Devaluation is inevitable
Last week’s initiatives of the authorities show that they have exhausted their resources vis-a-vis maintaining the threshold of stability. In the near future one should anticipate increased USD exchange rate, another round of inflation with inevitable consequences for production sites and markets.
Abolishment of privileges with regard to the mandatory sale of foreign currency earnings, the permission issued to five banks allowing them not to sell foreign currency to the population (with the exception of so-called "social needs") and the Azeri loan intended to maintain the status quo at the currency market for another month or so. However, foreign trade performance results, as well as information about Azerbaijan loan, cancellation of benefits, and the appointment of the new Head of the National Bank have already affected the USD exchange rate at the „gray market”. Market players assess the latest initiatives as additional barriers with regard to acquisition of currency, and the loan of Azerbaijan as a sign of the currency lack, they anticipate the growth of exchange rate and thereby trigger it. On 25 July, the „gray market” exchange rate increased by about 4%, reaching over the weekend the average of Br 6,300 per USD.
In the meanwhile the government plans to increase pensions, index salaries, fund state programmes, all of which will require broader emission. Moreover, the appointment of Ermakova as the Chairman of the National Bank spurs inflation expectations. There is not enough of resources available to prevent price increases and shortages of goods.
Foreign trade performance results show that exporters have already exhausted the devaluation shed, and that re-imports grow faster than exports. Moreover, comparative analysis of the data provided by the Customs Control Committee and by the Ministry of Statistics shows that there was no excess of exports over imports in May (as reported by the government).
There are no official channels left for obtaining loans, (except in case of political change), large privatization deals are put on ‘hold’. The most likely source of foreign currency remains the second tranche of the EurAsEC (autumn) and sale of Beltransgaz to Gazprom (probably by the New Year).
Therefore, it is reasonable to expect official devaluaiton in September to about Br 6,200 per USD with the „gray” rate closer to Br 7,500.
All actions of the authorities envisage salvation of the current economic policy and preservation of the political conrol. To be fair, their tactics works: protests grow slowly and constantly fluctuate under the influence of expectations (for instance, hopes to increase pensions and indexation of salaries, which inevitably will be devalued by rising food prices and prices for housing utilities services), and fear. Therefore the most popular ‘getaway’ from the current situation among the population is the „escape” option: into illegal business activity or to working abroad.
At the same time such policy also bears risks. First of all, it concerns the reduced functionality of the state and as a consequence reduced resource base and restrictions of the beneficiaries of the regime. Moreover, the narrowing scope of beneficiaries of the regime implies a split in the ruling elite.
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.