National Bank ‘eases’ measures to curb inflation to maintain gold reserves
On July 10th, the National Bank issued a statement that the discount rate would remain unchanged in July 2013.
The National Bank had formal reasons to reduce the discount rate. However, if continued into July, this measure would have negatively affected the currency market. Therefore, the National Bank chose to sacrifice the discount rate for the sake of maintaining the gold reserves level at USD 8 billion.
Until recently, the National Bank was continuously reducing the discount rate, justifying this by reduced inflation rate in Belarus. The reduction was carried out with the aim of preserving positive interest rates in the national currency in the economy. Inflation stood at 0.3% in June, while in the first half of the year it was at 7%, which allowed the National Bank to reduce the discount rate to 15-16% per annum. This level ensures positive rates in the economy (above inflation rate) and will allow discount rates to be reduced to 13-15% by the year’s end.
However, due to the sudden change in the foreign exchange and deposit markets, further reduction of the discount rate in July is not feasible. In June individuals were net foreign currency buyers. A stronger U.S. Dollar in world markets against major currencies at constant values of the NB currency basket has resulted in the Belarusian ruble depreciating against the US Dollar. Belarus’ population pays attention to US Dollar exchange rate fluctuations regardless of the currency basket rate. In light of falling incomes on national currency deposits, depreciation of the ruble against the dollar has resulted in an outflow of deposits from the banking system and a sharp decline in liquidity in the banking system.
The National Bank’s choice was predictable. Discount rate reduction would speed up the outflow of deposits from the banking system, since some of the deposits were at floating interest rate which depended on the discount rate. The population would invest their rubles in cash foreign currency. Bearing in mind the peak payments of over USD 400 million on external public debt in July, , additional demand for the currency would result in national reserves falling below the USD 8 billion margin. The National Bank has chosen to maintain the gold reserves, rather than not meet the discount rate reduction plan. In this way, it expresses its monetary policy priorities.
Regardless of governmental pressure to reduce loan interest rates in the economy, the National Bank was able to convince the country’s leadership that preserving gold reserves was a priority. The National Bank will continue to monitor Belarus’ currency market, adjusting it accordingly and will abandon harsh control over inflation processes.
Over the past year, military-political relations between Minsk and Kyiv have become complicated. Due to their high inertia and peculiarities, this downward trend would be extremely difficult to overcome.
The root cause of the crisis is the absence of a common political agenda in the Belarusian-Ukrainian relations. Minsk is looking for a market for Belarusian exports in Ukraine and offers its services as a negotiation platform for the settlement of the Russo-Ukrainian war, thereby hoping to avoid political issues in the dialogue with Kiev. Meanwhile, Ukraine is hoping for political support from Minsk in the confrontation with Moscow. In addition, Ukraine’s integration with NATO presupposes her common position with the Alliance in relation to Belarus. The NATO leadership regards the Belarusian Armed Forces as an integral part of the Russian military machine in the western strategic front (the Baltic states and Poland). In addition, the ongoing military reform in Ukraine envisages a reduction in the number of generals and the domestic political struggle makes some Ukrainian top military leaders targets in politically motivated attacks.
Hence, the criticism of Belarus coming from Ukrainian military leadership is dictated primarily by internal and external political considerations, as well as by the need to protect the interests of generals, and only then by facts.
For instance, initially, the Ukrainian military leadership made statements about 100,000 Russian servicemen allegedly taking part in the Russo-Belarusian military drill West-2017. Then the exercises were labelled quazi-open and military observers from Ukraine refused to provide their assessment, which caused a negative reaction in Minsk. Further, without citing specific facts, it was stated that Russia was building up its military presence in Belarus.
Apparently, the Belarusian and Ukrainian Defence Ministries have entangled in a confrontational spiral (on the level of rhetoric). Moreover, only a small part of the overly hidden process has been disclosed. That said, third states are very likely to take advantage of the situation (or have already done so). This is not only about Russia.
The Belarusian Defence Ministry officials are restrained in assessing their Ukrainian counterparts. However, such a restraint is not enough. Current military-political relations between Belarus and Ukraine are unlikely to stabilise without the intervention of both presidents.