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Denomination will prompt the National Bank to a real fight against inflation in Belarus

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April 22, 2016 19:35

On July 1st, 2016, Belarus will denominate the national currency at 10,000 to 1 ratio. Cash money will be replaced in order to simplify accounting and reduce cash handling costs. With this measure, the National Bank is attempting to demonstrate its determination in fighting against inflation by setting a self-restraint on further issue of money.

According to the Presidential Decree No 450 of November 4th, 2015, on July 1, 2016 the Belarusian rouble will be denominated at 10,000 to 1 ration and outstanding bank notes issued in 2000 will be replaced with bank notes issued in 2009. Currently, the minimal note is worth BYR 100 and that would correspond to 1 kopek issued in 2009. Denominated notes will be valid until January 1st, 2022.

In the past 23 years, this would be the third denomination in independent Belarus and will be the most significant. The first one was in 1994 at 10 to 1 ratio, and the second in 2000 at 1000 to 1 ratio.

Denomination should simplify accounting policies; reduce the time and costs of accounting and management. In addition, Belarus will introduce coins thus reducing the cost of replacing worn-out notes, which have the life span of about one year. Coins are replaced only every ten-fifteen years. Given equal manufacturing costs of banknotes and coins, the state will reduce its cash circulation maintenance costs.

The date when denomination takes effect is not the most convenient. As it will take place in the mid-year, there will be problems, both organizational and technical related to double accounting – in new and old banknotes. The best decision would be to launch the denomination on January 1st, 2016, yet not all required formalities will be completed by then.

The number of zeros on the banknotes is an indirect indicator of inflation levels in the country. The price index for the past 23 years totalled 5.3 million. By selecting banknotes and coins similar to Euro in value, the National Bank is attempting to reduce the impression of inflation in the country. This step may also become an internal self-restricting factor for the country’s leadership as it may restrict the money supply and contribute to a more balanced soft loans policy when dealing with state enterprises. As a result, inflation may gradually reduce to a one-digit level. The ultimate goal is 5% inflation by 2020.

In addition, denomination was needed in order to start talks over the IMF loan. The following IMF mission will stay in Belarus from November 9th to 19th, 2015. By reducing the number of zeros on the banknotes and declaring transition to inflation targeting until 2020, the authorities are sending a signal that they are ready for economic reforms and improving their negotiating position in the talks with the IMF over a new loan.

Overall, denomination will be held in order to simplify accounting and reduce the cash handling costs, as well, it aims to demonstrate commitment to economic reforms and improve Belarus’ bargaining position in talks over a potential IMF loan.

 

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