Declining GDP will be financed with money-printing

In January 2014, the GDP declined due to the crisis in industry and high comparative base in early 2013. To correct economic failures, the government usually attempts to stimulate domestic demand. In the mid-term, this will fuel inflation expectations and will weaken the Belarusian ruble – except if Belarus sells its assets or receives new loans.

On February 20^th, the National Statistical Committee published socio-economic data for January 2014, which demonstrated a deepening economic crisis in Belarus.

According to the National Statistics Committee, in January 2014 Belarus’ GDP fell by 1.1 % over the same period in 2013. Poor industrial performance was the main reason for the fall in GDP. The Industrial Production Index decreased by 7.1 % compared with January 2013. The country’s main industrial enterprises reduced their production, in some cases many-fold (BelAZ, MAZ). The income growth slowdown has affected retail trade turnover and decreased its positive impact on GDP. In addition, in 2013, the new methodology was introduced to calculate net taxes on products, which significantly increased the GDP value. In 2014, the base-line indicator for this parameter was already high.

The government’s actions in terms of tighter economic policies, address only the short-term and most urgent problems without setting long-term goals. Pressure on the National Bank to reduce the cost of lending will result in softer monetary policy and pumping enterprises with cash regardless of their performance. Industrial enterprises were allowed to sell products at a discount, but bureaucratic procedures reduce all positive effects from this decision to zero.

The mechanism that stimulates domestic demand works as follows. Industrial enterprises sell their stocks to farmers and agricultural organisations. Thus, enterprises receive cash for their illiquid products and farmers receive machines along with a considerable delay in paying or using concessional loans. These mechanisms have been used in Belarus to stimulate domestic demand a few times, albeit with identical results. On the one hand, enterprises convert cash into hard currency to purchase raw materials, which increases pressure on the ruble. On the other hand, farmers receive concessional loans provided by a money-printing machine. Therefore, inflation spirals due to the lack of foreign currency inflow, while the money supply grows, weakening the ruble. In the absence of foreign currency inflows, the only solution to this situation would be devaluing the ruble.

The lack of systemic reforms and support for the ruble has resulted in falling economic growth. The existing problems will be solved using traditional mechanisms stimulating domestic demand. As a result, the national currency will be devalued in order to remedy the Belarusian industry.