Citizens and businesses’ currency savings as a source of debt refinancing
2013 will mark the beginning of substantial external debt repayment period for Belarus. Interest rates on foreign currency deposits in the domestic market are lower than the foreign loans rates. A new savings strategy could avoid the need for external borrowing.
On October 4th, 2012 Finance Minister Kharkovets spoke about the possibility to place foreign currency bonds in the domestic market.
In 2013 Belarus will have pay off USD 2.9 billion. It is unlikely that the IMF loan will be refinanced, bearing in mind Belarus’ commitment to high GDP growth, which contradicts the IMF recommendations. In addition, cooperation on a new credit programme is halted by political factors.
Belarus agreed to refinance the Belaruskali loan at 8.5% for a three-year period. This rate is much higher than the rates prevailing in the domestic deposit market. In August the average rate on new short-term deposits in foreign currency for the population was 5.8% per annum and 3.6% for legal persons.
The government has reiterated its desire to raise population’s funds in the country’s economy several times. However, the increase in deductions on funds in foreign currency up to 12% would result in a further rates’ reduction and the currency outflow from the banking system.
Given the circumstances, the state could issue foreign currency bonds in the domestic market. In spring 2012, with 9% annual rate, there was a high demand for banks’ foreign currency bonds. New issues were bought out in short terms.
There are some technical difficulties with issuing bonds for private persons. However, the state could issue foreign currency bonds and simultaneously announce amnesty of capital, which has been planned. The state could consider amnesty of capital, which was invested in state-currency bonds with a lower interest rate than in the foreign loans market. These funds could be put in the turnover in Belarus and the public debt servicing cost could be reduced.
Therefore the Finance Ministry can assist the creation of a new investment instrument, to reduce the debt servicing cost and bring additional resources in the economy.
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.