Updated 2009 solution to 2013 growing stocks problem
On May 24th the country’s leadership ordered to sell stocks of agricultural machinery at a significant discount.
The problem with growing stocks is due to wrong managerial decisions in the deteriorated international market situation. Recent governmental decision has enabled the state enterprises heads to use market mechanisms to sell illiquid products. It can be noted that the government failed to learn its lesson from the analogous situation in 2009.
In January – April 2013 stocks’ growth was BYR 11.2 trillion and on May 1st, 2013 the total volume of unsold products at industrial enterprises was BYR 33.3 trillion, equivalent to USD 3 860 million. The stocks’ growth was due to government demands to meet the set performance targets in industrial production, regardless of the changes in the international market situation. The sharp drop in demand for Belarus’ products against the preservation of production volumes resulted in stocks’ growth, working capital outflow and companies’ financial situation deterioration.
Private enterprises have the flexibility to respond to sales crisis by reducing the staff, reorienting the production or temporary suspending the production. Sometimes they cut prices to sell the accumulated products. State enterprises are limited in their means because of possible charges by the inspection bodies: for instance, sales discounts might be regarded as damaging the state on a large scale and may result in criminal charges against an enterprise’s head. Recent regulation gives certain freedom to state enterprises’ managers to use market mechanisms to respond to market situations, but also sets certain limits on the discounts’ size and by product.
Government’s measures in 2013 implemented to address the growing stocks issue, exactly reproduce the post-crisis situation in 2009, when in order to preserve the production rate growth (against the background of international decline in industrial production) export credits were broadly issued, interest rates were offset to foreign buyers of domestic products, housing construction volumes were increasing and government programmes were adopted to stimulate demand for domestic equipment by supplying it to agricultural enterprises on credit. Four years later, Belarus’ leadership uses exactly the same means to solve the existing problems, instead of trying to eliminate the causes, namely, the limited powers of state enterprises managers to respond to the crisis in foreign markets.
Thus, on the governmental level, there was no in-depth analysis of the 2009 events. Belarusian economy repeated all its mistakes from 2009 and drew no conclusions, which, in turn, resulted in similar problems and consequences. Alternatively, the government can devalue the national currency, but as practice shows, this measure is temporary and only fixes problems in the short-term, without affecting the state management system, where the problems are rooted.
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.