July 1 – July 7, 2013

Wage growth provokes economic crisis in Belarus

The situation has not changed
Wage growth provokes economic crisis in Belarus

The Statistics Committee reported that the average monthly wage in May 2013 was BYR 4,988 million (USD 575).

In Belarus, wages continue growing despite the deteriorating economic situation. One of the main causes of 2011 crisis was a sharp rise in wages in late 2010. Belarusian leadership repeats all its previous mistakes and does not recognize the systemic problems inherent in the Belarus’ economic model.

Nominal wages in May were BYR 4 988.3 million or USD 575, which is 4% higher than in December 2012, and 32% higher than in May 2012. Labor productivity in Q1 2013 increased by 3.5% over the same period in 2012, and preliminary data shows that by June it will be 2%. The situation with one of the main macroeconomic ratios is deteriorating. Labour productivity is growing slower than wages increase as a result expenses grow faster than revenues, which deteriorates enterprises’ financial performance.

In 2013 the situation is similar to pre-devaluation period in 2011. In 2009-2010 wages increased sharply, the current account payments balance deteriorated, and there was no substantial foreign funding to cover the current account balance deficit were lacking. In 2013, the current account is negative, the international trade balance in services can not compensate for the negative foreign trade balance in goods, additional guaranteed external incomes are not feasible and the domestic foreign exchange market situation is closer to net foreign currency demand from legal and private persons. All this is largely due to the increase in wages, which increased consumer imports and created an additional demand for foreign currency for the saving purposes.

Current economic situation is as follows. The economic situation is deteriorating, while the government is focused on the implementation of quantitative indicators. Enterprises’ financial condition is poor – accounts payable and accounts receivable increase, net incomes reduce, and international economic situation for most businesses is deteriorating. Against this background, wages’ growth, altogether with administrative orders to maintain a relatively stable staffing policy create an additional negative factor that will result in pumping the economy with print money, followed by pressure on the foreign exchange market, reduced gold reserves and the need to depreciate the national currency to avoid economic collapse.

A systemic problem is that the solution to the current situation is bound to a narrow circle of decision-makers, private initiative’s suppression and extremely unfavorable investment climate for investors who unable to use administrative resource to set up a new enterprise. These problems were there for many years and were never solved, putting Belarus in a vicious circle of economic cycle “from devaluation to devaluation”.

Thus, Belarus is moving along the path that resulted in devaluation in 2011. Belarus fails to analyze its previous experiences and ignores constructive criticism; ergo it is bound to repeat its own mistakes. The probability is high that in the coming 1.5-2 years devaluation will be repeated.

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