EDB: Closer coordination in the financial sector will bring significant benefits to Belarus and other EAEU countries

ArmInfo - EDB Media Centre.  The development of the EAEU requires a coordinated foreign exchange policy, harmonised laws governing the financial market, and the establishment of a common financial market to ensure the free movement of capital between the member states. The single financial market will produce significant economic effects such as investments in the common market, with maximum returns, broader risk distribution, and lower borrowing costs, especially for smaller economies.

Belarus will benefit from its movement towards a single financial market in the EAEU. However, this also creates certain challenges. These findings of Eurasian Development Bank's (EDB) Centre for Integration Studies are presented in the report Financial Market Liberalisation in Belarus within the EAEU.

EDB's survey of financial institutions has shown that the sector can see a decrease in its costs by 10-15% if the barriers associated with both access to markets and the current operation of banks and insurance companies are lifted.

Experts found out that most risks related to the permission for banks from other EAEU  member states to establish branches in Belarus are low or moderate. These risks can be mitigated by harmonising the member states' procedures and requirements for the issuance of banking licences to branches, as well as prudential regulations for banks, deposit insurance, and by creating supranational banking administration, and enhancing monetary policy coordination.

The creation of a single financial market also envisions the liberalisation of capital flows by Belarus and foreign exchange regimes with the EAEU countries. To ensure that the lifting of capital account barriers would not result in a crisis or higher foreign debt and would not threaten financial stability, it should be tied to a number of recommended conditions for the country's macroeconomic policy. As at Q3 2015, only four out of eleven such conditions were fulfilled. For this reason in order to minimize a volatility of capital flow it would be advisable for Belarus to develop and apply Capital Flow Management Measures (CFMs), if the need arises.

Capital account liberalisation is usually accompanied by loosening of foreign exchange restrictions. One of such restrictions in Belarus is the export surrender requirement. The risks associated with its abandonment seem to be rather high for Belarus at the moment. According to the Centre for Integration Studies, international practice suggests that the country can pursue a stepwise strategy to do so.

The report also considers liberalisation risks in insurance, associated with the opportunity for insurance companies' branches to provide services throughout the EAEU. The recommendations are provided as to how to mitigate relevant risks. EDB experts comment that in many developing countries foreign branches managed to oust national insurance companies from the market, but this risk is rather low for Belarus.

One of the suggestions made to harmonise the EAEU insurance market was to set up a system of compulsory insurance for motorists driving abroad, similar to the Green Card system. The calculations have shown, however, that this would be unprofitable for Belarus and will result in additional expenses for its transport companies.

Overall, EDB experts assess that closer coordination in the EAEU financial sector will ensure an additional growth in GDPs of Belarus (0.9 percentage points), Armenia (0.4 percentage points), and the Kyrgyz Republic (0.3 percentage points). The main benefits from financial integration for these countries will be ensured by their trade with other EAEU member states and the lower cost of financial resources.