Alexander Lukashenko presses for high growth rates
On March 12, Prime Minister Mikhail Myasnikovich reported to Alexander Lukashenko about the results of social and economic development of Belarus in January-February and provided with an outlook for 2012. According to Lukashenko, the economy is developing rapidly and positively, and that “those 5-6% of the GDP growth we have long argued about are feasible”.
Alexander Lukashenko assesses the results and prospects of the economic development based on financial indicators. He believes, since the inflation is under control and the foreign exchange market has stabilized, everything is working well and the economy could be “boosted”. This acceleration is traditionally carried out by money creation credits and state programmes. Meanwhile, the reduced inflation and stabilized Br exchange rate only prove that tight monetary policy is yielding results.
The average GDP growth in January-February was 3% (3.6% in January). Accordingly, Alexander Lukashenko wants to boost the economic growth to reach the desired 5%, but so that “not to create problems in the foreign exchange and financial markets”. However, the economic theory and experience of Belarus and the IMF prove it is impossible. It is either macroeconomic stabilization and slow growth, or inflation and artificially maintained high growth rates of the GDP. A large number of experts argue, one should agree with the recession in the economy, while maintaining macroeconomic stabilization, which will create healthy grounds for future growth. However, the economic authorities of the country disagree and intend to use the traditional means of economic policy.
Lukashenko also warned against the reduction of gold reserve and about the need to ensure a positive foreign trade balance, however he did not say what needs to be done. Regardless of slower growth rates (compared with projected) and existing various high-risks, Myasnikovich was confident all projected parameters will be met by the end of the first quarter and by the year-end. This confirms the dependent and formal nature of the government.
The rapid increase in wages has led to a decline in the ratio between labour productivity and real wages to one. Previously, the rule was that enterprises, in which the state owned more than 50% of shares in the founding capital, were not allowed increasing salaries if this ratio was equal to or less than one. The authorities are unlikely to be able to meet the wage growth requirement without long-term consequences for the economy. Hence, the government is likely to contain wage growth for the sake of economic growth.
According to Belstat, In January – August 2017, GDP growth was 1.6%. The economic revival has led to an increase in wages. In August, the average monthly wage was BYN 844.4 or USD 435, i.e. grew by 6.6% since early 2017, adjusted for inflation. This has reduced the ratio between labour productivity and real wages from 1.03 in January 2017 to 1 in the first seven months of 2017. This parameter should not be less than 1, otherwise, the economy starts accumulating imbalances.
The need for faster growth in labour productivity over wage growth was stated in Decree No 744 of July 31st, 2014. The decree enabled wages growth at state organizations and organizations with more than 50% of state-owned shares only if the ratio between growth in labour productivity and wages was higher than 1. Taking into account the state's share in the economy, this rule has had impact on most of the country's key enterprises. In 2013 -2014 wages grew rapidly, which resulted in devaluation in 2014-2015.
Faster wage growth as compared with growth in labour productivity carries a number of risks. Enterprises increase cost of wages, which subsequently leads to a decrease in the competitiveness of products on the domestic and foreign markets. In construction, wholesale, retail trade, and some other industries the growth rate of prime cost in 2017 outpaces the dynamics of revenue growth. This is likely to lead to a decrease in profits and a decrease in investments for further development. Amid wage growth, the population is likely to increase import consumption and reduce currency sales, which would reduce the National Bank's ability to repay foreign and domestic liabilities.
The Belarusian government is facing a dilemma – either to comply with the president’s requirement of a BYN 1000 monthly wage, which could lead to new economic imbalances and could further affect the national currency value, or to suspend the wage growth in order to retain the achieved economic results. That said, the first option bears a greater number of negative consequences for the nomenclature.
Overall, the rapid growth in wages no longer corresponds the pace of economic development. The government is likely to retain the economic growth and retrain further growth in wages. Staff reshuffles are unlikely to follow the failure to meet the wage growth requirement.