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KEI and BEROC experts about the crisis in Belarus

The nowadays situation in the currency market of Belarus is actively commented in the media. The picture looks quite gloomy with the pronounced deficit of foreign currency, increase in the prices for imported products (by 12-15%) and reduction in the foreign currency reserves held by the National Bank of Belarus which fell during the first months of 2011 by 1 billion US dollars down to 4 billion US dollars.

On May 11, 2011 the National Bank of Belarus abolished restrictions on foreign currency exchange rates used by banks for selling-buying foreign currency transactions with population. Previously the commercial banks of the country had to sell available currency at the rate that did not exceed officially set one by 2%.

The experts of Kyiv Economics Institute (KEI) and the KEI partner - the Belarussian research center BEROC have shared their insight concerning the current crisis. Anastasia Luzgina, BEROC researcher, believes that the main reason why the National bank of Republic of Belarus cannot continue intervention to maintain exchange rate within the specified range is the reduction of foreign-exchange reserves of the country.
Anastasia Luzgina, BEROC Researcher"As a result of growing trade deficit and low foreign investments the foreign-exchange reserves of the country cut down to the monthly volume of imports. Thus the increased demand for foreign currency could not be satisfied without interventions by the National Bank. Considering the low level of foreign-exchange reserves, the central bank of the country had to limit the currency sales at the official exchange rate and to place some other restrictions on the currency market. Problems with the currency purchases in the different currency market segments resulted in the pressure on the national currency. A difference between the official rate and the market retail rate amounted up to 50%", - according to Anastasia. She also adds: "However the crisis development in the currency market does not give reasons to talk about the crisis of entire economy. Limited access to cheap currency did not stop manufacturing, and moreover fostered manufacturers to work more efficiently. According to the data for April, GDP grew by 12.3%, and production rose by 12.9% as compared to the corresponding period of the last year. The labour productivity in the first quarter of 2011 increased by 10.6% (while the annual target was 9,4%). Unemployment went down. Investments in the fixed assets are also growing significantly. The investments’ growth has increased by 23.4% during the first four months of 2011, while the annual target was 16-17%. The economy obviously continues to grow, despite the problems in currency sector".

Anastasia lists measures that are already being taken or are planned to be taken to stabilize the situation, namely:

1.Negotiations with the Russian Federation on loan extension to support the Belarussian currency;
2.Possible negotiations with the IMF to secure additional financial resources;
3.Tightening of monetary and fiscal policy, that will probably slow down the economy growth but will at the same time make it work more efficiently;
4.As of July 1, 2011 import duty on the imported cars will increase to limit their imports, which amounts to 5% of the total imports;
5.Privatization of some objects to ensure foreign currency inflow into the country.

The expert believes that that all the measures mentioned above will allow not only to solve problems in the currency market and to increase foreign-exchange reserves of the state but also will revitalize the economy and strengthen its’ production capacity.

The BEROC research fellow Kateryna Bornukova is more reserved in her forecasts. She thinks that currency crisis in Belarus will undoubtedly have negative consequences for the economy, especially in the short run as the Belarusian economy depends a lot on imports price for which are rising sharply.

Kateryna Bornukova, BEROC Research FellowKateryna is convinced that devaluation in Belarus was needed, and still remains an urgent necessity (official exchange rate is still fixed within the stipulated corridor). It is the only way to promote the competitiveness of the Belarussian products abroad and to make imports less attractive in order to liquidate enormous trade deficit. "However devaluation itself cannot be a panacea, but a call to action for the country’s government. Therefore whether Belarus will be able to benefit from this crisis in the long run depends only on the policy conducted by the government and the National Bank of Belarus, - expert comments. - In my opinion, the government today needs to give up plans to maintain high GDP growth rate which will just stimulate the further increase of trade deficit; the National Bank needs to conduct tougher monetary policy.

No doubt, this is a very unpopular policy measure, and probably only that one who offers a credit to support the Belarussian rouble will manage to persuade the government to follow such scenario. Unfortunately for Belarus, the most likely creditor is Russia which is not very interested in reforming the Belarusian economy. The collaboration with the IMF would be far more effective while the Russian credit without reforms will only allow to postpone problems for another year or two".

Situation in Belarus has been discussed in the Ukrainian mass media as well with overall pessimistic forecasts on the chances of the Belarussian economy to "survive".

The Kyiv Economics Institute’s senior economist Elena Besedina agrees with BEROC experts that the current crisis originated from the unfavorable balance of payments: "Belarus has been running current account deficit for some time, which is usually not a problem for many other countries including the U.S. provided countries receive enough foreign currency as investments to cover current account deficit. Unfortunately for Belarus, it was not the case as its capital account has been in deficit as well forcing the National Bank of Belarus to run down its currency reserves to pay for growing imports. Therefore, increasing country’s attractiveness for foreign investment can become a long run objective for Belarus government along with the short-term solutions to the current crisis."

Talking about devaluation that seems almost inevitable, the КЕІ senior economist Oleksandr Shepotylo advises to analyze Ukrainian experience of devaluation in 2008.

"Instead of trying to avoid inevitable by exhausting the foreign-exchange reserves of the National Bank of Ukraine to support the rate, Ukraine has devalued hryvnya in 2008. Now the negative consequences of this decision have mainly remained behind, and the situation with the balance of payments and hryvnya exchange rate is stable enough", - Oleksandr says.

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