Belarusian authorities ready for some pluralism but not for long-term structural reforms
The dialogue between the Belarusian authorities and business, independent and international economic experts about economic reforms allows softening criticism and creates favourable environment for negotiations with international creditors. The Belarusian leadership is not ready for structural reforms and reduced role of the state in the economy, however it is ready for changes in the most troublesome areas, including ensuring financial stability, improving the efficiency of state-owned enterprises and housing and utility services. In the medium term, supporters of reforms in the Belarusian government are likely to participate in public events, hold talks with international lenders, but unlikely to have any real impact on Belarusian economic policies.
Last week, Minsk hosted the fourth October Economic Forum KEF-2016.
The Belarusian authorities are sending mixed signals with regard to the economic policy reform. While negotiating with international creditors and business, Minsk underscores its commitment to carrying out structural economic reforms. However, when appealing to the population, the Belarusian top management declares a commitment to preserve Lukashenka’s economic model. Apparently, the Belarusian authorities attempt a traditional manoeuvre and would carry out some stretched in time transformations in some economic sectors, while preserving the leading role of the state in the economy. The Belarusian authorities’ main task is to preserve socio-political stability and ratings of government institutions.
Belarusian society has no positive expectations from reforms and changes to the existing economic model, which is based on the state ownership. The opposition and civil society organisations have introduced some new instruments for the population to protect their interests while carrying out reforms, however these instruments are insufficient to prompt the state bodies to take action, which could lead to broader economic policy adjustments.
The Belarusian leadership has enabled some pluralism in the state apparatus and greater visibility for supporters of market reforms. In addition, it may somewhat adjust the state policy to meet the interests of some groups and in order to mitigate pressure from business, independent experts and international creditors. However, authorities hope to retain control over the state policy without making major changes to its core.
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.