By David Lawder

WASHINGTON (Reuters] – Western sanctions are squeezing Belarus’ economy and limiting its financing choices, International Monetary Fund staff stated Monday. They recommended that Minsk reduce fiscal expenditures in order to decrease its foreign-currency borrowing.

Following the three-year period of Article IV economic consultations, the IMF issued a staff statement stating that Belarus will see a growth rate of around 2% and inflation at around 10%. This is due to higher commodity prices and currency depreciation.

According to the Fund, Belarus will see a 0.5% real GDP increase in 2022. Activity is being held back due to the COVID-19 pandemic and limited policy stimuli.

The IMF stated that there are many risks to the outlook, including geopolitical tensions and the potential for further COVID outbreaks. They also concern the effects of international sanctions and contingent liabilities within the public sector. These major risks are a compelling reason to plan for contingency.

IMF stated that sanctions only have limited financing options. Authorities are left with little choice than to drastically reduce fiscal deficit (estimated at 3.1% of GDP in 2021). The completion of a nuclear power station will partly explain the IMF’s prediction that this ratio would fall to 2.1% in 2022.

It was noted in the report that $1 billion worth of IMF Special Drawing Rights has been put into reserve by the government. The increase in reserves of the country at $8.5billion is a relative low level, sufficient to fund 2.3 months’ imports.

SDR allocations are part of $650billion global IMF reserves allocations. This raises concerns about whether the move aids President Alexander Lukashenko’s government. Western countries have placed sanctions on the president over claims that it rigged the election and cracked down against the opposition.

Belarus and Russia also face Western sanctions due to their treatment Ukraine. In response to this, they sought deeper economic integration.

According to The Fund, the existing sanctions restrict space for rollovers of debt that is already expired and new borrowing from Eurobond markets.

The IMF stated that while the authorities could continue borrowing on other markets and institutions, the IMF suggested that a further decrease in the fiscal deficit by 2023 would ease the pressure to issue debt. The IMF stated that 93% is foreign-currency denominated and therefore vulnerable to fluctuations in exchange rates.

The IMF warned that contingent liabilities from banks and state-owned entities could also drain public funds. It recommended to the Belarussian central banking that it end loan forbearance, other support measures, and reinstate financial regulatory norms pre-pandemic.