The Anti-Crisis Fund: wage growth will increase distortions in the Belarusian economy
Belarus intends to raise average salary in the country up to US$500 by the end of this year. How can plans to increase household incomes affect the country’s economic situation? What should be done to prevent crisis phenomena in the Belarusian economy? We sought answers to these questions in the EurAsEC Anti-Crisis Fund, whose resources are managed by the Eurasian Development Bank, and which is one of the key creditors of Belarus
Alisher Mirzoev, Head of Social and Economic Policy Department of the EurAsEC Anti-Crisis Fund, answers the questions of the BelaPAN News Agency.
- Lately, Minsk has been discussing raising wages more and more often. The President has recently announced that salaries of US$500 «should be reached» by the end of the year. What do ACF experts think about the plans of Belarus to raise wages?
- After the severe currency crisis in 2011, we see some stabilization in recent months. In order to support these positive trends, it is particularly important to follow fundamental principles of sustainable economic performance. Real wage growth (adjusted for inflation) should not outpace the growth of labour productivity. The violation of this rule spurs the inflationary spiral. This is what we witnessed in 2010, when the growth of real wages exceeded the growth of labour productivity more than threefold (by 33% and 10% respectively). Amid high and increasing foreign trade imbalances, this was one of the main reasons of the currency crisis that hit the country in the Spring of 2011.
If the authorities intend to raise average wages to US$500 by the end of this year, this, ceteris paribus, will considerably exceed even the most optimistic forecasts for labour productivity growth. Implementation of these plans will increase distortions in the economy that the government program supported by ACF resources aims to eliminate.
- One and a half months ago, in the beginning of April, consultations between the Belarusian side and representatives of the Anti-Crisis Fund resumed. The main purpose was to discuss the current trends in the Belarusian economy. What can you say about the current economic developments in Belarus?
These
consultations never stopped, we hold them on a regular basis. Parties exchange
visits each month or more often. Stabilization trends in the Belarusian economy
are evident; however stabilization has not been completed yet. Stabilization
should be the primary priority of the government policy this and next year. Indeed,
the rate of inflation has dropped significantly, foreign trade balances have
improved and international reserves in months of imports have almost doubled. Still,
it is too early to say that the level of stabilization needed for the recovery
of normal investment activity and an effective implementation of fundamental
structural reforms declared by the authorities has been achieved. The rate of
inflation
In order to continue stabilization and to enhance the resistance of Belarusian economy to changing external environment, it is important to understand the key reasons for the ongoing stabilization. Positive changes mentioned above were facilitated by the unification of the Rubel exchange rate and the return to market mechanisms which now determine it; tight monetary policy; and the use of non-debt financing to increase international reserves. These policies, together with balanced fiscal policy, should be maintained. At the same time, an important contribution to the stabilization of the Belarusian economy was made by external factors — favourable economic environment and an increase in energy subsidies from Russia. The authorities should take full advantage of favourable external conditions in order to implement structural reforms and to raise the country’s competitiveness.
- From your point of view, what should be the level of international reserves in Belarus?
The current level of Belarusian reserves is approximately two-months of imports. We urge Belarus to increase its reserves up to three months of imports by the end of 2013. In the medium term, it would be reasonable to have reserves at the level of at least five months of imports.
- Belarus started to receive the financial support from the Fund in the summer of 2011, when the county faced currency crisis. A month ago the experts of the Fund noted that in Belarus «the risks of resumption of the negative trends», that were observed last year before the unification of the exchange rate, remained. What risks did they mean?
There were several reasons for the distortions that led to crisis in the Belarusian economy. Apart from external shocks, the key causes were: excessive growth of cheap loans, including loans under government programs; wage growth outpacing the growth of labour productivity; low efficiency of investment, unbalanced expansion of non-tradable sectors, and extremely low level of international reserves. Risks of revival of the negative trends do exist because these causes are related. It is hard to imagine how it is possible now to achieve significant growth in real wages without a large increase in credits to the economy; or in the scale of quasi-fiscal operations, or without worsening external balances.
At present, the banking system of Belarus has ample excess liquidity. There is a risk that this liquidity would be directed into the real sector of economy. Such scenario is possible if the authorities decide to substantially reduce interest rates in the financial market.
The downward trend in inflation, observed since the end of 2011, supports further decrease in interest rates. The problem is that this trend is also based on widening administrative controls over prices. In our view, if decisions to cut interest rates are based on distorted price signals, distortions may grow.
- Earlier Belarus committed to a specific volume of privatization. As agreed, in January-September 2012 privatization revenues should reach US$1.2 billion. So far, large privatization deals have not been concluded. Moreover, potential investors are unaware which enterprises will be privatized this year in Belarus. What do ACF experts think about this?
- Conditionality on privatization under the ACF program is driven by the need to raise international reserves. If Belarus fails to increase them now through privatization, it will have to take other adjustment measures to achieve the increase in reserves. Such corrective measures might be quite painful since they will most likely require larger cuts in domestic demand through the reduction of real incomes and investment. Given this, privatization goals should be met.
Belarusian government is talking about liberalization of the economy and an expanding role of the private sector. From this point of view, privatization is logical and is in line with the policy earlier announced by your Government.
- In April and May you discussed the content of the updated Letter of Intent with the Belarusian side. The Letter specifies the obligations of Belarus under the ACF Program. Are negotiations on this document still in progress?
- Yes, the negotiations are in progress. We have sent to the Belarusian side our new proposals which consolidate the already achieved positive results and allow to continue the stabilization process.
- By the way, what is the reason for your recommendations to limit the volumes of lending to the Belarusian economy?
-
Our proposal just supports the plans of the Belarusian government to reach the inflation
target