Fighting inflation: Belarusian style

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April 22, 2016 18:26

On March 1st, 2013 Lukashenko talked about the need to curb inflation and strengthen the administrative regulation.

The government forecast for 2013 is that inflation will not exceed 12%, which is anticipated to be achieved by administrative means. Early 2013 performance results cast doubt about their ability to fulfill this task. Economically opposing indicators, such as production growth and wages growth on the one hand, and inflation on the other, can be achieved as projected, but it will entail deterioration in the enterprises’ financial situation.

The socio-economic development forecast for 2013 envisages the consumer price index in December 2013 at 112% of December 2012. To this end, the government has developed a matrix phased price increase to achieve the desired performance. Using the National Statistics data about the share of any product in the consumer price index, quantitative impact of the final price on inflation can be calculated. Product manufacturers will be informed when, and to what extent they can increase prices.

In January 2013, the CPI was 103%, which is 25% of the total price increase for the year. In February, in 12 days the CPI was 100.4% of the average prices in February. The National Statistical Committee, starting mid-February, stopped providing formal data on the decadal prices’ growth rates. The CPI calculation methodology has certain shortcomings, which exclude changes in the structure of consumption of goods by the population during the year. Data on consumer prices in 2012 were calculated based on the structure of household consumption in 2011, which, given the large differences in income results in a distortion of the actual CPI.

As a rule, orders about price increases are practiced in state owned enterprises, but officials announced they will actively interfere with the pricing policy at private enterprises. At the same time, companies are ordered about the desired quantitative output growth and wages growth. These figures are detached from the current market situation, and a number of enterprises, especially in the public sector, have to meet high output growth indicators, while market conditions require a reduction in the output due to overproduction and increased losses.

As a result, industrial enterprises are in a kind of economic trap. Wage growth leads to increased costs and reduced competitiveness in foreign markets. The increase in production (regardless of the situation in the markets and, above all, international) results in deteriorated financial situation. To offset losses from lower prices in foreign markets prices in the domestic market would have to increase, but they are restricted by the matrix indices for price growth, ordered by the government.

Thus, the price growth can be restricted administratively, but the financial situation of the enterprises will suffer, and the government is less concerned about that that about meeting the projected GDP and production growth forecast. In the end, enterprises will be to blame for this, not officials.

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