Academy of Science: Devaluation will lead to soaring inflation

Results of a devaluation will ruin the Belarusian economy.

The devaluation is unreasonable in the current situation in the country, Garegin Vardevanian, the deputy director for research at the Institute of Economics of the National Academy of Science of Belarus, thinks.

“The devaluation of the Belarusian ruble against the US dollar is unreasonable in the current situation. It can have negative impacts on the economy in general, including the banking system, that will significantly exceed the dubious positive effects,” the expert wrote in an article in the October issue of Bankovsky Vestnik, the magazine of the Belarusian National Bank.

The negative consequences include “the loss of advantages in the yield of financial instruments in the national currency in comparison with freely convertible currencies”, “rocketing growth” of demand for the foreign currency and “inflation growth due to the high dependence of the country's export on imported materials”, the expert thinks.

In his opinion, the devaluation will lead to the increasing “gap between the average salary in Belarus and Russia in dollar terms”.

The devaluation will cause the “need to raise the discount rate that will lead to a decrease in the credit resources availability for economic entities”, the deputy director of the Institute of Economics adds.

Garegin Vardevanian emphasises that the devaluation cannot be viewed as an instrument for stimulating the export under the current conditions in Belarus.

“The assertion that we can often meet in the media about the exhaustion of the effect of the 2011 Belarusian ruble devaluation is not correct, because there were no effects from the beginning,” Vardevanian is confident.

In his opinion, it would be wrong to explain the positive results of the foreign trade in 2011-2012 by the devaluation effects, “because most factors of the export growth and the decrease in the foreign trade negative balance have no relation to the exchange rate adjustment in 2011”.

The deputy director of the Institute of Economics reminds that “almost 70% of the export in 2011 was mineral raw goods with their prices being formed by the international market and not depending on the fluctuations in national currency rate.

Last year's export growth was caused by the increase in supplies of the mineral raw goods – oil products, lubricants, solvents and thinners – to foreign markets, Vardevanian emphasises.

The share of the three mentioned goods items in the falling export ($6bn) was almost 98% in the first half of 2013, the expert notes.

“So, the export in 2012 and the first half of 2013 continued to depend on the situation in the oil products market. It gives us serious grounds to doubt the importance of the role of the currency exchange rate. A deeper and more thorough analysis of the cause-effect links in the concerned sector is needed,” Vardavanian supposes.

The expert thinks it is necessary to “find a new paradigm of the macroeconomic policy that would not allow a significant imbalance in the foreign sector and would prevent the pressure on reducing the Belarusian ruble exchange rate”.

“Keeping financial stability and macroeconomic balance must be priorities in the economic policy as aims for the economic growth,” Garegin Vardevanian thinks.

According to him, “the risks of balance of payments gaps relating to difficulties in implementing the aims of attracting direct foreign investments or other sources of external financing must be minimised at the stage of developing the annual macroeconomic forecast”.

We remind that the government reconsidered the forecast for 2014 several times. The draft forecast providing for the GDP growth of 3.3% was presented at the meeting of the Presidium of the Council of Ministers on October 30.