By Andrei Makhovsky
MINSK, Aug 28 (Reuters) - The International Monetary Fund, in Belarus to assess the government's progress as part of its $3.5 billion loan programme, said on Friday Minsk should cut down on state lending to reduce imports and shore up banks.
The economy of Belarus is still largely in state hands, a legacy of the Soviet era which Minsk has been slow to change. Traditionally, the government stimulates economic growth through state bank lending to industries.
"Strict limits should be introduced on credits given within state programmes. This would not only lead to lower demand for imports but also enable more effective controls of banks' risks," the IMF said in a report summing up its findings.
Four state-controlled banks hold over 50 percent of banking sector assets. Economic growth has averaged between 7.5-10 percent annually in recent years but has slowed to 0.3 percent in the first six months of this year.
The economic crisis in Belarus stems from a sharp fall in its exports as demand from Russia and the EU drops.
That boosted the trade gap in the first half of this year to $3.9 billion from $2.2 billion last year. That in turn has pressured the Belarussian rouble, which the government had already devalued by 20 percent at the start of the year.
Minsk has received $1.5 billion from the IMF and should get an answer about a third tranche worth about $680 million by next Wednesday. Russia has also lent Belarus $1.5 billion.
Despite that, however, central bank reserves have fallen to $3.6 billion at the start of August from a record of $5.7 billion a year ago.
"The stimulation of domestic demand threatens the aim of reducing external vulnerabilities through the building up of foreign reserves," the IMF said.
The IMF said the economy needed deep structural reforms if strong growth was to continue as some favourable conditions -- such as cheap Russian energy -- are no longer on offer. It has said Minsk should start the privatisation process.
"A number of external detrimental factors could prevent a return to the same pre-crisis growth dynamics ... Given those factors, the potential long-term growth in Belarus could be 2-3 percent lower than seen in the past 10 years," the IMF said.
"Belarus could only win if it carries out market-orientated reforms ... Significant state interference in the economy should be reduced." (Writing by Sabina Zawadzki; editing by David Stamp)