Belarus’ ‘know-how’: import restrictions for budget’s benefit
The new accounting and taxation rules have been introduced in Belarus, which considerably adjust financial activity of importers-intermediaries. In October, importers will be prompted to seek substantial sums to repay tax liabilities to the state budget. The state, however, with these new rules solves the cash-inflow-before-2015 problem at the cost of additional expenses for businesses, and accelerates inflation.
As of July 24th, Decree no 361 took effect, which amended some taxation and accounting rules.
As of July 24th, a 90-day delay is introduced on the right to deduct import VAT for companies importing and selling products in the same state. The aforementioned Decree shall not affect the interests of large industrial enterprises, which import own raw materials for further processing. In practice, this provision means that, most companies with quarterly VAT-payment period when transferring tax for the Q3 2014 (until October 22nd) will need to seek additional amount equivalent to the import VAT for the entire period from July 24th until the end of Q3 and list it in the budget. This rule will be valid until the end of 2014.
For the government, this new rule means that it will receive an interest-free loan for a 90-day period from organizations importing goods, mainly consumer goods. Taking into account the overall situation with the profitability of trade and intermediaries, in most cases, importers will have either to use available funds of the founders, or apply for bank loans. These measures will imply additional costs for business and might entail 5%-15% price-hikes on goods depending on seasonality and interest rates on loans.
In October, the state will receive a significant inflow of VAT payments to the budget, because the mechanism of deferred liabilities to offset the VAT paid will take effect. The pressure on the foreign exchange market will be eased, as importers will decrease their supply due to increased prices on goods. The banking system will have a significant amount of new borrowers, as importers will be prompted to resort to loans. The Government will note the growth in prices, and inflation limits will be exceeded, but foreign trade deficit will decrease. Domestic goods will receive somewhat competitive advantage over imported goods, which, in turn, might reduce domestic producers’ stocks of consumer goods.
Meanwhile, enterprises, which use a significant amount of imported raw materials purchased on the domestic market for their own production, will not see a significant improvement due to higher prices on raw materials on the domestic market. Consequently, prices on goods, produced by these enterprises will go up.
The state has once again changed the rules of the game for business in order to achieve its own short-term objectives. The population will feel the effects of the new rules through the rise in prices for imported goods and the deterioration of the goods’ assortment in retailers.
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.