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Belarus : Rehabilitation Loan (Loan 3660-BY)

The Belarus Rehabilitation Loan for US$120 million, supported by Loan 3660-BY was approved in FY94. The loan and its companion operation, the Institution Building Loan (Loan 3640-BY), were the first Bank operations in Belarus. The Rehabilitation Loan was closed in FY97 after two extensions totaling 18 months. A request for a third extension was denied and the balance of US$3.14 million was canceled. The Implementation Completion Report (ICR) was prepared by the Europe and Central Asia Regional office. The Borrower’s contribution is included as an appendix.

The objective of the Rehabilitation Loan was to support structural reforms necessary to facilitate economic recovery and the transition to a market economy. Part of the foreign exchange proceeds of the loan was to be accessed by importers through an auction system and part was earmarked for specific categories of “critical” imports. The Government’s program was outlined in a Memorandum of Economic Reform Policies annexed to the President’s Report for this loan. It included policies of macroeconomic stabilization, promotion of competition, private sector development, improved accountability of State enterprises, ownership reform, and social protection.

The project did not achieve its objectives. After a period of erratic reform implementation, there was a shift in policy in late 1995. The reform effort was effectively halted and some of the earlier reforms were reversed. Instead of moving towards a market economy, there was a return to administrative mechanisms. The exchange rate was fixed at levels above its market value and multiple exchange rates were maintained. Price regulations remained in effect. Little was done to encourage private sector development; transparent rules to increase accountability of State-owned enterprises, were not formulated and hard budget constraints were not imposed. The process of privatization has been much slower than in neighboring countries and relatively few enterprises have been transferred to private ownership. At project closing, a system of targeted support for the poorest groups was still being formulated.

The ICR rates project outcome as unsatisfactory and sustainability as unlikely. It considers achievement of institutional development objectives to have been negligible and Bank performance to have been satisfactory. OED concurs with these ratings.

The main lesson to be drawn from this project is that use of Bank lending as a rapid response to unique and unpredictable circumstances is inherently risky. It is difficult to reduce this risk, but operations should be structured in a way that reinforces commitment to reform.

No audit is planned.

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