The National Bank prepares for Belarusian ruble depreciation

April 22, 2016 18:32

On June 19th, National Bank Chairman Yermakova spoke about the monetary policy plans.

Devaluation expectations are growing in Belarus. There are no reasons to believe that devaluation of 2011 will repeat. However foreign trade situation requires some BYR devaluation and the National Bank is ready for gradual weakening of the national currency.

Several indicators prove there are certain problems in the foreign exchange market in Belarus. By IMF standards gold reserves in May decreased by USD 229 million. In April foreign trade reached minus USD 401.5 million without upward trend. In the currency market in May, individuals and legal entities created net demand for foreign currency. The inflow of deposits in national currency into the banking system slowed down, resulting in decreased net foreign currency supply by individuals. Negative trends in the foreign assets in the banking system continue increasing and there are no further opportunities to attract foreign loans. New loans from either the EurAsEC Anti-Crisis Fund or the IMF are not envisaged. Against this background, it is quite logical that devaluation expectations are growing, which was acknowledged by Yermakova and Nadolny (National Bank’s First Deputy Chairman) – they almost simultaneously assured Belarusians that the National Bank was not planning to devaluate the national currency substantially.

In fact, there are no reasons for multiple devaluation of BYR in 2013. In the short-term, international reserves’ level is sufficient to compensate for the excess currency demand over supply. The current account in Q1 2013 cannot be considered satisfactory, but it is not as catastrophic as in late 2010 - early 2011. High debt repayments by mid-2013 will be covered by attracted loans and moreover, there is still some potential in attracting population’s foreign currency reserve assets via state currency bonds. But in the longer-term, this safety cushion will not be enough.

The National Bank realizes there is a need to weaken BYR. Russia announced plans to weaken Russian ruble, which will have a direct impact on foreign currency inflows in Belarus. The foreign trade balance is affected by the situation with consumer imports, the volume of which, because of the stable exchange rate increased by 35% in Q1 2013, compared with Q1 2012. The National Bank’s challenge is that it has to prevent sharp exchange rate fluctuations because people are very quick to respond to it: ruble deposits in the banking system may be in a very short time transformed into cash currency and withdrawn from the banking system. Under these conditions, the national currency deviation by more than 2% per month is highly undesirable.

Thus, maintaining stability in the foreign exchange market has become increasingly challenging for the National Bank. In these circumstances, a gradual depreciation of the national currency would somewhat improve the foreign trade situation, while sharp depreciation would be unacceptable because of the potential rapid and undesirable reaction by the population to exchange rate fluctuations.