Belarus officially acknowledges devaluation of its currency
The devaluation of the Russian ruble and some statements made by the Belarusian authorities have led to panic on Belarus’ foreign currency market. In order to mask devaluation, a 30% tax on buying the foreign currency has been introduced until February 1st. However, the National Bank has not waited until February, and instead introduced a unified buying rate for foreign currency. With the help of this new method of price assessment, the National Bank is trying to minimize the losses of gold and forex reserves. This might lead to the Belarusian ruble further devaluing.
December is the month when expectations of devaluation are higher among Belarusians. This year, concerns were boosted by the situation with the Russian ruble. Statements made by the Belarusian authorities on the stability of the Belarusian ruble’s exchange rate had the opposite to intended effect. Due to the steep upsurge in demand for the foreign currency, the general public has purchased more than $180 million on net basis. Another impact factor which influenced the fall in gold and forex reserves was a significant amount of foreign debt repayments in December. The total amount of gold and forex reserves has fallen to the critical point of $5 billion.
In order to mask the devaluation of currency starting from December 19th the Belarusian authorities have introduced a 30% tax on the purchase of foreign currency on the exchange market. This measure has allowed the government to reach the end of 2014 without significantly adjusting the budget. By gradually lowering the tax to 20% by December 30th, to 10% by January 5th, and cancelling the tax on January 8th, and with the official exchange rate of the Belarusian ruble growing, the Belarusian authorities have carried out the devaluation of the national currency. The Belarusian ruble has fallen by 26.4% in respect to the US dollar by January 8th, 2015 in comparison to December 19th, 2014.
Because of the more significant fall of the exchange rate of the Russian ruble to the US dollar, this devaluation is not sufficient. After the change of the rate, trading on the exchange market continues with the many-fold excess of demand for foreign currency over the current supply. At a time when there is a lack of secure income of lending resources, the National Bank has changed its methods for assessing the currency exchange rate. The ratio of foreign currency in the reserves was changed with the share of the Russian ruble growing which might lead to the Belarusian ruble being further anchored to the currency of Belarus’ main export partner. The nonsterilized interventions will be carried out to some extent, without the use of gold and forex reserves. Such an approach allows for larger flexibility of the Belarusian ruble’s exchange rate. However, it also increases the risks of a repeated increase in the national currency’s exchange rate.
In such a manner, Belarus has failed to avoid devaluation because of its dependence on its main trade partners’ currencies. The devaluation which was carried out by the Belarusian authorities is insufficient, and the 2011 scenario of a gradual devaluation could repeat.
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.