EBRD and World Bank warn against pay rises as detrimental to the financial system

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April 22, 2016 18:14

The European Bank for Reconstruction and Development warned against salaries increases in the public sector in Belarus as it could result in a new surge of macroeconomic instability after the parliamentary elections in September 2012. The National Bank and the government however continue loosing the economic policy.

A report, published in July “Regional Economic Prospects in EBRD Countries of Operations: July 2012”, says the EBRD expects economic growth in Belarus in 2012 at 4.5%, and in 2013 - 3%. Inflation in Belarus in 2012 is projected at 60% (annual average). 

In turn, World Bank Director for Belarus, Moldova and Ukraine Chimyao Fan noted in a letter to the Prime Minister of Belarus Mikhail Myasnikovich that in the face of considerable uncertainty in the external environment the premature easing of macroeconomic policies in the country could be fraught with considerable financial and economic risks.

According to the World Bank representative in Belarus it is important to continue maintaining macroeconomic stability with tight monetary and fiscal policies to contain inflationary pressures and strengthen positive trends in terms of restoring the balance of external accounts. 

However, the National Bank and the government have been easing economic policies this year. Thus, according to the Ministry of Statistics, gross average wage in June 2012 amounted to Br 3752.1 thousand (USD 445.3), which corresponds approximately to the average of October-November 2010. 

A further increase in wages could result in a change of currency preferences in favor of foreign currency and exacerbate inflation and devaluation risk in the economy. This summer, the population again became a net buyer of foreign currency, in contrast, in September 2011 - May 2012 individuals were selling more currency than buying.

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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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