Financial performance of Belarusian economy leaves no hope for economic growth to resume
Writing off currency exchange rate differences in March 2016 has not helped to improve the financial health of the economy. The main reason behind Belarus’ economic losses was faster growth of production costs in comparison with the growth of rouble revenues. The lack of funds does not allow companies to produce new products and promote them on foreign markets, which is why export performance is unlikely to improve in 2016 and economy is unlikely to recover.
According to the National Statistics Committee, in Q1 2016 the Belarusian economy performed with a BYR 1.2 billion loss. A year before, the Belarusian economy’s profit was BYR 11 trillion. In March 2016, the government enabled writing off currency exchange differences, which has reduced the losses by BYR 20-25 billion. More than one third of Belarusian companies are unprofitable, and 70% of those profitable have less than 10% in return on sales. Currently, the following industries are unprofitable: oil extraction, metallurgy, cement and rubber products, electric power, mechanical engineering, hotel business and catering.
The economy is at a loss due to enterprises’ financial and investment activity. In order to modernise their production capacities enterprises have used foreign currency loans, but due to the national currency devaluation, the servicing costs of the loans have increased substantially. Enterprises purchased fuel and raw materials outside the country using foreign currency and deterred payments, which had led to an overestimation of the amount payable for the received raw materials. As a result, production costs grew at a faster pace than revenues, which led to losses in the economy.
Amid economic losses, economic growth is impossible. The enterprises have no funds to modernise production capacities. Without new equipment, they cannot produce new products and demand for old products is consistently reducing. The lack of funds does not allow enterprises to study modern trends in their product niches and promote their products on foreign markets. In Q1 2016, exports of goods decreased by 20%, and trade deficit totalled USD 825 million.
In the given circumstances, only some economic sectors will demonstrate a positive trend in sales on foreign markets. The state will not stimulate domestic demand due to a plan to reduce budget spending by 7-8% in 2016. The National Bank, in turn, for the sake of stability on the currency market will constrain the money supply and soft loans to the economy. The decline in industrial production is inevitable, wage growth will be minimal and will not exceed the inflation rate. Construction is not the economic driver any longer and the share of other types of economic activity, even in the case of their growth, is not enough to overcome the overall economic downturn in 2016.
Even after writing-off losses from currency exchange rate differences at BYR 20 trillion, the Belarusian economy in Q1 2016 is at a loss. Amid the lack of funds at enterprises and restrictions on lending by the National Bank, the Belarusian economic recovery is impossible.
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.