Belarusian government talks about reforms to secure investment
‘The government of bankers’, headed by Prime Minister Kobyakov succeeded in stabilising monetary and financial markets. In Q1 2015, Belarus’ real economy was in recession, however, the situation has been normalised by introducing higher tax burden on profitable economic sectors and reducing lending and expenditure on government programmes. The government plans to keep the economic situation under control by delaying loan payments to Russia, hoping to obtain a new loan from the IMF and by introducing ad hoc administrative measures without reforming the existing socio-economic model.
Prime Minister Kobyakov said that the new composition of the Belarusian government had already done a lot to normalise the domestic consumer market situation and would do even more.
In power since late 2014, Kobyakov’s Government consists mainly of bankers unlike preceding Myasnikovich-led government of ‘strong economic managers’. In 2013, the Myasnikovich’s government was responsible for implementing a large-scale economic modernisation, which was a failure leading to financial crisis of 2014-2015. The president has tasked the new government with normalising and ‘not deteriorating’ the economic situation.
Some experts anticipated that the new government would embark on economic reforms. However, so far, the Belarusian authorities have implemented contradicting measures in order to ensure economic stability. For instance, the National Bank and the government alike have made statements about the need to liberalise the economy and business environment, as well as restrict lending and spending on state programmes in order to normalise monetary and financial markets. Despite the fact that in Q1 2015 GDP went down by 2%, the prime minister underscored, that “implemented systemic measures create overall favourable grounds for better performance by enterprises”.
Simultaneously, the government is attempting to preserve control over prices with some ad hoc price regulations, and has introduced additional fees and taxes on profitable economic sectors and fines on those officially unemployed (the new law on ‘social parasites’). In addition, the authorities have attempted to gain additional revenues from IT business, which might have long-term negative effects on the IT industry as a whole and generally contradict the declared intentions to reform the economy. Until now, the IT industry was one of the most growth-promising sectors in the Belarusian economy, should a decision to reform the socio-economic model was made.
Nevertheless, while negotiating with international lenders, the prime minister said Belarus was ready to implement structural economic reforms. At a meeting with World Bank Director for Ukraine, Belarus and Moldova Qimiao Phanom, Prime Minister Kobyakov said that Belarus hoped for a proactive stance and support from the World Bank in negotiations with the International Monetary Fund over a roadmap for economic reforms on April 17th – 18th in Washington. “We welcome a balanced and tailored approach to the analysis of the economic situation in our country and we are grateful to the World Bank for assistance in developing the roadmap for structural reforms”, he said. Indeed, economy specialists say that the roadmap developed by the government envisages structural reforms and revision of Belarusian economic model. The authorities hope to receive the first tranche from the IMF already in 2015; however, the implementation of the core measures of the economic transformation plan would begin only after the presidential campaign in 2016 – 2020.
In addition, the Kremlin has indirectly agreed to support the incumbent Belarusian president in the upcoming presidential elections. The prime minister said that Russia had agreed to refinance Belarus’ debt payments in 2015: “We have reached the agreement with the Russian partners to refinance payments due to the Russian Federation this year in full, including debts on intergovernmental loans and to the ACF”.
However, Kobyakov’s government is unlikely to implement structural economic reforms envisaged by the ‘roadmap’ in full. Despite its ‘reformist’ rhetoric vis-à-vis international creditors, the government’s initiatives as regards economic reforms are highly controversial and do not fall outside existing socio-economic model.
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.