Belarus unifies the exchange rate as inflation soars, real incomes drop

“Fast facts” from Belarus’s official socio-economic data

MINSK, Belarus – 28 October 2011– The National Bank of the Republic of Belarus (NBRB) on 20 October moved to unify Belarus’s exchange rate, by allowing the official exchange rate to fall to the level set by market forces (around $1 = 8400 rubels). This amounted to Belarus’s second crushing devaluation of the year; as of April, the official exchange rate had been around $1 = 3000 rubels (Chart 1).

 

Inflation, which was headed into triple-digit territory (in year-on-year terms) even before 20 October (Chart 2), now seems set to soar further, as the impact of the depreciating rubel works its way through the Belarusian economy.

 

Despite the use of price controls and other administrative measures, consumer price inflation in September was running at close to 80 percent; meat prices had more than doubled, compared to September 2010. Industrial producer price inflation was running at 88 percent.

 

The official data indicate that the real value of household incomes, wages, and pensions are dropping sharply in the face of this inflationary onslaught (Chart 3). Pensioners seem to be particularly hard hit: the real value of pension incomes in September was some 20 percent below September 2010 levels.

Belarus’s collapsing exchange rate is a reflection of the National Bank’s meager foreign exchange reserves, which through August remained well below the threshold level needed to finance three months of imports (Chart 4). Financial markets remain uncertain about whether and how Belarus will be able to meet its foreign debt obligations.

On the other hand, Belarus continues to report rapid growth in dollar exports of goods and services—and, surprisingly, for imports as well (Chart 5). While rising energy prices explain some of the dollar import growth, these data suggest that foreign exchange continues to be available for key importers—who, prior to the October exchange rate unification at least, could obtain dollars on favourable terms.

The rapid export growth in turn has made possible the posting of monthly trade surpluses in May, July, and August (Chart 6). These surpluses would have to grow a lot larger in order to increase the NBRB’s foreign exchange reserves. In any case, a $5.3 billion current account deficit was reported during the first half of 2011.

This rapid growth in foreign trade turnover, and the appearance of monthly trade surpluses, can help explain the apparent “disconnect” between Belarus’ soaring inflation rates and falling real incomes on the one hand, and continuing output growth on the other (Chart 7). A 9.1 percent increase in GDP was reported during the first eight months of the year, thanks to strong output growth in industry (up 11 percent during the first three quarters of 2011) and agriculture (up 4 percent). A 15 percent increase in the volume of gross fixed investment was reported during the first three quarters as well. Likewise, no significant declines in employment, or increases in unemployment, are apparent in the official labour market data; the unemployment rate has remained around 0.7 percent throughout 2011.

Some of this reported output growth could be due to the deflation of nominal increases in production and sales by price indices that may not fully reflect Belarus’s surging inflation. It could also reflect output that is produced in order to meet plan targets rather than demand; as of 1 October, the value of inventory stocks in the industrial sector were some 53 percent of average monthly industrial output.

However, part of the reported output growth may be due to a redistribution of final demand away from domestic toward foreign markets. The combination of the rubel’s sharp depreciation and the declines in real wages and household incomes—as well as the 20 percent decline in housing construction reported during the first three quarters of 2011—is consistent with export-led growth. Whether this growth can continue if imports (including of the fuels and components needed to produce exports) also decline—particularly if all companies have to purchase foreign exchange at the new, market exchange rate—remains to be seen.

However the disconnect between Belarus’s reported output growth, surging inflation rates, and declining real wages and incomes is explained, it is clear that many Belarusian households are very adversely affected by current socio-economic trends. Official unemployment rates may remain low, but significant numbers of workers are reported to be on leave with reduced (or no) pay. As of May 2011, some 855,000 people  (10 percent of the population—280,000 of which were in Minsk) were reported to be on waiting lists for housing.According to press reports, the employment contraction in the construction sector is pushing growing numbers of workers to leave the country in search of job opportunities abroad.

Growing labour outmigration is suggested by Belarus’s balance-of-payments data, which show remittance inflows during the first half of 2011 23 percent above mid-2010 levels, and double mid-2009 levels (Chart 8). While it is unlikely to quickly challenge other former Soviet republics (Moldova, Armenia, Tajikistan, Uzbekistan, and Kyrgyzstan) in terms of reliance on labour migration and remittances, the country’s deepening socio-economic tensions seem likely to further boost the numbers of Belarusian citizens who choose to leave the country, in search of greener pastures.

 

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