Population hampers National Bank’s plan to reduce discount rate
In mid-August the interbank loans rates returned to 37-39% per annum.
In July 2013 the National Bank received a clear message from the population about what interest rates on national currency deposits they would consider acceptable and below which they would react with withdrawal of deposits. The minimum acceptable deposit rates are significantly higher than the discount rate projected for the year-end. This implies that the National Bank will be unable to provide low-cost loans to the economy by the year-end, and that the industry will be held responsible for the failure.
The broad money supply data and foreign exchange market situation in July 2013 provide a clear understanding of the acceptable interest rates on national currency deposits for the population. When the discount rate dropped to 23.5% per annum against the forced depreciation of the national currency in July, there was a sharp outflow (about 7% as of early July) in term ruble deposits by the population from the banking system. The main marker for the Belarusian population is the interest rate at 25% per annum, if lower, a sharp outflow of ruble deposits and their partial translation into foreign currency deposits instantly follows.
The National Bank’s rapid response - raising deposit market interest rates - somewhat leveled the situation, but at the same time, raised the expectations of national currency deposits holders, who now consider rates at 30%+ per year as the minimum acceptable in view of the increased risks of national currency depreciation. According to the monetary policy basic guidelines for 2013, the discount rate by the year-end has to fall down to 13-15% per annum. The National Bank is no longer able to implement its step-by-step strategy to reduce the discount rate due to sharp negative reaction by the population and the need to weaken the BYR exchange rate.
The international reserves are lower than the critical USD 8 bln. Moreover, current real value of the gold reserves has been retouched with USD 350 million upwards using short-term loans from non-residents. Due to the lack of guaranteed international funding and the country’s leaders’ reluctance to privatize the state property, the only way out for the National Bank is to maintain high interest rates on deposits, (unofficially at circa 35% per annum) and to smoothly weaken the Belarusian ruble against the US Dollar at circa 1% per month. This allows to ease the pressure on the international reserves and to reduce their dwindling pace.
Since the discount rate cannot be reduced further, the government’s plans to reduce the loans’ costs for the economy fail too. However, it does not carry negative consequences for the NB management, since the main reason behind the situation is the industry’s failure to fulfill export growth plans. Shortfall in foreign exchange earnings due to falling exports enables the National Bank to maintain harsh monetary policy, i.e. to keep high interest rates on loans in the economy. It is worth mentioning that the National Bank is not under pressure anymore to reduce the loans’ costs. Macroeconomic stability has been given the priority, and low-cost loans by the year-end should not be anticipated.
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.