Belarusian authorities initiate market reforms discussion in order to secure external financing
The Belarusian government is attempting to demonstrate to the international financial institutions its commitment to economic reforms. Simultaneously, Lukashenka has assured the population and the elite of the stability of the existing economic model. The Belarusian authorities are unlikely to embark on market reforms and may only implement band-aid solutions under the pressure of external creditors.
The Economy Ministry has reported first successes in the implementation of the six-step reforms programme and announced further steps.
Participants in the Third October Economic Forum “Economy of Belarus: Facing the Choice Again” held in Minsk last week, were Belarusian and foreign economists, representatives of international financial institutions, diplomats, journalists as well as Belarusian officials at all levels, including the Presidential Administration, the National Bank and the Economy Ministry. In fact, representatives of the presidential administration, the government and the National Bank were of the same mind with regard to the need for reforms in Belarus.
Some analysts believe, that the authorities have initiated discussions about economic reforms in preparation for the launch of unpopular measures. Previously, at an economic conference at President Hotel, Assistant to the President for Economic Affairs Rudy harshly criticized the existing economic model for heavy relying on micromanagement.
In his speech at the Economic Forum Rudy noted that the number of supporters of market reforms among senior management had increased: "In recent years, a generational shift has occurred in the government and the National Bank; and since 2013 the state bodies, no matter who is in the senior management, have constantly been developing reform programmes”.
The fact that senior officials of the Presidential Administration participated in the Economic Forum should have demonstrated to the international financial institutions that political leadership was serious about structural economic reforms. In addition, according to IMF head in Belarus Yang Chum Kila, the Belarusian government had agreed to all the proposals of the IMF experts.
The Belarusian authorities think they have achieved their goal and made the IMF representatives believe they are ready for structural reforms. Yang Chum Kil was optimistic about the Belarusian government’s commitment to reforms, “I can therefore say with confidence that the government wants macroeconomic stabilisation and is ready to undertake structural reforms”.
Meanwhile, the title of Rudy’s speech at the Economic Form was quite provocative: "Why reforms will fail (in Belarus in 2016)?”. In particular, he emphasised the lack of demand for reforms in society, implicitly outlining the president’s position in this regard, who usually appealed to people’s sentiments when making unpopular decisions: "The first reason: the need for reforms is not obvious for broad population. There is no public demand for reforms and if so, the question arises, why are they [needed]”.
That said, President Lukashenka has taken a back seat in the discussion of the future economic policy. He nevertheless has emphasised his commitment to micromanagement of the economy to the most conservative-minded population groups. For instance, during the operational meeting of the Armed Forces commanders last week, President Lukashenka once again vowed to maintain the existing economic model: "We need to have a clear understanding now that reforms mean one thing – the need to produce a quality product and sell it for good money”.
Interestingly, both, independent experts and the country’s leadership agree that one of the main factors hindering reforms is the ‘power vertical’. Deputy Head of the Presidential Administration Nikolai Snopkov said that structural reforms were inevitable, however also noted imbalances in the state governance: "At the moment, the use of the [power] vertical as one of the key elements in our society, unfortunately, does not lead to the desired effects. The reason is in the disunity of goals, which we observe in the executive power vertical”.
The authorities are likely to refrain from structural economic reforms and explain it by the difficulty to preserve control over the state system and the threat to social and political stability in the country, especially in the view of events in Ukraine.
In order to obtain loans from the international financial institutions, the Belarusian authorities are attempting to demonstrate the growing influence of public officials – supporters of market reforms – on Belarus’ economic policy, as well as their commitment to a dialogue and greater public involvement in formulating the country’s economic agenda.
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.