Economist Named The Main Reasons For Massive Inflation In Belarus

The Soviet mechanical vision of the economy remains in the imperious offices.

Accelerated inflation has become one of the most notable economic outcomes of 2021. Lev Lvovsky, a senior researcher at BEROC, writes about the issue in the Expert View bulletin, issued by BEROC (Kyiv) as a part of the project Monitoring the Belarusian Economy: Trends, Sentiments, Expectations, thinktanks.by writes.

As Lev Lvovsky notes, in the year of the recovery of global economic activity, it reached 6.8% in the U.S., 5% in the Euro-zone, and 8.39% in Russia. High world prices could not but come to Belarus. On the one hand, their impact was positive - the prices of some export goods increased greatly, which caused an export miracle. On the other hand, Belarus has accepted some of this global inflation as a small open economy.

The first is distrust, which inevitably leads to accelerated price growth. The consumer price index is closely related to expected inflation. In this case, the mechanism of a self-fulfilling prophecy works, when the expected inflation is transformed into a real one.

Let's say an entrepreneur enters into a contract for a year in advance for the supply of certain products, the economist writes. If he thinks that inflation will be, for example, 20%, then he defines in the contract that the counterparty must pay more for this percentage in a year. The counterparty, for example, also expects the same price increase, which means that he will not consider this condition crazy and will agree to such a contract.

This is one example, but if many in society share the idea that the price increase will be a conditional 20%, then in the end it will turn out to be something like this. Thus, during political crises, trust in state institutions, including the National Bank, decreases. In addition, the expected inflation in such conditions is growing. This is exactly what is happening in Belarus. Official inflation for the year was 9.97% in annual terms. According to the National Bank, the level of expected inflation was 14.2% in December. For comparison, in August 2020 it was 11.7%, and in May of the same year - 10.6%. As you can see, inflation expectations are rising. They push its actual growth.

The second feature, notes Lev Lvovsky, is the excessive love of the state for regulation. The Soviet mechanical vision of the economy remains in the imperious offices: if the price in the store is high, then it is necessary to arrive and to decrease it. However, history shows that real price controls can lead to shortages of goods. Such an outcome would be too strange in the 21st century. You have to go for tricks in order to prevent this, which still leads to higher prices, no matter how hard you try. The Ministry of Antimonopoly Regulation and Trade (MART) regulated the prices of a large number of consumer goods last year, but from time to time allowed them to increase up to a certain limit. This was done when “occurred an objective situation to an increase in the world prices”. Naturally, the retailer, fearing future losses, in this case, raises prices by the maximum allowed rate. Because of such measures, Belarus is among the countries that try to keep prices down but still receive their growth.

Another factor, in the opinion of Lev Lvovsky, is related to yield. 2021 was also not the most successful year for agriculture in Belarus. Yields of major crops were lower than the previous two years. Producer prices for agricultural products increased by 18.7% over the year as a result.

European sanctions last year did not affect the incomes of Belarusians, the economist states.

At the same time, in his opinion, an important factor is that the National Bank of Belarus is still trying to refrain from launching a printing press, although in recent years there have been a couple of episodes of directed lending. There are serious chances that the National Bank will be under pressure in the future, and a part of the new investment cycle will be fulfilled through unsecured emission since it will not be possible to lend on market terms as a result.