Economy of Belarus - Monetary Policy

Monetary Policy

During 1995-1998 monetary policy was highly expansionary. Net domestic credit of NBB was increasing at the rate of over 100 percent from 1996 till mid-1998 as a consequence of numerous presidential decrees and resolution of the Council of Ministers instructing NBB to extend credits. Since no external sources were available for covering state budget deficit, the NBB emission activity provided its financing. Also, through authorized banks serving governmental programs, the NBB extended preferential targeted loans to state-owned enterprises. The list of credited enterprises is prepared by the government and sometimes depends on the ad-hoc strategies of development. In 2000, Belarus managed to unify its currency exchange rates, tightened its monetary policy, and partially liberalized the foreign currency market. Starting from the period of an administrative peg of the exchange rate of the Belarusian ruble in 1995, the monetary policy was based on administrative regulation of interest rates. In November 1995, administrative limitations of the inter-bank credit market activity were initiated and still remain in force. In spite of the Central Bank Law passed in 1994 guaranteeing its independence, President Lukashenko has a power to nominate and dismiss the Chairman of the NBB. and to formulate monetary and foreign exchange policy. Over the past years, preferential credits, administrative price setting, and decline of the interests rate spread below 15 percentage points in the second quarter of 1997 resulted in damaging consequences to enterprises and especially banks. As the process of exhaustion of the Central Bank's hard currency reserves exhibits a dangerous tendency, government introduced restrictions on currency transactions. These have resulted in inconvertibility of the Belarusian ruble for the current transactions since March 1998.