WASHINGTON, March 9 (Reuters) - In a stern warning to Belarus, the International Monetary Fund on Wednesday said its current account gap had become unsustainable and called on the government to tighten fiscal and monetary policies.
In its annual review of the Belarus economy, the IMF said urgent and far-reaching policy adjustments were needed to reverse damage to the former Soviet republic's economy from a rapid credit expansion, public wage increases, and spending on housing, agriculture and other sectors.
The current account deficit reached 16 percent of gross domestic product last year, financed mainly through foreign currency borrowing in international markets and from domestic banks in exchange for ruble liquidity at low interest rates.
The IMF said since the completion of the country's IMF program in March last year, Belarus had relaxed policies causing a widening in the current account deficit.
There is a "risk that expansionary policies cannot be sustained even in the short term, and there is an urgent need for adjustment," the IMF said.
An IMF staff paper said Belarus's authorities believed that through a combination of external borrowing, higher-than-expected revenues from the sale of state assets, and preferential prices for oil, they could finance the deficit, while increasing exports and growing their way out of debt problems.
The staff said the policies were based on "highly optimistic" plans, and policies for 2011 "are too loose".
"If substantial external financing is available, the authorities' policies could succeed in the short term -- possibly lifting output growth above potential -- but Belarus cannot run large current account deficits indefinitely," the IMF staff paper said.
IMF staff said without significant policy tightening that would lower the current account deficit, Belarus' external debt was expected to reach 75 percent of gross domestic product and public debt would rise to 29 percent of GDP in 2016.
IMF debt sustainability analyses suggest Belarus will become dependent on largely unidentified outside financing and a debt path that could eventually become unsustainable, staff noted.
If Belarus loses its access to financing, reserves could be drawn down faster than expected, IMF staff added.
"A loss of reserves could lead to the loss of control over the exchange rate and initiate a destabilizing spiral of depreciation and inflation, expose the banking system to risks and disrupt production," the staff document warned. (Reporting by Lesley Wroughton; Editing by Leslie Adler)
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