Cheap national currency loans for the economy
On February 21st, Prime Minister Myasnikovich announced implementation of a step-by-step strategy regarding loans interest rates reduction.
High interest rates on loans hamper modernization, which has been declared an economy’s priority in the coming years. With the means available the National Bank lowered rates on the interbank market, which is a prerequisite for reducing the loans’ costs. Deposit investments profitability will be reduced, and the bankers will be asked to share revenues in the name of “the economic needs”.
The average rate on overnight loans in the interbank market in the national currency in January 2013 was 35.4% for loans to residents. Enterprises could obtain loans at 40% p/a and higher, which, taking into account the declining profitability of sales in the economy up to 7% in December, is a prohibitive rate. Slight increase in lending to some public enterprises in the national currency is linked to the ‘subsidies for modernization programme’ practices. This mechanism is used, because such subsidies relate to industrial subsidies and do not reduce GDP by their amount. Private enterprises do not have access to these practices and reduce the amount of debts to the banks.
Using credit auctions, the National Bank marked the desired level of interest rates in the interbank market at 35% p/a. The liquidity problem for the backbone state-owned banks remains unresolved, which hinders reduction of rates in the interbank market. In the second half of February, the National Bank was able to solve the problem and the rates fell below the refinancing rate standard (30% p/a). The recommendation to limit the margin on loans issued by banks with lower interest rates will reduce the cost of credits.
The problem of high interest rates on loans reached the highest state level. To compensate for the ban on mortgages in foreign currency, the National Bank has decided to issue loans with substantially reduced rates to poor people, who cannot benefit from preferential programmes. As of February 25th, this social group can borrow at a reduced rate – 16% p/a – which will strengthen the housing construction industry. Statement by the Prime Minister and the President indicate, that possibly, banks will be offered to lower rates for special categories of borrowers, “for modernization purposes”, for enterprises that cannot benefit from public programmes.
Thus, the reduction of interest rates on loans has been declared a national task, and conventional donors, the banking sector and individuals, who have placed deposits in the banking system, will be forced to share partially their incomes through lower pays for borrowed funds. If banks practically have no other choice, individuals may transfer their savings from national currency deposits to foreign currency deposits with depreciation sentiments increasing.
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.