EFSD loan is unlikely to solve Belarus problem with international reserves
If Belarus signs a loan agreement with the Eurasia Foundation for Stabilisation and Development in 2016, she may count on USD 1.1 billion. Since June 2014, Belarus repays USD 88.3 million quarterly to the EFSD for the USD 2.56 billion loan. A new loan is unlikely to lead to an increase in gold reserves, as the funds will be fully used to refinance liabilities to Russia in 2016.
According to the Belarusian Finance Minister, in the next two weeks an agreement on the allocation of a USD 2 billion loan may be reached between Belarus and Eurasia Foundation for Stabilization and Development (EFSD). The first tranche of USD 1.1 billion would be allocated in 2016, and the remaining amount - in three tranches in 2017. The stated purpose of the loan is to replenish Belarus’ gold reserves. In addition, Belarus aspires to attract foreign borrowings through placing Eurobonds on foreign markets with a total worth of USD 1.0-1.5 billion. Loan talks with the IMF have been postponed until April 2016.
Belarus has already applied for a loan to this fund, formerly known as the Anti-Crisis Fund of the EurAsEC. In 2011, Belarus was granted a USD 3 billion stabilization loan in order to maintain the balance of payments. Due to Belarus’ failure to comply with the loans’ key requirements, the last tranche of USD 440 million has never been disbursed. Since June 2014, Belarus has been making quarterly payments of USD 88.3 million in order to service the loan.
If the loans is allocated, Belarus’ gold reserves will not increase. In 2016, she will have to repay USD 353.2 million to the EFSD for the previous loan. According to the Belarusian Finance Ministry, Belarus’ total obligations in 2016 for interstate loans, including the EFSD loan, make circa USD 1.1 billion. The entire amount the loan, therefore, with be returned to Russia by the year-end. The total amount of Belarus’ public debt payments in 2016 are estimated at USD 3.2 billion. The export duty on oil products by the year-end may earn only circa USD 700-800 million for the state budget. In this regard, Belarus is likely to take advantage of the existing window of opportunity on the international financial market and place foreign currency bonds. Current quotes for Belarusian Eurobonds maturing in 2018 amount to 103% of the nominal value, which means, Belarus may count on placing the new issue of bonds at 6-6.5% per annum. The loan agreement with the IMF, if it is signed, would bring another USD 1 billion to Belarus before the end of 2016. Belarus therefore will be forced to seek additional funds on foreign markets, or borrow on the domestic market, since the guaranteed financial inflow is not enough to service her public debt in 2016.
The EFSD loan agreement will help Belarus to refinance her debt to Russia in 2016, and will not lead to an increase in gold reserves. In order to fulfil her public debt obligations, Belarus still needs to raise circa USD 1.5 billion in 2016 on foreign or domestic markets.
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.