Emission provokes inflation and devaluation
The monetary base in Belarus in January-July 2011 has increased by 35.4%. The volume of cash in circulation in January-July has increased by 57.1% to 7059.3 billion rubles.
The growth of cash in circulation resulted in growth of the “black market” exchange rate of US Dollar from Br 6300 in the beginning of August to Br 7700-8000 by 20 August. Non-cash US Dollar exchange rate increased up to Br 9000-9500 per USD.
Financial state of banks is deteriorating. The negative balance of net foreign assets of Belarusian banks on 1 August 2011 amounted to USD 5256.9 million, as compared with USD 5130.5 million on 1 July 2011 and USD 4247.6 million in the beginning of the year. In January-July gross foreign assets have increased by USD 48.7 million (3.3%) to USD 1534.5 million with liabilities growing by USD 1058.1 million (18.5%) up to USD 6791.4 million. Non-residential loans account for USD 5852.1 million of all liabilities, increasing from the beginning of the year by USD 841.1 million (16.8%). Debt on ruble and foreign currency loans is growing too. The National Bank of Belarus recommended (ordered) to the banks to ensure that their regulatory capital is increased by 15-21% by the end of 2011 and to maintain the share of distressed assets of banks in the assets subject to credit risk at the level of 8% maximum.
Continuation of the current emission policy results in the devaluation and inflation risks for the economy and affects balance sheets of the banks and businesses. However the government is yet unable to stop the emissive lending to industries and agriculture.
In the current situation it is important to exclude the National Bank’s interventions to keep the ruble liquidity of state banks and therefore to reduce the amount of financial support to the economy. Only after that one could try to achieve a single exchange rate of the Belarusian ruble. In addition, the unfolding economic crisis threatens the stability of the banking system. The banks are trying to solve the liquidity crisis via borrowing money from non-residential (parent) banks, however such policy has its natural restrictions.
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.