New government plans tough austerity measures

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April 22, 2016 19:04

The National Bank of Belarus has adopted a number of measures as a part of its monetary policy in order to stabilize Belarus’ financial situation. In the first days of January, the new government and the new team of the National Bank have managed to address the problems on the currency exchange market without social discontent growing. However, the measures adopted by the government and the National Bank have led to personal income freezing, or even falling, which goes against the traditional state policy of pumping up household income in the year of the presidential elections, which will have an adverse effect on the authorities’ popularity. In the future, this could lead to a contradiction between the actions and statements of the Executive Office of the President, government, and the National Bank, as well as to officials being increasingly criticised by the president.

President Lukashenko is trying to bring on board professionals who have proven to be relatively successful in managing crises on the currency exchange market within the current socio-economic model. Key staff changes within the government and the National Bank were made over the Christmas holiday period in order to soften the public’s reaction at a time when the population is concerned with the limitations on the currency exchange market. The head of state has not blamed the previous teams of the government and the National Bank for failures in the country’s socio-economic development. However, president Lukashenko has underlined his readiness to use “another reserve of personnel” after the election. 

Meanwhile, in early January the National Bank’s new management has managed to address the problems on the currency exchange market by carrying out another devaluation of the national currency by 26%, although originally there had been plans for a single currency exchange rate by February 1st. It is worth mentioning that the new head of the National Bank, Pavel Kalaur, has some experience in dealing with currency exchange crises, having worked at the National Bank for 17 years. It was precisely when Kalaur was a deputy head of the National Bank that a one-time devaluation of the national currency was held, and earlier, in 2000, he led a team which had a single currency exchange rate as its goal.

At the same time, the year of the presidential elections is usually a year when Belarusians see a significant growth in their personal income. But this time, the Belarusian state cannot guarantee such a growth (which was usually artificially created using domestic resources) without risking yet another currency devaluation. Despite the president’s statements on the need to increase personal income, the current government and the new team at the National Bank are picking up where the previous authorities left off, namely limiting the growth of the wages and sustaining the stability of the exchange rate. Introducing the new head of the National Bank, the president defined his duties: “The most important thing today is the stability of the national currency. We face a strategic task – to strengthen the trust of the population in the national currency – the Belarusian ruble.”

It is worth mentioning that since summer 2014, wage growth in Belarus has been de-facto frozen, and living standards even fell after the national currency was devalued by 30% at the start of this year. 

President Lukashenko continues to view the staffing policy as a basis for sharpening the current socio-economic model’s efficiency. The new head of the President’s Executive Office, Kosinets, underlines growth in performance discipline as the most important of his primary goals in his new office: “Discipline is the mother of victory. If there isn’t discipline, there won’t be a victory. That’s why there should be discipline everywhere. The heart of the problem lies in another thing. There are terms “strictness” and “humaneness”. Alongside strictness, there should also be humaneness.”

Most likely, during the year of the presidential elections, the government’s main objective will be to keep the population’s standards of living at an acceptable level by curbing inflation and price rises. The Belarusian authorities will continue to prop up the currency exchange market without changing the socio-economic model or carrying out structural reforms of the economy. In addition, official Minsk will step up the search for foreign borrowing which might provide a certain growth of personal income – but minus the risk of yet another devaluation.

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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.

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