Government chooses between stagnation and devaluation

On October 19, 2012, an extended participation session of the National Bank Board took place

Comment

The deteriorating situation with foreign trade and growing pressure on the foreign exchange market, are forcing the National Bank to resort to rigorous monetary policy . However, such a policy makes it impossible to fulfill plans for a 5-percent GDP growth n 2012.

Termination of exports of dissolvents and dilutants resulted in a deteriorating situation with foreign trade. Another negative factor is a decline in potash fertilizer export; export sales of potassium chloride are highly unlikely to improve by the end of the year. Due to the fact that Russia will join the WTO, several Belarusian export positions will have to compete with foreign suppliers.

In such a situation, the National Bank has to resort to rigorous monetary policy which has been significantly relaxed in recent months. Active economy lending, wage rises as well as a decrease in loan rates created an illusion that the economic situation had stabilized.

The last two months have demonstrated a noticeable deceleration in industry due to slower growth in production of chemical and petroleum products.

Due to the current situation with the export of potash, potash fertilizers as well as dissolvents and dilutants, growth rates will not recover and will continue to decline. As a result, the industry growth rate of GDP is slowing down, which correspondingly affects growth of wholesale trade. Retail sales and investments into fixed assets could compensate for the reduction in GDP growth by industry.

Rates growth in the interbank market is caused by a number of reasons. A lack of liquidity in the market, limited support of the National Bank, stricter requirements to the mandatory cash reserves resulted in growth of loan rates in the interbank lending market. Under such circumstances, it is inevitable that debt financing of the economy will reduce, and consequently lead to a decline in investment into fixed assets. Most likely, the companies will be forced to resort to the policy of wage restraint due to the worsening economic situation, which will result in the reduction of turnover growth. Therefore, it could be concluded that government not only has no tools to increase GDP growth rate, but also to maintain the GDP at the level of 2.5% In this situation, government has to admit that they failed to fulfill their obligations to provide for GDP growth rate of 5% in 2012.