Budget surplus will not reduce public debt if support for unprofitable enterprises retains
In 2016, the state spent only 2.4% of the budget surplus to repay public debt. The growth in public debt in recent years was due to the inefficient resource management and modernisation failures in many economic sectors. The government has planned to spend almost entire budget surplus in 2017 to repay public debt, however, it may reconsider and spend it on wage growth instead.
According to the Finance Ministry, in 2016, budget revenues totalled BYN 17.7 billion and expenditure at BYN 17.4 billion, eg a budget surplus of BYN 0.3 billion. Meanwhile, in 2016, public debt grew by BYN 4.1 billion, reaching some BYN 37 billion, which was more than double budget revenues in 2016. The public debt grew, inter alia, due to the low specific weight of the budget surplus allocated to repay public debt. In 2016, Belarus repaid BYN 6.7 million of public debt and BYN 1.7 billion of servicing costs, which exceeded the expenditure on the judiciary and the law enforcement altogether.
The problem with public debt growth is associated with two main factors. The state used intergovernmental loans to modernise industry. As a result, instead of new efficient enterprises, which could report sustainable profits and increase production indicators, Belarus has chronically unprofitable organizations, which require refinancing of bad debts on loans, taxes and energy supply debts. The second factor is the need to support unprofitable enterprises which provide employment in mono cities and large settlements, in the absence of other large employers. In 2015 alone, the state spent more than USD 870 million to increase the share in statutory funds of enterprises. The increase in the share was due to the state support (budgetary and loan interest subsidies) with the subsequent increase in the state share in the statutory fund by the amount of the aid.
In 2017, budget surplus is projected at BYN 1.5 billion, of which BYN 1.4 billion would be used to repay public debt. In January – March 2017, public debt decreased by BYN 1.1 billion, inter alia, due to the strengthening of the national currency against the US Dollar. Following the settlement of the oil and gas dispute between Belarus and Russia and due to the higher oil price than projected (USD 35 per barrel), the budget surplus goal could be achieved by the year-end. In addition, the state has somewhat reduced the state support for unprofitable enterprises, making it possible to partially repay public debt from budgetary savings.
The main risk is the resumption of the direct economic management, which, amid GDP growth and repayment of due external liabilities in 2017, could lead to loan interest rates subsidies in order to reach the average wage target at BYN 1000 per month. In this case, the state would once again spend budget surplus on support for enterprises and would postpone the reduction of public debt.
Overall, one of the reasons behind the growth in public debt is the minimum amount of budget surplus allocated to repay the debt. If Belarus makes due public debt payments in 2017 and if high oil prices retain, budget surplus would be allocated to support unprofitable enterprises, instead of reducing public debt.
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.