Stabilization of the foreign currency exchange market: advantages and disadvantages

April 22, 2016 17:59

The progress in the stabilization of the currency market is undeniable: there is currency in the currency exchange offices. However, the government tries to bring down the market exchange rate in order to reach a balanced exchange rate too fast. It could lead to the new/old challenges and problems.

The market exchange rate of Br in the course of the week was consistently strengthening: from Br 8500 to Br 7890 per USD. (Euro exchange rate dropped more significantly due to its devaluation against USD on the international markets).

The NBB denies any interventions in support of the ruble (quite the opposite, claims it buys Dollars to prevent even more drastic depreciation). However, there is every reason to believe that during the first trading days there were manipulations with the exchange rate. The trading mechanism at the supplementary session envisaged submission of purchase/sale requests one day before the session. Therefore the NBB had all the information about the supply and demand before the trading session started and potentially could adjust it (using administrative resources to put pressure on the commercial banks and on the state-owned enterprises). Following the first trading sessions representatives of the major importers were saying that partially their demand had not been satisfied. Also the government has mobilized a powerful media resource arguing that the market exchange rate will continue falling.

Regardless of the optimistic statements by the authorities, 1) it is still too early to talk about a downward trend; 2) trading volume is too small to assert that the current Br exchange rate reflects its market value.

Therefore, regardless of the optimistic statements by the authorities, 1) it is still too early to talk about a downward trend; 2) trading volume is too small to assert that the current Br exchange rate reflects its market value.

The efforts of the authorities to stabilize Br by the end of the week lead into a trap: with the USD exchange rate falling, importers wait or submit purchase requests at a low rate, while exporters are waiting. Indecisiveness of exporters is supported by the tax policies of the authorities: the difference between the official and the market exchange rate (40%) is considered as profit therefore a subject to appropriate taxation.

Cash currency market situation is also unstable: with the abolishment of the 2% margin between the buying and the selling rates, banks have significantly increased the gap for the population. The difference between purchase and sale rates is 10% or more. As a result, by the end of the week the population was reluctant to sell the currency, while banks preferred selling only the currency they bought from the population. Therefore a number of banks periodically had shortage of currency with immediate reaction of the black market: in the first days of the week the black market was quiet and by the end of the week activated again.

The goal of the authorities is clear: they would like to balance out the market and the official exchange rates by the end of October at about Br 6000 per USD.

The goal of the authorities is clear: they would like to balance out the market and the official exchange rates by the end of October at about Br 6000 per USD. As a result, the IMF mission to visit Belarus in the second decade of the month would be able to fix progress, or complete stabilization of the currency market, i.e. recognize the implementation of the main requirements of the IMF. This will automatically open a new chapter in the negotiations over the loan for the next year (this year the gap will be closed by loans from the Chinese Savings Bank, etc.). The new Stand-by programme would allow to build up the gold reserves of the NBB and to maintain the exchange rate at a level acceptable for the authorities.

Regardless of the statements of the government, without the IMF loan the situation will be less optimistic, as the fundamental problem of the Belarusian economy, i.e. the negative trade balance, has not been solved. Moreover, there is every reason to believe that all the positive dynamics in reducing the trade deficit has been exhausted in the 3rd quarter of 2011 and that the deficit will increase again in the 4th quarter of 2011 and in 2012:

  • sales of petroleum products are unprofitable and after the adoption of new duties on exports of oil products by Russia (October 2011), one of the major export industries of the country will face serious challenges;
  • with the stabilization of the currency market imports will recover, while the expenses of the Belarusian enterprises will increase due to the unwinding inflationary spiral (the rising cost of raw materials (with high summer exchange rate incorporated), energy, wages and etc.);
  • gas prices will continue rising in the 4th quarter of 2011;
  • pressure on the currency market will continue in order to finance industry, agriculture, construction and income growth via emission.

The short-term progress in the stabilization of the currency market is undeniable: there is currency in the currency exchange offices. However, the government tries to bring down the market exchange rate in order to reach a balanced exchange rate too fast. Coupled with its plans for a balanced rate at a level below the equilibrium of the market, as well as a fundamental lack of structural long term reforms, it could lead to the new/old challenges and problems. First of all, it concerns the high level of the negative trade balance and the need to finance it via new lending programs. Besides, the actions of the Belarusian authorities and the statements of the Belarusian President regarding the monetary policy are far from being consistent and predictable.