Inflation and prices
On 28 May the retail price of vodka increased by 10%, sugar by 40%. As of 1st June the price of tobacco and alcohol will be increased by 30%.
On 24 May the Belneftekhim Concern increased the retail prices of petroleum products by an average of 20%. The cost of petrol A-95 was set to approx. USD 0.9. It is anticipated that in the near future petroleum prices will rise again.
On 25 May international railway fares were raised. On 26 May the margins of selling prices of beef and pork were increased.
The Ministry of Economy has acknowledged that during the past 5 months the inflation could exceed 15%. Following the devaluation, the Ministry of Economy recalculated the annual inflation at 55-75% however following discussions in the government the forecast was lowered to 33%.
The official devaluation resulted in even higher prices. The increase of pensions from 1 June (on average by 13.7%), and of salaries of public sector workers, drags the country deeper into a spiral of “wages – prices”.
The next step is raising fares on public transport, gas, electricity and heat, followed by a slight increase in wages in the public sector. All this will heat up the flywheel of inflation and become an additional factor of growing USD rates. At the same time, the country still lacks the political will to tighten the monetary and fiscal policy (freezing salaries, suspension of activities and bankruptcy of enterprises, etc.).
The government’s unwillingness to acknowledge the unpleasant data and the economic consequences speak of their “coward” attitude.
The government experts consider the possibility of a moratorium on the actual accession of Belarus to the single economic space on 1 July 2011 as one of the solutions to curb inflation. They explain that in the case of lifting of the restrictions on mutual trade with the Customs Union member countries locally produced goods, particularly goods of social significance with regulated prices, will be “washed out” from the Belarusian market by “dealers” and immigrants from the neighboring countries because of the sheer disparity of prices (also increased by the devaluation). Belarus will face a problem of shortages of essential products with all the potential social consequences. Another negative effect of lifting the restrictions on mutual trade with the CU countries is that it will expose Belarus to the flow of imports, which could have painful consequences for some Belarusian industries (light industry, food industry).
Therefore it is likely that Belarus introduces such moratorium however at the moment Russia has leverage to prevent it.
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.