GDP growth behind the economic imbalances
On March 13th, 2013 Statistics Ministry reported about 4.4% GDP growth in January-February 2013.
Against the background of the industrial production slowdown in Belarus, the government continues insisting on the planned GDP growth. GDP growth is secured by changed calculation methodology and the usual means’ application. Artificial heating of the economy results in increased economic imbalances and a possible repetition of the 2011 economic crisis.
Industry generates over one-third of the Belarus’ economy added value. In the first two months in 2013 industrial production decreased by 0.4% compared with in the same period in 2012. Industry cannot help the government to achieve the planned GDP growth rate at 8.5% in 2013. Therefore GDP will be growing due to investment in fixed assets and equipment and due to warehouse stocks growth.
In January 2013, the warehouse stocks increased by BYR 5 trillion, enabling GDP growth: the unsold output was taken into account when calculating GDP by production. In 2012, the methodology for calculating net taxes on products was clarified, allowing for the calculation of industrial subsidies and excluding them from the subsidies on products, thereby increasing the GDP. In February 2013 investment in fixed assets increased significantly – both, due to increased procurement of equipment, construction and installation works, and due to the changes in the calculation methodology. Wholesale trade has gone up due to the resumed sales of potash fertilizers – regardless of the reduced contract price – only supplies’ volumes are calculated.
February socio-economic indicators show an economic slowdown. Freight traffic and retail sales have reduced, agriculture is facing certain problems. Against this background, the industrial modernization looks more like a race: who spends the allocated funds in the shortest possible time. Investment import increases, deteriorating Belarus’ payments balance. The reduced cost of loans will increase the demand for the cheap national currency and will heat the inflation.
Thus, the government chose to repeat its mistakes of 2009-2010. Instead of a balanced growth, GDP growth rates will be achieved by any means, leading to the inevitable result. GDP growth based on domestic demand requires significant investment. But the investment conditions in Belarus are not the most attractive. Therefore, in order to avoid the repetition of the 2011 crisis, the government should change the strategy.
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.