Critically low level of gold reserves may prompt Belarus to reforms
In 2015, Belarus’ gold reserves dwindled by USD 0.9 billion. The gold reserves have shrunk due to the unfavourable foreign market situation for Belarusian goods and net foreign currency purchases by private and legal persons on the domestic market. In the absence of secured loans, Belarus decided to reform the social sphere in order aspire to an IMF loan, which could lead to further economic reforms in Belarus.
According to the National Bank, on January 1st, 2016, Belarus’ international reserves totalled USD 4.175 billion, i.e. shrank by USD 883.2 million in 2015. In December 2015 alone, the international reserves decreased by USD 408.1 million. In order to repay its domestic and external commitments, the National Bank in December 2015 raised USD 834.5 million and EUR 25 million on the domestic market from foreign currency bonds. Otherwise, the international reserves could drop below USD 3.5 billion, which could exacerbate the negative trends on the foreign exchange market.
The reserves have languished due to the deteriorating foreign trade situation and changing trends on the domestic foreign exchange market. In January – November 2015, foreign trade deficit totalled USD 2.8 billion (USD 740 million in November alone). In late 2015, exports decreased due to lower sales of potash fertilizers, oil products, and the negative impact on exports of the National Bank’s exchange rate policy. The National Bank strengthened the Belarusian rouble against the Russian rouble and Belarusian goods had lost their competitive advantage on the Russian market. On the domestic foreign exchange market, private and legal persons have become net buyers of the foreign currency. In addition, the National Banks’ initiative on the deposit market has led to a partial withdrawal of foreign currency savings from the Belarusian banking system.
At all rates, the only option for preserving the level of international reserves remain foreign loans. The agreement with the EFSR for a USD 2 billion loan has not yet been reached. The agreement with the IMF has not been concluded due to disagreements over terms of social reforms. In late 2015 – early 2016, the authorities have undertaken some measures aimed at overcoming obstacles in negotiations. For instance, they have increased electricity and gas tariffs by 20%, and plan to recover up to 80 % of housing and communal services costs (now subsidised by 65%) and extend service record requirement from 15 to 20 years for old-age pension by 2026. In addition, there are talks about a national referendum on rising the retirement age. That said, other measures could be adopted in order to meet the IMF requirements as understood by the government. Once the loan agreement is reached, reforms may continue in other economic sectors in order to help Belarus to overcome the cyclical crisis the country has fallen into thanks to the current socio-economic model.
Overall, in 2015 Belarus could not keep gold reserves needed to meet her external and domestic liabilities, intact. In the absence of domestic remedies to stabilise the currency market situation, the government may implement the IMF requirements in order to remove contradictions in negotiations over a new loan, which, in turn, may lead to economic reforms in Belarus.
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.