Leanid Zlotnikau: The Printing Press Is on. It’s the Road to Hyperinflation and Chaos in the Economy

The authorities have set their sights on Venezuela.

In recent months, the Belarusian economy has been going through challenging times. Belarus' gold and foreign exchange reserves decreased by $354 million in the first two months of 2021. One of the reasons is the "bailout of the BMZ" and other loss-making state-owned enterprises. The state foreign debt has reached a historical maximum. Economist Leanid Zlotnikau commented on the economic situation in Belarus, especially for Charter97.org.

- How dangerous the situation with gold reserves is for the Belarusian economy?

- I would say that the situation is not so dangerous, because the decrease in 2020 was about 5%. The reserve of gold reserves is over 7 billion now. It would be quite dangerous if the reserves amount to 3.5-4 billion.

One can say there is some reserve above the last line. Another thing is that it may not last long.

- The Ministry of Finance clarified the budget for 2021. The deficit was initially estimated at 4 billion rubles, but now the figure of 5.6 billion rubles is being announced. Many experts say the deficit will only grow. How critical do you think the situation with the growing budget deficit is?

- The budget depends on how critical the situation in the economy is. It makes no sense to consider a single budget.

The situation is tense. In 2019-2020, Russian subsidies to the Belarusian economy have almost completely stopped (in 2015, for example, they amounted to about $5 billion. Then they gradually decreased ). Besides, due to various circumstances, external borrowing conditions became more complex.

- Public foreign debt is now more than $18 billion, and gross debt is more than $42 billion (it is a historic maximum). It exceeds many times the total amount of international financial assets of Belarus, even taking gold into account. Can we say that the probability of default has become more real than in previous years? Should the Belarusians be afraid of a situation similar to the crisis of 2011?

- Of course, the debt is not yet as high as in other countries, including, for example, the USA. But it is high enough. Everyone is discussing the external debts of the state alone. While there are also debts of banks and enterprises. But the problem is not only and not so much in the size of the debt but rather in the country's ability to repay it. It is a serious problem.

The situation is increasingly tense on the Eurobond market; the interest rate is high and unsustainable for us. I doubt the government will borrow on the Eurobond market at less than 10% per annum. The Belarusian economy will not be able to repay such debts. Yes, we should be afraid of default, not only because of the debts but also because the National Bank's control over the money supply and inflation has been reduced. It happened not by the will of the National Bank but by the government.

We should remember that in 2019-2020, Russian subsidies to the Belarusian economy almost ceased (in 2015, they amounted to about $5 billion). Also, due to various circumstances, external borrowing conditions became more complicated.

Fears of default have a reason.

- Many experts say that the government will turn on the printing press. Do you think this scenario is likely?

- It was turned on 30 years ago. We are witnessing a price hike that is the result of this press. I point out that the printing press has been operating since the early years of the country's independence. Prices rose by more than a billion times during this period.

- How does the printing press affect the economy?

- There must be a balance between the amount of money in circulation and the number of goods and services that the economy produces plus imports. Imagine a situation when the authorities simultaneously double wages and benefits while the amount of goods on sale remains unchanged. In that case, prices would double, i.e., money would devalue. If prices do not increase, the store shelves will be empty.

The first Belarusian money has depreciated by more than a billion times so far. We are far ahead of almost all countries in the world by this indicator, except perhaps Zimbabwe. It has bills of billions of Zimbabwean dollars. The last Belarusian money put into circulation since 2015 has already depreciated by 75%. By the summer of 2021, it will depreciate twofold due to inflation.

If the economy receives, for example, 10% more money than it needs to service the turnover of goods and services in the economy, then inflation will be close to 10%.

The famous economist Keynes argued that a bad government turns to the printing press. In Belarus, the printing press was used for good intentions - to support the growth of wages. According to Belstat, the average wage rose from Br1.217 million in 2010 ($460) to Br1.290 ($531) in 2020.

According to the National Statistics Committee, the growth of real wages over 2011-2019 was 176.6% (an increase of 76.6%, while in dollar terms, it increased by 15%). Wages rose 1.76 times in rubles (1.15 times in dollars). Pensions rose 1.5 times.

But the amazing thing is that during this period GDP grew by only 10.6%, industrial production by 18%, agriculture by 17.8%, and labour productivity per GDP by 13.9% (the latter is a unique case). The aforementioned GDP growth did not occur at the expense of its resources.

If the economy produces only 15-20% more goods and services for consumption, while the country's consumption increases by 50-70%, inflation is not the only source of growth. In addition to the inflationary wave, which follows after the unreasonable increase in incomes of the population and depreciates them, there are other factors of unearned income growth in Belarus.

First, these are Russia's subsidies. After 2015, (this year they amounted to about $5 billion, and for 2015-2020 - $10-15 billion) gradually decreased in 2020.

Secondly, the decline of capital investments (during this period, they have decreased by 14.5%), and the reduction of housing construction (by 37%). Thirdly, an increase in gross foreign debt by USD 13.7 billion over 2011-2020.

We have indicated only the main factors that have kept the Belarusian economy afloat over the last decade.

In general, the situation is such that the printing press can help. But throwing money into circulation to support wages works for 3-5 months, while the inflation caused by it devalues the money and then a new throw-in of even more money is needed. It is the path to hyperinflation and chaos in the economy. This path will bring us to the condition of Venezuela today, which is building socialism of the 21st century.

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