National Bank seeks for optimal scheme to reduce the discount rate
National Bank Chairman Nadezhda Ermakova stated the discount rate could be further reduced in April.
In March 2013 the inflation dropped to 1.1% due to government’s pricing policy, enabling the National Bank reducing the discount rate. Industry insists on discount rate’s sharp reduction, which, however could reverse the situation in the foreign exchange market and increase pressure on international reserves. If negative trends progress, the National Bank may resume to increasing the discount rate.
In March inflation was reduced to 1.1%. The government has slowed down with increasing utilities costs and transport tariffs by putting it off until later. The inflation rate is a key factor to justify further discount rate cuts. Inflation data for Q1 2013 allows for discount rate reduction to 25% pa and at the same time for preserving positive interest rates on loans in the economy.
The rapid reduction of the discount rate carries considerable risks for the fulfillment of parameters laying the scope of the National Bank’s responsibility.
Banks’ resources are largely formed by individual deposits in national and foreign currency. In February 2013 BYR term deposits in the banking system were growing at record pace. Interest rates on national currency deposits in many banks are floating and tied to the discount rate. Interest rate reduction will result in lower profits from deposits and in an outflow of funds in national currency from the banking system or in deposits conversion in foreign currency. In turn, this will result in a change in the foreign exchange market in Belarus, which in February and March was formed by foreign currency net supply from individuals. Currency conversion was a major source of ruble deposits’ growth.
The second threat is the potential rapid growth of the banking system’s loan portfolio if loans rates decrease significantly. Liquidity excess in the banking system can be absorbed by the economy, and the outflow of ruble resources will reduce the lending opportunities. The rapid growth of borrowing by companies, in turn, could trigger inflation. In these circumstances, finding a balance between the desires of industrial sector and aspirations of the major contributors to the ruble resource base is quite a challenge.
Thus, the National Bank will reduce the discount rate in April, but the reduction will be insignificant (within 1.5-2 percentage points). In the future the discount rate could be increased again if imbalances in the foreign exchange market start developing rapidly.
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.