B, G, PD, CS KG, PS, PD Financial Sector Review 2003 120.0 B, G, PD,D KG, PS, PD E-development Study 2003 100.0 B, G, PD,D,CS KG, PS, PD Development Policy Review 2004 150.0 B, G, PD, CS KG, PS, PD Country Procurement Assessment 2004 130.0 B, G, PD, D KG, PS, PD a. Government, donor, Bank, public dissemination, civil society. b. Knowledge generation, public debate, problem-solving. Annex B5 "age I of I CAS Annex B5 Belarus Social Indicators Latest single year Same region/income group Europe & Lower- Central middle- 1970-75 1980-86 1993-99 Asia income POPULATION Total population, mid-year (millions) 9.4 10.0 10.0 474.4 2,093.0 Growth rate (% annual average for period) 0.7 0.7 -0.5 0.1 1.1 Urban population (% of population) 49.9* 61.2* 69.3* 66.5 42.9 Total fertility rate (births per woman) 2.2 2.1 1.3 1.6 2.1 POVERTY (% of population) National headcount index (disposable incomes) .. .. 46.7* Urban headcount index Rural headcount index .. .. INCOME GNI per capita (US$) .. .. 2,550 2,160 1,200 Consumer price index (1 995=1 00) .. . 1710.3* 182 137 Food price index (1995=100) .. 0 1759.8* INCOMEICONSUMPTION DISTRIBUTION Gini index .. .. 26.9* Lowest quintile (% of income or consumption) .. .. 9.3. Highest quintile (% of income or consumption) .. 37.0* SOCIAL INDICATORS Public expenditure Health (% of GDP) .. .. 4.9 4.0 2.3 Education (% of GNI) .. . 5.9 5.1 4.8 Social security and welfare (% of GDP) .. .. 10.8 8.8 Net primary school enrollment rate (% of age group) Total .. .. 100 92 99 Male .. .. 100 93 100 Female .. .. 100 92 99 Access to an improved water source (% of population) Total .. .. 100 90 80 Urban .. .. 100 95 94 Rural .. .. 100 82 69 Immunization rate (% under 12 months) Measles .. .. 98 97 87 DPT .. .. 97 97 87 Child malnutrition (% under 5 years) .. .. .. .. 9 Life expectancy at birth (years) Total 70 71 68 69 69 Male 66 67 62 64 67 Female 74 76 74 73 72 Mortality Infant (per 1,000 live births) .. 15 12 21 32 Under 5 (per 1,000 live births) .. .. 15 26 40 Adult (15-59) Male (per 1,000 population) 196 255 335 289 191 Female (per 1,000 population) 85 95 115 127 133 Maternal (per 100,000 live births) .. .. 20* Births attended by skilled health staff (%) .. .. Note: 0 or 0.0 means zero or less than half the unit shown. Net enrollment ratios exceeding 100 indicate discrepancies between the estimates of school-age population and reported enrollment data. Latest year for access to improved water source data is 2000. 2001 World Development Indicators CD-ROM, World Bank * Source: Ministry of Statistics and Analysis of Belarus, 2001. Annex B6 Page 1 of 2 Belarus - Key Economic Indicators Actual Estimate Projected Indicator 1996 1997 1998 1999 2000 2001 2002 2003 2004 National accounts (as % of GDP) Gross domestic producta 100 100 100 100 100 100 100 100 100 Agriculture 17 15 14 15 15 16 16 15 16 Industry 39 41 41 39 37 38 38 37 38 Services 44 43 46 46 47 46 46 47 47 Total Consumption 81 79 78 79 79 76 78 78 79 Gross domestic fixed investment 21 25 26 26 23 22 23 24 24 Exports (GNFS)b 46 60 59 59 68 70 71 76 77 Imports (GNFS) 50 66 64 62 69 69 72 78 81 Gross domestic savings 19 21 22 21 21 24 22 22 21 Gross national savingsc 20 21 22 22 22 25 23 23 22 Memorandum items Gross domestic product 14757 14109 15264 12104 12727 11757 12036 11998 12762 (US$ million at current prices) GNP per capita (US$, Atlas method) 2060 2350 2520 2630 2090 1580 1280 1270 1330 Real annual growth rates (%, calculated from 1990 prices) Grossdomesticproductatmarketprice. 2.8 11.4 8.4 3.4 5.8 4.1 1.5 2.1 3.4 Gross Domestic Lncome 2.8 7.0 13.0 2.3 4.8 2.3 0.7 0.9 2.3 Real annual per capita growth rates (%, calculated from 1990 prices) Grossdomesticproductatmarketprice. 3.1 11.7 9.4 4.4 6.1 4.0 2.5 3.1 4.4 Total consumption 2.1 5.6 15.0 7.3 4.2 2.6 2.4 1.6 3.5 Private consumption 3.6 4.9 18.3 7.5 2.9 2.0 2.9 1.0 3.1 Balance of Payments (US$ millions) Exports (GNFS)b 6698 7838 7097 6400 7980 8247 8489 9100 9878 Merchandise FOB 5790 6919 6172 5646 6987 7314 7525 8044 8690 Inports (GNFS)b 7275 8691 8117 6655 8257 8127 8666 9324 10319 Merchandise FOB 6939 8326 7673 6216 7825 7694 8206 8849 9805 Resource balance -576 -853 -1019 -256 -277 120 -177 -224 441 Net current transfers 91 78 96 104 157 124 155 185 210 Current account balance -516 -859 -1017 -194 -162 193 -62 -77 -271 Net private foreign direct investment 105 350 201 443 90 84 60 120 25'5 Long-term loans (net) 44 66 -10 -2 64 22 3 -36 -18 Official 33 43 91 -25 -24 126 59 -32 -14 Private 11 23 -101 23 88 -104 -56 -4 .4 Other capital (net, inc. errors & ommissions) 446 366 771 -282 84 -277 50 50 '0 Change in reservesd -79 77 55 35 -76 -22 -52 -57 -57 Memorandum items Resource balance (% ofGDP) -3.9 -6.0 -6.7 -2.1 -2.2 1.0 -1.5 -1.9 -3.5 Real annual growth rates ( YR90 prices) Merchandise exports (FOB) .. .. .. .. .. .. Primary .. .. .. .. .. .. Manufactures Merchandise imports (CIF) .. .. .. .. .. .. Annex B6 Page 2 of 2 Belarus - Key Economic Indicators Actual Estimate Projected Indicator 1996 1997 1998 1999 2000 2001 2002 2003 2004 Public finance (as % of GDP at market prices)' Current revenues 30.6 31.8 29.1 28.7 29.2 33.9 34.3 32.6 31.9 Current expenditures 27.7 27.1 25.9 23.9 24.5 26.5 25.9 24.6 24.1 Current account surplus (+) or deficit (-) 2.8 4.7 3.2 4.8 4.7 7.3 8.4 7.9 7.8 Capital expenditure 4.8 6.7 4.4 7.0 4.9 9.5 9.4 8.3 8.1 Foreign financing -0.1 0.4 -0.3 -0.8 -0.6 -0.2 0.0 -0.6 -0.5 Monetary indicators M2/GDP 14.2 15.8 30.9 16.7 17.7 17.5 17.5 17.5 17.5 GrowthofM2(%) 52.4 111.4 276.0 132.7 219.3 76.8 37.4 16.5 12.5 Privatesectorcreditgrowth/ 46.3 54.0 44.8 47.5 46.0 46.3 47.3 59.0 61.1 total credit growth (%) Price indices( YR90 =100) Merchandise export price index .. .. .. .. .. .. Merchandise import price index .. .. .. .. .. .. Merchandise terms of trade index .. .. .. .. .. .. Realexchangerate(US$/LCU)f 102.5 82.9 96.4 96.5 96.5 102.5 105.8 113.1 113.1 Real interest rates Consumerpriceindex (%change) 53.0 64.0 73.0 294.0 169.0 61.1 39.1 16.1 11.7 GDP deflator (% change) 53.7 71.6 76.6 316.8 185.0 77.9 35.4 14.1 S.8 a. GDP at factor cost b. "GNFS" denotes "goods and nonfactor services." c. Includes net unrequited transfers excluding official capital grants. d. Includes use of IMF resources. e. Consolidated central government. f. "LCU" denotes "local currency units." An increase in US$/LCU denotes appreciation. Annex B7 Page 1 of 1 Belarus - Key Exposure Indicators Actual Estimate Projected Indicator 1996 1997 1998 1999 2000 2001 2002 2003 2004 Totaldebtoutstandingand 1105 1171 1154 982 851 865 897 881 884 disbursed (TDO) (US$m)a Net disbursements (US$m)a 35 152 -62 -106 -103 22 33 -16 2 Total debt service (TDS) 113 143 146 202 232 248 251 247 231 (US$m)a Debt and debt service indicators (%) TDO/XGSb 16.3 14.8 16.1 15.2 10.5 10.3 10.4 9.6 9.8 TDO/GDP 7.5 8.3 7.6 8.1 6.7 7.4 7.4 7.3 6.9 TDS/XGS 1.7 1.8 2.0 3.1 2.9 3.0 2.9 2.7 2.3 Concessional/TDO 7.8 7.3 7.4 8.6 9.8 9.4 8.7 8.4 7.9 IBRD exposure indicators (%) IBRD DS/public DS 7.3 5.8 5.6 9.9 8.9 8.2 7.8 8.7 10.1 Preferred creditor DS/public 27.0 27.3 52.0 57.3 54.5 36.8 35.9 34.2 29.6 DS (%)C IBRD DS/XGS 0.1 0.1 0.1 0.3 0.3 0.2 0.2 0.2 0.2 IBRD TDO (US$m)' 121 124 135 122 105 96 95 143 221 Of which present value of guarantees (US$m) Share of IBRD portfolio (%) .. .. .. .. .. .. IDA TDO (US$m)d 0 0 0 0 0 0 0 0 0 IFC (US$m) Loans Equity and quasi-equity /c MIGA MIGA guarantees (US$m) a. Includes public and publicly guaranteed debt, private nonguaranteed, use of IMF credits and net short- term capital. b. "XGS" denotes exports of goods and services, including workers' remittances. c. Preferred creditors are defined as IBRD, IDA, the regional multilateral development banks, the RIMl, and the Bank for International Settlements. d. Includes present value of guarantees. e. Includes equity and quasi-equity types of both loan and equity instruments. Annex B8 Page I of I CAS Annex B8 - Belarus Operations Portfolio (IBRD/IDA and Grants) As of Januray 16, 2002 Active Projects Difference Between Last PSR Expected and Actual Supervision Rating Original Amount in US$ Millions Disbursements a/ Project ID Project Name Development P FY IBRD IDA GRANT Cancel. Undisb. Orig. Frm Rev'd ObLectives Proaress P008302 FORESTRY DEVELOPMEV S S 1994 41.9 8 3.1 11 2 P044748 SOC INF RETROFIT S S 2001 22.6 22.6 0 TOTAL 64.5 8 25.7 11.1 2 a. Intended disbursements to date minus actual disbursements to date as projected at appraisal. Annex B8 (IFC) Page I of I CAS Annex B8 (IFC) for Belarus Belarus Statement of IFC's Held and Disbursed Portfolio (In US Dollars Millions) Held Disbursed 0 0 FY Approval Company Loan Equity Quasi Partic Loan Equity Quasi Partic Approvals Pending Commitment Loan Equity Quasi Partic Amnex B9 Page 1 of 4 BELARUS COUNTRY ASSISTANCF STRATEGY Country Program Matrix Sectors Country Strategy & Key Bank Group Activities Progress Benchmarks Partners Actions Lending AAA 1. Macroeconomic i. Sustained No Bank lending * Public Expenditure * Sustained foreign * IMF is considering a Environment rnacroeconomic stability: directed specifically Revicw (2003) exchange policy follow-up to thc Staff inflation and budget at this area * Development * Reduced level of inflation Monitoring Program (SMP). * Liflaton and budget Policy Review (CEM) * Increased foreign A Stand-BY Arranlgement is deficit under control (2004) exchange reserves not likely in the nearest future * unified foreign * Mcomntrn exchange rate policy maintained 2. Price * Eliminate price and No Bank lending * Business * At least 80 percent of * IMF: Price liberalization Liberalization margin controls, except directed specifically environment prices are liberalized (except is an important issue on the natural monopolies and at this area surveys (annually) natural monopolies and some IMF agenda some socially important * Development socially important goods) * IFC: Business goods. Policy Review environment surveys will be (CEM) (2004) carried out in close __ partnership w~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ith the IFC 3. Public Sector * Increased fiscal No Bank lending * Country Financial * The 2003 budget to * IMF is planning to Accountability transparency directed specifically Accountability quantify the size of quasi- include the issue of fiscal * Improved public at this area Assessment (2003) fiscal accounts and to transparency in its dialogue procurement rules * Public Expenditure eliminate off-budget resources Review (2003) for line niinistries, including * Country the innovative finds. Procurement Assessment (2004) Annex B9 Page 2 of 4 Sectors Country Strategy & Key Bank Group Activities Progress Benchmarks Partners Actions Lending AAA 4. Poverty * Government is * Social * Poverty * System of targeted social * UNDP and TACIS have Reduction concerned about the rising Assistance LIL Assessment (2003) assistance in place been implementing programs poverty and is planning to (2002) * Social sector * At Icast 30 communities that address poverty introduce a system of target * Chemobyl dialogue (2002-03) covered by SIF * The Italian Government social assistance nationwide Project (2003) * Social and Gender has been active in providing * Social Analysis (2003) TA for social protection. Assistance Reform * Chernobyl Impact (2004) Study (2002) * Social Inivestment FunDd (2004) *Rural Development (2004) 5. Health * Contain Tuberculosis * TB/AIDS * Health sector note * Tuberculosis and * UN has provided and HIV/AIDS epidemics (2002) (2002) HIV/AIDS epidemics extensive TA on HIV/AIDS * Improve the efficiency * Health Policy * Health sector contained and illicit drug use of the sector Reform (2003) dialogue (2002) * Decrease in total TB cases prevention of 2% per year. * OSCE supports TB * A strategy for AIDS control pilots in prisons prevention approved by the * TACIS and WHO have Government also been active in this area * Vitebsk health reform pilot implemented countrywide. 6. Social Sector * Improve heating and * SIRP (2001) * 500-600 schools and Infrastructure lighting conditions in hospitals rehabilitated umder schools and hospitals the SIRP * Reduce fiscal burden through energy savings Annex B9 Page 3 of 4 Sectors Country Strategy & Key Bank Group Activities Progress Benchmarks Partners Actions Lending AAA 7. Private Sector * Develop a sound * PSD (2003) * Continuation of the * Increase number of SMEs * EBRD provided crcdit Development. business and investment IFC program on SME by 20 percent annually lines and supported SME climate for SME sector support (2002-04) * Improved environment for development * Simplify entry * Obstacles to businesses as evidenced by * USAID supported the requirements Business and surveys, including business SME development program * Streamline licensing Investment Study registration, licensing, controls * UNDP has been procedures (2002) and inspections. supporting SME development * Improve governance * E-development (2003) 8. Financial Sector * Improve the efficiency * Financial Sector * Develop a program for * EBRD has provided of the sector Review (2003) finawcial sector reform equity investments and credit lines to the banking system 9. Agriculture * Implement pilot farm * Rural * IFC is planning to * Number of rural SME restructuring development (2004) provide TA on SME doubled during the CAS development in rural period. areas 10. Environment * Mitigate the * GEFIIBRD * Environmental * Compliance with * UN has created an environmental Environment Project Strategy Update (2002) international treaties and Interagency Task Force to consequences of Chemobyl (2003) protocols on environment coordinate international effort * Preserve the * Chemobyl * Preserve unique on Chernobyl. biodiversity Project (2003) ecosystems and biodiversity * IAEA is the most active * Implement climate * Improved radiation agency in addressing the change prevention measures monitoring systems in place Chemobyl issues in Belarus. They expressed interest in working with the Bank in this area and offered grant co- financing in the order of $10 million * TACIS has bccn very active in international water issues as well as Chernobyl- related programs * UNDP has a range of environmental programs, including climate change, biodiversity, and Chermobyl. Amnex B9 Page 4 of 4 Sectors Country Strategy & Key Bank Group Activities Progress Benchmarks Partners Actions Lending AAA 11. Civil Society * Government is willing _ Civil society * NGOs play a greater role All major donors (UN, Development to listen to NGO concerns activities (2002-04) in country's life (measured TACIS, USAID, OSCE, and Build the civil * Social and Gender through surveys) bilateral donors) have been society's capacity to Study (2003) . Increased delivery of active in supporting the voice its concerns services through NGOs development of democracy, and become a more building the NGO capacity, important partner in supporting civic engagement, the country's life. public education, gender, etc. Annex B IO CAS Annex BIO - Belarus Page I of I CAS Summary of Development Priorities As Of January 15, 2002 Country Major issue Country Bank Reconciliation Network area performancea priorityc priorityc of country and Bank priorities d Poverty Reduction & Economic Management Poverty reduction fair anticipated increase in incidence high high Economic policy poor sustainability high high Public sector fair high high Gender fair moderate moderate Human Development Department Education fair targeted quality improvement moderate moderate Health, nutrition & population poor TB/AIDS, cardio vascular high high Social protection fair not targeted high high Environmentally & Socially Sustainable Development Rural development poor lack of reform moderate moderate Environment good Chernobyl related high high Social development fair high high Finance, Private Sector & Infrastructure Financial sector poor lacking infrastructure moderate high Private sector poor hostile environemnt high high Energy & mining poor controlled prices moderate moderate Infrastructure fair lack of investment moderate low not a Bank priority a. Use "excellent," "good," "fair," or "poor." b. Indicate principal country-specific problems (e.g., for poverty reduction, "rural poverty;" for education, "female secondary completion;" for environment, "urban air pollution"). c. To indicate priority, use "low," "moderate," or "high." d. Give explanation, if priorities do not agree; for example, another MDB may have the lead on the issue, or there may be ongoing dialogue. Template created on 02/20/2002