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Devaluation Cannot Be Stopped?

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Devaluation Cannot Be Stopped?

The Belarusian ruble depreciates against the dollar even during the tax week.

Before the reduction of oil supplies from Russia, the Belarusian ruble usually strengthened during the tax week against the background of the sale of foreign currency earnings by exporters. However, last week, the ruble fell against the dollar again, hitting the record of 2016, wrote banki24.by.

Friday trading resulted in the official exchange rate of 2.2120 BYN against 1 USD. Thus, February 21, the Belarusian ruble hit the multi-year low against the American currency.

Until last Friday, the Belarusian ruble had the worst position in February 2016. Then the official rate fell to 2.2069 BYN per 1 USD. So why did the Belarusian ruble weaken so much in February and what will happen to it then? Banki24.by tried to find answers to these questions.

Firstly, the dollar index is about to hit the all-time high. The dollar index is the ratio of the dollar to a basket of 6 currencies - the euro (EUR), Japanese yen (JPY), pound sterling (GBP), Canadian dollar (CAD), Swedish krone (SEK) and Swiss franc (CHF). The higher the dollar index, the stronger the dollar is against other currencies. Thus, for this reason, the Belarusian ruble is in a weak position against the American currency.

Secondly, the state of the Belarusian economy and absence of structural reforms contribute to the vulnerability of the Belarusian ruble. Unless structural reforms are carried out, our goods, with a few exceptions, will remain poorly competitive on foreign markets if the Belarusian ruble is not weakened to a basket of currencies at least by the size of annual inflation.

The explanation of the need for creeping devaluation is as follows. For exports not to lose price competitiveness, it is necessary to achieve a weakening of the national currency in parallel with rising prices in the economy. Otherwise, export goods from Belarus will be more expensive in their national currencies for external consumers. This is especially important in the Russian market, where Belarusian goods are forced out by competitors from Russia, while our exporters receive less foreign currency earnings in the ruble equivalent if our ruble is stronger compared to the Russian one.

Things are not too well in the domestic market, either. Belstat records a permanent decrease in the share of domestic goods in retail turnover. The ill-considered policy of the previous management of the National Bank, which pegged the Belarusian ruble to the dollar without looking at the Russian currency, led to a collapse in the exchange rate in winter 2014-2015. The authorities decided to ignore the laws of the economy to create a brief illusion of stability and predictably failed. The consequences of that failure are still affecting Belarusians.

Top officials have no will for economic reforms. This means that the structure of the Belarusian economy will remain the same, while the neighbours' will slowly rise. Consequently, Belarusian goods will increasingly lose out in competition even in the market of the Eurasian Economic Union.

Defeat in such a struggle poses a threat because Belarus can no longer disassociate itself from the rest of the EEU members with prohibitive duties. If Belarus joins the WTO, it will lose the opportunity to protect the domestic market by non-market methods from the absolute majority of the world's countries.

Unless reforms in the economy are carried out, imports of goods will continue to chronically exceed exports. In this situation, a strong ruble 'kills' exports and contributes to import growth. Since net exports are a component of GDP, they also harm economic growth. The latest example of the impact of revaluation without accompanying reforms is in Ukraine. The strengthening of hryvnia at the end of 2019 caused the GDP growth rate of this country to drop to 1.5% in the 4th quarter against 4.1-4.6% in 2-3 quarters. The seasonally smoothed GDP of Ukraine grew only by 0.1% in October-December.

Finally, the deficit of foreign currency proceeds from the sale of oil products and potash fertilizers negatively affects the Belarusian ruble exchange rate. The issue of oil supplies to Mozyr and Naftan refineries, which in January-February receive three times less raw materials than in 2019, has not been settled. Exports of oil products from Belarus have been blocked, while refineries provide the domestic market.

Since July 2019, there has been no long-term contract for the supply of potash fertilizers to China. Previously, China was among the top 3 markets for Belarusian potash consumers. In 2020, even the official assessment of potash exports is 0.5 million tons lower than the fact for 2019.

All these considerations form a vector, along which the Belarusian ruble will move downwards. The speed and scale of this process is highly dependent on the availability of agreements on oil imports. If Russia and Belarus do not agree in the next few weeks, it is likely to take 2.3-2.35 BYN for 1 USD in March. The National Bank promised long ago that it will not waste reserves for anything. Short-term effect of currency interventions will only drain the currency pot of the authorities, but will not change the general trend.