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Government has two options: curb inflation or increase budget revenues

April 22, 2016 18:39

In September 2013, consumer prices went up by 1.7 %.

Inflation has returned. The government attempts to run outlook for prices while simultaneously raising the rates for regulated services. The announced gradual devaluation of the Belarusian ruble could put an end to the only positive trend in 2013 – low inflation rate.

In August 2013 inflation was record-low, 0.1%, which was due to the seasonal decline in vegetable prices. In September petrol prices went up and some service costs, revealing the real picture with inflation in Belarus. Prices went up for postal services, fuel, electricity and hot water. It is worth noting that prices on all these goods and services are regulated by the government.

A paradox has been created: on the one hand, the government is trying to fulfill its inflation forecast for 2013. On the other hand, prices on goods and services, controlled by the government, are going up. Petrol prices went up due to previously increased excise duties on fuel. Electricity tariffs went up following the government’s desire to reduce cross-subsidies in the energy sector. (In Belarus, significant one-off increase in prices causes a spike of citizens’ discontent, while gradual price increases can overcome this negative effect.)

Inflation expectations increased as soon as the government started talking about the Belarusian ruble’s gradual devaluation. The share of imports in consumer goods retail trade is quite high. BYR depreciation and high interest rates on loans are calculated by importers and retail traders in the goods’ final price. Domestic manufacturers of consumer goods, in turn, depend on imported raw materials. The share of imports in Belarusian industry’s material costs is over 50 %. Depreciation of the Belarusian ruble results in higher costs, and ultimately – in higher prices of products. In January - September 2013 inflation was 10%. The inflation forecast for 2013 is 12%. To implement the forecast, inflation in Q4 2013 should not exceed 2%. In Q2 2013 inflation was around 2%, but since then the macro-economic situation has deteriorated.

The government has two options: curb inflation or increase budget revenues. Since most of the projected socio-economic parameters will not have been met by the year-end, the failure to meet the inflation outlook is not that critical.

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