Belarus Chose Internal Devaluation As New Anti-Crisis Policy - Digest Of Belarusian Economy

Internal devaluation

In 2009 and 2011, income growth followed currency devaluation that helped compensate for higher prices and a less favourable exchange rate. Despite high interest rates, the National Bank always found a way to stimulate the economy through cheap subsidised credit and loans. Real wages went up and, even in dollar terms, they quickly recuperated.

All of this, of course, undermined the supposedly stimulating effects of currency devaluation. Belarusian firms did not become any more competitive on international markets as wages remained high. At the same time imported goods also did not experience any significant relative price increases, as the money-printing policies of the National Bank resulted led to inflation for Belarus-produced goods as well.

But this time will be different, or so the authorities seem to think. The National Bank has proclaimed internal devaluation as its new policy. First of all, the policy signals a shift to expensive loans and strict rules on access to financing to keep prices at bay. But it also implies that wages will not grow enough to compensate for devaluation. Indeed, real incomes fell by 3.2 per cent in January–February 2015 compared to January-February 2014. Modest nominal wage increases in March are also not likely to catch up with inflation.

So far the policy seems to be working – imports of consumer goods declined dramatically in January 2015, being three times lower than a year ago.

Administrative controls on imports and import prices have played important part in their decline. But the internal devaluation policies have also played an important role. Unfortunately, these policies come with their own high costs. The share of unprofitable firms spiked in January (see figure 1) as firms faced lower demand. And the looming threat of unemployment may make it impossible for the authorities to commit to internal devaluation policy as elections approach.

Labor Market Under Stress

Last month 44 thousand people worked part-time at the request of their employers, 60 thousand unwillingly took unpaid or partially paid leave, and 72 thousand others were simply idle. All of these groups together comprise around 3.5 per cent of the labour force in Belarus. The increase in different types of labour force inactivity signals the potential for growing levels of unemployment.

For state enterprises, employment has long been a sacred cow. But the National Bank, committed to internal devaluation, issued a recommendation for commercial banks not to give out loans to help them finance their payrolls. State enterprises now have to use hybrid forms of employment (part-time, unpaid vacation, idle days etc.) to avoid massive job cuts.

While state enterprises are motivated to preserve their employment levels at almost any cost, the private sector’s natural reaction to the crisis is to cut jobs. Unfortunately, the statistical bodies in Belarus do not publish unemployment statistics in accordance with international standards (the Ministry of Labour and the Statistical Committee conduct labour force surveys quarterly, but keep the results under wraps).

The registered unemployment numbers are not informative, since the unemployment benefits are very low, and people registered as unemployed have to take up other menial jobs in their communities. At present there is more than enough reason to believe that unemployment in 2015 will exceed the usual 6 per cent level.

The authorities traditionally view employment as a matter completely under the state's control, despite it this no longer being true. The private sector recently became a major player on the labour market, employing up to half of the labour force, according to some estimates. Unemployment generated by the private sector may become a major socio-economic challenge in 2015, especially given the lack of state support to the unemployed.

In Search of Financing, Again

The foreign reserves of Belarus dropped again in February to a dangerously low $4,65bn. The National Bank claims not it is not intervening in the currency market, nor is it spending its reserves to prop up a more favourable exchange rate. Nevertheless, these reserves will be necessary to pay off the country's outstanding debts.

Lukashenka inadvertently crushed plans to borrow fr om international markets through Eurobonds with his recent verbal slip wh ere he said Minsk is looking to “restructure" (attempt to renegotiate the debts with creditors) instead of “refinance” (an attempt to find new loans to pay off previous debts) during a press-conference.

Only two potential sources of financing are left for Belarus. One is the traditional way – to get a loan from Russia. At the moment this is a little problematic, as Russia is itself experiencing serious financial difficulties.

Another way to get financing is to seek a loan from the IMF. After the recent thaw in relations with the West, an IMF loan is not beyond the realm of possibility. However, the IMF mission in March concluded its recent trip to Minsk with a less than optimistic assessment. The IMF is ready to support structural reforms in Belarus, but it needs a commitment from the highest level to proceed.

Minsk's internal devaluation policy failed to impress the IMF as more serious reforms are needed. Can Belarus commit to a series of long-feared structural reforms? This remains to be seen, but many of the challenges of 2015 may finally push Minsk to carry out partial reforms.

This article is a part of a joint project between Belarus Digest and BEROC.