Devaluation is inevitable
Last week’s initiatives of the authorities show that they have exhausted their resources vis-a-vis maintaining the threshold of stability. In the near future one should anticipate increased USD exchange rate, another round of inflation with inevitable consequences for production sites and markets.
Abolishment of privileges with regard to the mandatory sale of foreign currency earnings, the permission issued to five banks allowing them not to sell foreign currency to the population (with the exception of so-called "social needs") and the Azeri loan intended to maintain the status quo at the currency market for another month or so. However, foreign trade performance results, as well as information about Azerbaijan loan, cancellation of benefits, and the appointment of the new Head of the National Bank have already affected the USD exchange rate at the „gray market”. Market players assess the latest initiatives as additional barriers with regard to acquisition of currency, and the loan of Azerbaijan as a sign of the currency lack, they anticipate the growth of exchange rate and thereby trigger it. On 25 July, the „gray market” exchange rate increased by about 4%, reaching over the weekend the average of Br 6,300 per USD.
In the meanwhile the government plans to increase pensions, index salaries, fund state programmes, all of which will require broader emission. Moreover, the appointment of Ermakova as the Chairman of the National Bank spurs inflation expectations. There is not enough of resources available to prevent price increases and shortages of goods.
Foreign trade performance results show that exporters have already exhausted the devaluation shed, and that re-imports grow faster than exports. Moreover, comparative analysis of the data provided by the Customs Control Committee and by the Ministry of Statistics shows that there was no excess of exports over imports in May (as reported by the government).
There are no official channels left for obtaining loans, (except in case of political change), large privatization deals are put on ‘hold’. The most likely source of foreign currency remains the second tranche of the EurAsEC (autumn) and sale of Beltransgaz to Gazprom (probably by the New Year).
Therefore, it is reasonable to expect official devaluaiton in September to about Br 6,200 per USD with the „gray” rate closer to Br 7,500.
All actions of the authorities envisage salvation of the current economic policy and preservation of the political conrol. To be fair, their tactics works: protests grow slowly and constantly fluctuate under the influence of expectations (for instance, hopes to increase pensions and indexation of salaries, which inevitably will be devalued by rising food prices and prices for housing utilities services), and fear. Therefore the most popular ‘getaway’ from the current situation among the population is the „escape” option: into illegal business activity or to working abroad.
At the same time such policy also bears risks. First of all, it concerns the reduced functionality of the state and as a consequence reduced resource base and restrictions of the beneficiaries of the regime. Moreover, the narrowing scope of beneficiaries of the regime implies a split in the ruling elite.
The country's leadership has instructed the local authorities to raise minimum wages at enterprises by the end of 2019 to BYN 1,000, which would lead to an increase in the average wage in the economy as a whole to BYN 1 500. The pace of wage growth in 2017 is insufficient to ensure payroll at BYN 1000 by late 2017 without manipulating statistical indicators. In order to fulfil the president’s order, the government would have to increase budgetary expenditures on wages in healthcare and education, enterprises – to carry out further layoffs and expand the practice of taking loans to pay wages and restrict investment in modernisation of fixed assets. In 2010, the artificial increase in wages led to a threefold devaluation in 2011, an increase in the average salary to BYN 1500 will not match the capabilities of the economy and would lead to yet another devaluation.