National Bank is ready to take any measures to obtain foreign currency
Interest rates on the interbank market reached 78.7 % per annum.
Record high interest rates on the interbank market is the natural result of the National Bank’s measures aimed at forcing the banks to sell available foreign currency. The National Bank wants the national reserves to stop falling. As a result, the economy might experience financial paralysis, but industrial financial performance is not the National Bank’s responsibility.
On September 12th, interest rates on the interbank market reached a record high of 78.7% per annum. Even during devaluation in 2011, the interest rate was not this high. Various actions by the National Bank (NB) have led to this phenomenon. For instance, the National Bank increased the requirements for the allotments to the reserve funds, which resulted in additional demand for ruble liquidity. Unofficial restrictions on deposit interest rates for individuals - not more than 35% - introduced in August, against consistent weakening of the national currency, resulted in an outflow of national currency from ruble deposits in September and in a dramatic need for additional ruble liquidity by banks. The National Bank increased the interest rates to support liquidity, but as the support was limited, it provoked higher interest rates on the interbank market. The National Bank’s ultimate goal was to force banks to sell available foreign currency, which it then bought itself.
Banks are faced with a dilemma. Failure to comply with NB requirements regarding contributions to the compulsory reserve fund, results in penalties – up to twice the size of the discount rate – and all the transfer of outstanding requirements to the next period. But in this case, banks do not sell the currency. Alternatively, banks can sell the currency and fulfill the requirements without paying a fine. However, if the national currency sharply fluctuates, foreign currency risks will increase. As the banks are incapable of gaining such an amount of foreign currency in the short-term, they were unofficially allowed to increase the interest rates on deposits up to 42% per annum. The banks believe that people’s mercantile interests prevail over devaluation expectations. The opportunity to make quick money may encourage depositors to convert their foreign currency savings into national currency deposits in Belarus’ banking system.
The National Bank’s measures might have far-reaching economic consequences. Costly deposits lead to higher loan interest rates - up to prohibitive levels. Some banks have already announced the discontinuation of business loans. Given the large volume of payables and receivables, this can result in payment paralysis in the economy. Real estate lending programmes for individuals have been suspended. One consequence of the 2011 devaluation was many uncompleted construction projects were suspended due to the revision of construction costs and belated crediting. The new suspension of lending will result in a new ‘wave’ of uncompleted construction projects. However, the National Bank is more concerned about the size of gold reserves, hoping to replenish them in the near future. The NB is not really concerned about the situation in industry, which operates at minimal profitability and hugely relies on loans to pay for the delivery of goods and workers’ wages.
The National Bank attempts to refinance foreign currency payments, but this is becoming more costly and threatens unpleasant consequences for the economy. One solution would be to sell off assets, but this issue is beyond the National Bank’s scope of responsibility.
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.