Belarus may repay external debt, but lose economic independence
In 2014, Belarus was able to cope with servicing her public debt thanks to new loans from Russia. In 2015, Belarus will need to repay USD 4 billion of foreign debt, but she knows where to obtain such an amount. If Belarus continues integration within the Eurasian Union, she will have no problems with servicing her foreign debt, yet she will lose some independence in economic decision-making.
On September 2nd, the draft Law on the national budget for 2015 was debated in the Parliament.
In 2014, Belarus had to repay USD 2.4 billion of foreign public debt. She also needs USD 0.8 billion to pay debt service fees. As of early September, all due payments were made on time. The Belarusian economy alone is unable to generate enough income to repay the outstanding debt. Belarus has been using her gold and currency reserves, as well as domestic and international loans to make all due payments on time. That said, her main creditor was Russia.
In 2015, Belarus’ international debt will reach USD 4 billion. The draft 2015 budget envisages the following proceeds: USD 1.5 billion from saved duties on petroleum products produced from Russian crude oil, about USD 0.6 billion from exporting Belarusian oil, USD 1 billion from new intergovernmental loans and borrowings on foreign markets. Belarus services her international debt from the national budget. Therefore, in order to increase her tax proceeds, Belarus might introduce a special fee for the right to export oil, might increase excise taxes on tobacco and alcohol, and might increase VAT and income tax rates. Overall, the government seems to have enough funds to repay and service the international public debt.
Belarus’ ability to service her international debt has improved since she has engaged in the Eurasian integration. By merely signing the Eurasian Union treaty, Belarus will save circa USD 1.5 billion (Russia’s export duty subsidy). In addition, the bridge loan from VTB bank will be re-registered as a state loan from the Russian government.
But as Belarus receives some support from Russia, she loses traditional tools to protect her domestic market from competitive products made in Russia or elsewhere. Deeper integration will mean that she becomes more dependent on the economic situation in Russia, which is experiencing some problems due to internal and external factors. Russia’s growing influence on Belarus may result in the latter losing her autonomy in decision-making on economic matters, and, eventually, to a de-facto economic takeover by Russia.
Belarus calculates that she will be able to repay and service her growing international debt in 2015 and that her public debt will not influence the overall economic situation. For that, however, she may well pay with her independence in economic decision-making.
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.