Country Report Belarus December 1998 Main report

Outlook for 1999-2000: Inflation will rise but hyperinflation avoided

Inflation will rise, but hyperinflation should be avoided --

The risk of hyperinflation will emerge as the country's major problem in 1999. For the time being, Belarus will continue using monetary emissions to address the short-term needs of the real economy, resulting in an erratic and un- predictable expansion of the money supply. Rather than tighten easy credits, the government will tighten price controls in an attempt to keep down visible inflation. This will ultimately fail, and will foster the emergence of latent inflation, a characteristic of centrally controlled economies that is reflected in severe shortages and increased black-market prices. The failure of price controls, however, will eventually force the government to begin controlling its rampant monetary expansion. Thus, whereas we forecast continued high inflation during the early part of 1999, we expect disinflation to bring official inflation levels down to 90% by the end of 1999. As the economy begins to recover, we expect a gradual loosening again in 2000, leading to a widened current-account deficit that will prove increasingly difficult to finance and renewed problems by the end of the forecast period. After slowed inflation throughout much of 2000, the annual average will be around 45%, although year-end inflation will reach approximately 75%.

-- unless Mr Lukashenka defies all reason

The main risk to our forecast is that Mr Lukashenka does not alter his current path. This will happen if he rejects the IMF's conditions and gives up on multilateral assistance, or if he senses that his strong growth policy will topple without easy credits and command-driven output. Both of these options are possible. If Belarus chooses either, then hyperinflation will probably prove unavoidable, affecting growth and plunging the country into even deeper crisis.

Forecast summary (% change year on year unless otherwise indicated) 1997(a) 1998(b) 1999© 2000© Real GDP 10.0 7.0 0.0 2.0 Industrial production 17.6 8.0 -1.0 2.0 Agricultural production 6.9 1.0 2.0 2.0 Consumer prices Annual average 64 71 240 45 Year-end 63 193 90 75 Exports fob ($ m) 7,383 6,909 5,458 5,840 Imports fob ($ m) 8,718 8,454 6,912 7,189 Current-account balance (% of GDP) -6.0 -6.8 -8.3 -9.9 (a) Actual. (b) EIU estimates. © EIU forecasts.

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