Devaluation on cards, poor economic model to blame

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April 22, 2016 18:40

On November 6th, the National Bank published the latest data on Belarus’ international reserves.

Belarus is rapidly approaching devaluation: in October, international reserves were the lowest since 2011. While selling off assets may keep devaluation at bay, it will not address the root cause, i.e. an inefficient economic model.

As of November 1st, Belarus’ international reserves were USD 6.8131 billion, a decrease since October by USD 574.6 million. In October, public debt repayment in 2013 peaked. Belarus repaid more than USD 260 million to the IMF on the principal loan, as well as other liabilities. The domestic foreign exchange market was a net buyer of foreign currency, which has led to a substantial decrease in gold reserves.

Belarus’ gold reserves were lower than in October 2013 only three times before: in June 2009, December 2010 and January 2011. In 2011, the drop in the international reserves resulted in the Belarusian ruble devaluing by 300%. The current level of international reserves is worth around 1.7 months of imports. In December the demand from individuals and corporations for foreign currency is likely to increase due to Christmas and New Year celebrations. Around the same time, Belarus is anticipating the fourth and the last tranche (USD 440 million) from EurAsEC ACF, but its disbursement might be delayed depending on the situation with the Baumgertner case (CEO of the Russian potash company, Uralkali).

Belarus may avoid devaluation only if it starts selling its assets and spending the proceeds on servicing the public debt and the population’s growing needs. However, only profitable Belarusian assets are of any interest to investors, and if they are sold, Belarus’ budget revenues will drop and the need to devalue BYR will arise once again.

The problem is rooted in Belarus’ economic model which is based on rigid centralized management, consumerist approach to foreign investment, corruption and fear of economic reforms, misappropriation of available funds, bureaucratized decision-making and the lack of real interest from international investors. Belarus is not yet sure if it can count on Russia’s support, and without it Belarus might go bankrupt overnight.

Belarus faces the devaluation of the Belarusian ruble in the near future. The vicious circle might be broken only if Belarus reforms its management structure.

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Growth in real wages may disrupt macroeconomic balance in Belarus
October 02, 2017 12:12
Фото: Дмитрий Брушко, TUT.BY

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.

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