IMF wants to see real economic changes, not illusionary reforms
IMF mission was working in Belarus on March 14th – 25th.
Belarus has once again showed interest in the IMF credit resources. A draft concept for Belarusian economic reforms programme is being developed, if adopted it could attract a new IMF loan. The main stumbling block for a new IMF loan programme is a special attitude to economic reforms by Belarus’ authorities.
In January-February 2013 Belarus paid USD 530 million off its USD 3 billion international public debt repayable in 2013, the IMF share is USD 1.6 billion. Prospects for Belarusian Eurobonds on international markets are uncertain due to the situation in Cyprus. The only guaranteed international inflow in 2013 is the EurAsEC Anti-Crisis Fund’s loan tranche. Complicated negotiations with ACF representatives, spasmodic allocation of the promised funds and the lack of alternative borrowing sources push Belarus towards seeking for alternative loans. The IMF is one of the potential donors, but the fund’s loan programmes are subject to certain economic reforms requirements.
On March 28th, 2013 the government announced the elaboration of the economic reforms programme concept for Belarus. The ultimate goal of this program is to attract the IMF loan. Statements by Economy and Finance Ministries representatives implied that potential reforms will be cosmetic, not changing the country’s economic model. The concept will be presented at the spring session of the Boards of Governors of the IMF and the World Bank in April 2013.
The IMF believes, the inflated target for GDP growth in 2013 (8.5%) is incompatible with the aims to contain inflation at 12% in 2013, which is a major obstacle to the new credit program. There are political obstacles to obtaining the IMF loan, but they are not crucial for the new loan programme with the IMF. Cosmetic economic changes are insufficient amid the lack of progress in privatization and curbing the state’s interventions in the economic processes in the country. As a rule, state control over the economy is loosened only during the crisis and is resumed when the situation stabilizes.
Thus, any economic reform programmes in Belarus are limited by the leadership’s views on the economic processes in the country. Full control over economic processes, preserving the state sector, active interferences at the privatized enterprises, the revision of privatization transactions, - all this is contrary to the IMF lending standards and pre-doom any such reform programs to fail.
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.