Belarusian government may fulfil GDP growth forecast at 1.7% in 2017
The industry became the main driver of the Belarusian economy in 2017 and made the main contribution to GDP growth at 1.6% in January - August. Belarus’ socio-economic development forecast for 2017 based on a low price for oil, growth was expected due to new economic sectors. A higher oil price has led to an increase in Belarusian exports, while the implementation of oil agreements in the case the oil price retains or goes up would ensure GDP growth at 1.7% in 2017.
According to Belstat, in January-August 2017, Belarus' GDP grew by 1.6% compared to the same period in 2016. The main growth was ensured by the industry, the added value of which increased by more than 5%. Earlier harvesting season as compared with 2016, has demonstrated growth in agriculture; reduced subsidies to the economy enabled to increase the indicator of net taxes on products. Construction was the only major economic sector which performed worse than in 2016.
In 2017, the Belarusian government drafted two socio-economic development forecasts. The first assumed low oil prices – at USD 35 per barrel, which should have deterred industry performance. At this oil price, economic growth was projected at 0.2%. The ‘optimistic’ scenario envisaged economic growth at 1.7%, mainly due to the new economic sectors.
Currently, the price of oil is higher than the forecast. In January – July 2017, the average price for Russian URALS oil totalled USD 50 per barrel, which boosted economic growth in Russia and led to an increase in Belarusian exports by 24% in January – July 2017. Thanks to an increase in production, Belarusian enterprises were able to raise wages, which let to growth in retail trade turnover by 1.9% in January – August 2017. Simultaneously, Russian industry growth rate has slowed down, which could lead to a production slowdown in Belarus.
In the given circumstances, one of the key factors which would help fulfilling the ‘optimistic’ forecast for economic growth in 2017, would be oil supply agreements. Belarusian refineries are unlikely to process all envisaged 24 million tons of oil in 2017 due to the limited capacity and a cut in supplies in Q1 2017. Should Belarus receive all oil as planned, she is likely to resell circa 6 million tons of Russian oil and keep the oil export duty. This would improve the wholesale trade. Belarusian refineries would process 18 million tons of oil in 2017, which would be the same volume as in 2016.
Additional budget revenues could be spent on pay rises in the social sphere and would lead to an improvement in retail trade. Altogether, these factors would ensure GDP growth in 2017 at 1.7%, even if the Russian economy somewhat slows down.
Overall, high oil price has been the key factor which ensured the economic recovery in Belarus. Russia's compliance with the oil supply agreements in 2017 at 24 million tons would guarantee additional budget revenues and ensure implementation of GDP growth forecast at 1.7%.
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.