Belarus

major macro economic indicators

(e): Estimate (f): Forecast *Off-budget operations and secured debts of public enterprises included

Risk assessment

Heading towards a second year of recession

The recession will continue in 2023. Final consumption, the main item of GDP (68% of GDP in 2021) and, in particular, that of households (nearly half) will continue to be weakened by persistent inflation.  As real wages are not increasing at the same rate as inflation, household purchasing power will be eroded. However, since October 2022, the government has implemented inflation control, in particular by establishing a pricing mechanism for manufacturers, importers and retailers. According to this mechanism, industrial producers are only authorised to increase prices when economically justified and after clearance by a higher authority. Imports and resellers are subject to a limit on their margins. The deteriorating economic situation in Russia will generate fewer remittances from expatriates settled there (more than 20% of transfers), but this will have almost no impact on GDP (remittances from expatriates represented less than 2% of GDP in 2021). Gross fixed capital formation (24% of GDP in 2021), whose contribution to GDP growth was already negative before the start of the war in Ukraine, will continue on this trajectory. Net exports will contribute positively, due not to export recovery, but rather following lower demand for imports. The decline is explained not only by lower household demand, but also by sanctions applied by the European Union, the country's second partner (which represented 20% of trade in goods in 2021). These sanctions apply to Belarusian imports and exports and concern key sectors, such as imports of equipment and machinery (8% of total imports), and exports of potash for fertilizers and petroleum products (respectively 10% and 13 % of total exports). The National Bank of the Republic of Belarus (NBRB) maintained its key interest rate at 12% throughout 2022, to reduce it by 50 basis points in January. It also wants to reduce dollarisation by increasing banks' foreign currency reserve requirements. This operation may prove difficult given the risk associated with the ruble, and the reluctance of banks to own this currency.

Public and external accounts influenced by Russia

In 2022, the country's trade balance was in surplus, after a fall in import demand. Faced with EU and US sanctions, exports from Belarus have been redirected to third countries and notably to Russia, its main partner. Belarus, with the help of the Russian Federation, wishes to set up an import substitution plan to overcome supply problems and stimulate domestic production. Russian aid consists of providing financing in the form of sovereign loans at below-inflation rates. The financing of 20 projects was approved in September 2022 and concerns 20 investment projects worth $2 million. It is in Russia's interest to strengthen trade ties between the two countries, which would also allow Belarus to export more to its partner. However, the effects of this plan will not be immediate: while Belarus was able to redirect part of its exports to Russia in 2022, it will suffer from weaker external demand from the country in 2023, which will erode the trade balance. Lower inflationary pressures will boost import demand. The combination of the two factors risks leading to a trade balance deficit. The combination of the two factors may result in a trade balance deficit. If the direction of the balance of services is uncertain, it will suffer from EU sanctions, including a ban on Belarusian road carriers entering EU territory, or those on information technology services. These sectors represent two-thirds of the services balance (43% and 29% respectively in 2021), and the EU is Belarus' main trading partner for services (31% in 2021). The primary income balance (notably resulting from the repatriation of income from foreign investors and income from cross-border workers) will contribute negatively to the current account balance. The lower remittances from expatriates, particularly from Russia, will have a negative impact on the current account balance. The government forecasts a budget deficit in 2023. The main source of revenue is taxes. A new law, in force since January 2023, provides for an increase in taxes on companies and entrepreneurs (to 20%, up from 18%). This increase will not be enough to transform the deficit into a budget surplus since revenues will be weakened by high inflation and by lower oil revenues, not only due to the export ban on these products to the EU, but also to lower prices on exports to Russia.

Controversial role in the war in Ukraine

The re-election of President Alexander Lukashenko in August 2020 sparked major protests, on back of claims of forced elections and the poll marred by massive electoral fraud. The Lukashenko regime's backlash against protesters prompted the EU, the US, the UK and Canada to instigate a first round of sanctions. In May 2021, Belarusian air traffic control ordered an Irish plane from Greece bound for Lithuania to make an emergency landing in Belarus, following which authorities arrested a Belarusian opposition journalist who was on board. This led to additional and stricter sanctions from the West (including against 166 people and 30 state-owned companies). In retaliation, Lukashenko orchestrated a migrant crisis by luring migrants from Afghanistan, Iraq and Syria, letting them into Belarus by plane and pushing them towards EU borders. In response, Latvia, Lithuania, and Poland closed their borders. This in turn sparked fresh sanctions.

In 2022, following Loukachenko’s support for the Russian invasion of Ukraine, the EU introduced a swathe of sanctions against Belarus. The measures include sanctions against individuals and also concern several areas of the economy, such as the banking system (banning of the SWIFT system of five Belarusian banks), prohibition of transactions with the NBRB, as well as trade restrictions. In the wake of these sanctions, Belarus not only strengthened its commercial ties with Russia, but also forged closer ties with certain Central Asian countries, notably Kyrgyzstan and Kazakhstan to circumvent the sanctions. From June to October 2022, EU timber imports from these two countries increased by 18,000 and 74 times respectively year on year.

Belarus supports its Russian neighbour in the war against Ukraine. Although its army is not fighting on Ukrainian territory, Belarus has been directly involved, either through the Russian offensive launched from its territory at the start of the conflict, by providing logistical aid or stationing Russian soldiers on its territory. In mid-February 2023, President Lukashenko, however, declared that he was ready to mobilise Belarusian troops only in the event of a direct Ukrainian attack on the Belarusian people.

Last updated: June 2023