Belarus’ government abandons ambitious development plans before presidential elections
Belarus’ socio-economic development forecast for 2015 is rather modest in comparison with 2014. Just ahead of the presidential campaign, the authorities have abandoned their intentions to improve living standards. In addition, Belarus’ economy could face recession due to the situation in the Russian economy.
On October 3rd, Belarus’ socio-economic development forecast for 2015 was released to the public.
The 2014 forecast envisaged GDP growth at 3.3%, inflation at 11% (December 2014 to December 2013), a boost in exports of goods and services at 8.6%, and raising USD 4.5 billion in net foreign direct investment. As of September 2014, inflation was higher than 12% and the forecast was revised upward to 17%. Exports have not boosted, rather dwindled by 1.1%, in H1 2014 FDI was only USD 1.3 billion and GDP grew only by 1.5%. GDP growth forecast for 2015 is around 2%-2.4%, inflation at 12%, and exports growth at 4.3%. Such a forecast means that the authorities have lowered their expectations regarding Belarus’ economic growth in 2015.
As a rule, before the presidential campaigns, the authorities strive to demonstrate growth in GDP, people’s real incomes, and exports. Meanwhile, the 2015 forecast implies that the authorities are seeking to secure a stable and low economic growth rate, rather than an inflated one that would seriously weaken the national currency. The Belarusian authorities are not aiming high in terms of GDP growth. This is also due to stagnation in Russia and Ukraine as well as the world’s economic slowdown. All in all, the projected economic forecast is quite realistic.
The situation in the Russian economy could be the only threat to Belarus’ 2015 forecast. Belarus’ exports to Russia make up 42% of the total exports. In addition, USD 2.8 from USD 3.1 of Belarus’ public debt is owed to Russia. EU and US sanctions on Russia might reduce investment activity on the Russian market, and further reduce exports of investment goods produced in Belarus. Also, they might affect Russian banks and the government in terms of their ability to issue loans for the Belarusian economy. Moreover, restricted access to new technologies in the oil extraction industry might reduce oil extraction volumes, which would reduce Russia’s proceeds and have a multiplication effect on the Russian economy as a whole. Belarus is unable to influence sanctions and will be prompted to readjust her economic development forecast for 2015 if recession in Russia deepens. .
The Belarusian authorities have chosen a balanced approach to economic growth in 2015 and do not intend to pump the economy with printed money. If sanctions on Russia are stepped up, that will have a direct impact on the Belarusian economy. In addition, President Lukashenko might review the government’s plans, as he has done many times before, and recommend revising the forecast parameters upward.
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.