Chinese loans will not solve external debt problems of Belarus
Belarus and China have reached several loan agreements totalling USD 3.5 billion altogether. Chinese companies will receive the bulk of this amount for supplying equipment and services. Even though thanks to the loans Belarus will implement several infrastructure projects, its public debt will increase without any effect on broad money supply.
Sino-Belarusian meetings last week have resulted in loan agreements with total worth of USD 3.5 billion. A USD 1.4 billion loan will be allocated for 14 years at 4% per annum with a 5-year grace period for the construction of Slavkaly, a new mining and processing complex. In addition, it has been agreed that Slavkaly will supply potash fertilizers to China in the next 20 years. A USD 88 million loan will be allocated for Beldzhi company to develop a plant to produce passenger cars. In addition, circa USD 2 billion will be allocated for other infrastructure projects in Belarus.
All these loan agreements will be relatively cheap with interest rates up to 4.5% and will have long-term repayment period (10 years). The loans will be tied, i.e. envisage participation of Chinese companies in the construction and equipment supply from China worth at least 50% of the total allocated funds. In addition, funds will be allocated only after Chinese financial institutions approve projects for implementation.
China has concluded such agreements to promote exports of its goods and services. Most of the allocated funds will end up on the accounts of Chinese companies, which will carry out works and supply equipment to the construction site. Meanwhile, Belarus has received the opportunity to implement some projects it had no funds for otherwise. In addition, Belarusian companies will be involved in the construction, which will create new jobs.
However, these loans cannot be used to replenish Belarusian international reserves. As a rule, Chinese fund about 85% of the total project cost, which means that Belarus will need to search for additional loans. Moreover, these are long-term projects and funds will be allocated in tranches upon completing certain amount of work – in other words, Belarus would be unable to refinance her debt from these loans. Finally, the government of Belarus will guarantee Chinese loans thus increasing the country’s external debt and its servicing costs.
Overall, thanks to the Chinese tied loans, Belarus may implement some infrastructure projects for which she has no funds of her own, but the money will return to Chinese companies engaged in the construction.
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.