Government cuts: risks and opportunities

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April 22, 2016 18:20

Cuts in the number of state officials should improve the state apparatus’ controllability. However, the lack of adequate career opportunities for the ones laid off will create tensions among Belarusian officials, which, in turn, could help different political organizations to improve their influence.

On October 12th, the Head of State ordered to set up a commission to work out how to optimize the state apparatus. The Commission was tasked to draft reform proposal before the end of the year.

The state apparatus reform in Belarus is meant to be radical. According to Lukashenko, the reform will reduce the number of public officials by 25-30%. According to 2011 official data, 70,612 people were employed in the public administration, 56,232 of which were state employees (excluding security agencies staff).

The problem with the reform is that in Belarus there is no tradition of a successful transition from the public service in other areas, for example, in business. There are individual cases of successful transit from a high-level position to large and medium businesses, but they only underscore the general lack of career opportunities for the laid off officials, in particular, if the reform aims to free up to 25-30% civil servants.

At this reform stage, the government offered no solutions to this problem, which creates a risk to public authorities. First of all, now a variety of political players in Belarus and abroad have a window of opportunity to campaign and recruit from this circle of experienced and influential people. Namely, from Interior Ministry employees which will be subject to staff cuts in the first place.

It should be anticipated, that Belarusian security services are aware of this problem and will track contacts of retired officials very closely. In the meanwhile, until completed, the government reform itself objectively reduces the stability in the state power and increases the overall political risks in Belarus, which plays into the hands of the law enforcement agencies, especially the KGB.

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Growth in real wages may disrupt macroeconomic balance in Belarus
October 02, 2017 12:12
Фото: Дмитрий Брушко, TUT.BY

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.