Mis-reporting Provokes Mismanagement
On February 13th ‘refined’ data about GDP growth in January 2013 was published.
Belarusian authorities by all means try to avoid GDP and international reserves’ fall. They use different means, but the basic idea is not to lower these indicators. Achieving the desired values, they create the illusion of proper economic development, but consequently make improper management decisions.
Published statistics reported 3.1% GDP growth. The growth was possible due to a significant increase in net taxes on products. Without this component, GDP decreased by 0.8%. In 2012, the way net taxes on products were calculated was changed. Finance Ministry found ways to calculate the volume of industrial subsidies, which resulted in an increase in net taxes on products. Conventionally, GDP growth is provided by increases in stocks and investments in fixed assets.
In 2012, capital investments were not actively used to increase GDP because of tight monetary policy, which had resulted in decreased value added in the construction and the GDP growth rate by 0.6 percentage points. In 2013 the government plans to increase the volumes of housing construction and investment in fixed assets. Thus, GDP is prevented from falling by manipulations with GDP components’ calculation methodology and increased investment in the construction. It is crucial not to show GDP drop in total over the period (month, quarter, semester or year). GDP fluctuations within the period are allowed.
The situation with foreign exchange reserves is slightly different. The key standard for reserves is USD 8 billion. The National Bank, using entire banking system, seeks to prevent the fall of the gold reserves below this figure to date. Unlike GDP, international reserves statistics is published as of a concrete date, which allows for certain manipulations to mask the reduced volumes: for instance, by short-term borrowings from banks and repayments after the reporting date in question. In addition, the National Bank has a certain amount of liquid assets which are not included in the gold reserves due to non-compliance with the IMF standards (because of their liquidity or the counterparty rated as lacking reliability). On June 1st, 2012 the funds not included in international reserves were net swaps with China (more than USD 2 billion). On February 1st, 2013 these resources fell to USD 1.2 billion. By maintaining the international reserves at the same level, the National Bank attempts to reduce population’s devaluation expectations, which could result in assets’ sharp outflow from the banking system.
There is rationale behind maintaining the level of international reserves: population is satisfied with the illusion of control. Most nationals are not financially literate enough and if the level of international reserves does not fall, they will not ask additional questions.
The situation with ensuring GDP growth rate is rather irrational and could have negative consequences. Certain manipulations allow reporting ‘correct’ GDP growth rates, as a result, target figures are set for enterprises, warehouses’ stocks grow, financial situation at the enterprises deteriorates, and new manipulations to show the desired result are invented. The overall picture in the economy is distorted to show better figures, which affects the adequate and timely response to emerging issues.
Thus, the Belarusian authorities are trying to improve the economic performance by distorting the picture. First of all, it affects themselves, when based on distorted picture they make wrong management decisions. This vicious circle can be broken by reorienting towards the qualitative parameters, rather than quantitative, but this solution does not find understanding at the highest governmental levels. Only economic challenges may facilitate the change in the attitude to economic indicators.
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.