National Bank is ready to take any measures to obtain foreign currency

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April 22, 2016 18:37

Interest rates on the interbank market reached 78.7 % per annum.

Record high interest rates on the interbank market is the natural result of the National Bank’s measures aimed at forcing the banks to sell available foreign currency. The National Bank wants the national reserves to stop falling. As a result, the economy might experience financial paralysis, but industrial financial performance is not the National Bank’s responsibility.

On September 12th, interest rates on the interbank market reached a record high of 78.7% per annum. Even during devaluation in 2011, the interest rate was not this high. Various actions by the National Bank (NB) have led to this phenomenon. For instance, the National Bank increased the requirements for the allotments to the reserve funds, which resulted in additional demand for ruble liquidity. Unofficial restrictions on deposit interest rates for individuals - not more than 35% - introduced in August, against consistent weakening of the national currency, resulted in an outflow of national currency from ruble deposits in September and in a dramatic need for additional ruble liquidity by banks. The National Bank increased the interest rates to support liquidity, but as the support was limited, it provoked higher interest rates on the interbank market. The National Bank’s ultimate goal was to force banks to sell available foreign currency, which it then bought itself.

Banks are faced with a dilemma. Failure to comply with NB requirements regarding contributions to the compulsory reserve fund, results in penalties – up to twice the size of the discount rate – and all the transfer of outstanding requirements to the next period. But in this case, banks do not sell the currency. Alternatively, banks can sell the currency and fulfill the requirements without paying a fine. However, if the national currency sharply fluctuates, foreign currency risks will increase. As the banks are incapable of gaining such an amount of foreign currency in the short-term, they were unofficially allowed to increase the interest rates on deposits up to 42% per annum. The banks believe that people’s mercantile interests prevail over devaluation expectations. The opportunity to make quick money may encourage depositors to convert their foreign currency savings into national currency deposits in Belarus’ banking system.

The National Bank’s measures might have far-reaching economic consequences. Costly deposits lead to higher loan interest rates - up to prohibitive levels. Some banks have already announced the discontinuation of business loans. Given the large volume of payables and receivables, this can result in payment paralysis in the economy. Real estate lending programmes for individuals have been suspended. One consequence of the 2011 devaluation was many uncompleted construction projects were suspended due to the revision of construction costs and belated crediting. The new suspension of lending will result in a new ‘wave’ of uncompleted construction projects. However, the National Bank is more concerned about the size of gold reserves, hoping to replenish them in the near future. The NB is not really concerned about the situation in industry, which operates at minimal profitability and hugely relies on loans to pay for the delivery of goods and workers’ wages.

The National Bank attempts to refinance foreign currency payments, but this is becoming more costly and threatens unpleasant consequences for the economy. One solution would be to sell off assets, but this issue is beyond the National Bank’s scope of responsibility. 

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