National Bank has lost domestic sources to replenish international reserves
In March, both private individuals and legal entities were net purchases of the foreign currency. Belarus’ international reserves will continue declining, due to the lack of guaranteed revenues from external creditors and the upcoming debt repayment period. Given the circumstances, the National Bank will have to readjust the national currency (by circa 15%) after the World Hockey Championship.
In early 2014, devaluation, anticipated by many, did not occur. Belarusian ruble was stable against the US Dollar, and people have been profiting from high interest rates on national currency deposits. People were selling their currency savings and depositing Belarusian rubles in the banking system. Simultaneously, the National Bank, aiming to make loans affordable, was gradually reducing the interest rates on national currency deposits, along with the population’s interest in ruble deposits. In March, the population was a net buyer of the foreign currency (bought USD 87.2 million).
The National Bank was left without domestic resources to replenish the international reserves. Currency bonds worth USD 50 million, issued for the population have not been fully sold during the past three months. Bonds for legal persons failed completely (USD 8 million sold out of USD 50 million). Both, individuals and legal entities have become net currency buyers. External debt service in March and April 2014 will require USD 500 million.
Acquired credit lines from the Development Bank and other banks in Belarus can not fully meet the economy’s needs in loans. Thus, the international reserves become the only source of funding for the National Bank, leading to their reduction to the critical size (1 month worth imports of goods and services).
Currently, the Belarusian ruble’s stability is due to a political decision. The State has to demonstrate a controlled situation in the economy, despite the adverse external and internal factors in the economy. Russian economic situation will continue deteriorating, also due to the imposed sanctions, resulting in a further decline in sales of Belarusian goods on the Russian market.
When Belarusian ruble is devalued, the devaluation size will exceed that in Russia. This will help Belarus to overcome the negative effects of the recession and Belarusian economy will be able to sell the existing stocks at industrial enterprises.
The Belarus’ economy has repeated all mistakes from the previous economic cycle before the devaluation. Once again, the need for a new devaluation will be explained by the external crisis, without acknowledging faulty domestic economic policies.
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.