Struggling Belarus devalues currency

Valery Kalinovsky


Belarus effectively devalued its ruble by 10 per cent in a bid to ease pressure on its shrinking foreign exchange reserves and strained public finances.

Moody's Investors Service meanwhile downgraded Belarus' credit rating Tuesday by one notch to B2 on Tuesday, warning that the country's foreign exchange reserves amounted to less than a sixth of its estimates of the country's 2011 external financing needs.

The politically sensitive move by Belarus came two weeks after the government froze the official exchange rate and closed open market trading because of a mad scramble for foreign currency by the country's cash-strapped businesses.

A central bank statement said "foreign currency purchase-sale agreements between banks and economic entities may be performed at a level diverging from the official rate by no more than 10 per cent."

Officials said the measure -- covering over the counter operations that account for up to 70 per cent of all currency trading -- was aimed first and foremost at shoring up the cash-strapped government's hard currency reserves.

Economists have long sounded alarm bells over a loose government lending policy that was compounded by increasing international economic isolation after President Alexander Lukashenko's controversial reelection last year.

Many observers received the news as the inevitable first step in a much broader devaluation that could hurt pocket books of regular consumers and have political ramifications for Lukashenko himself.

"This is an effective devaluation because businesses will no longer be trading at the official exchange rate," said independent economist Leonid Zlotnikov.

"We will once again have different exchange rates for different classes of clients and a still different rate on the street. We are returning back to the 1990s."

The former Soviet republic is running one of the widest current account deficits in the world at 16 per cent of gross domestic product.

Moody's expressed concern about external financing gaps and problems with a growth model based on foreign debt.

"Moody's immediate concern is the external financing requirements of Belarus' large current account deficit," the ratings agency said in a statement.

"Current levels of official foreign exchange reserves of approximately $1.3 billion fall short of Moody's estimate of a 2011 external financing requirement of between $8 and $10 billion," it added.

Moody's, one of the top three global ratings agencies, also expressed concern about "medium term difficulties of reorienting the current external debt funded, domestic demand-led growth model."

Standard & Poor's this month downgraded Belarus' debt deep into junk status amid European bank predictions of a 20-per cent devaluation in the weeks to come.

But the government appears ready to implement a series of other draconian measures that economists said could put only a temporary lid on exchange rates while further damaging the economy in the long term.

One banker told the Interfax news agency that the central bank has urged all commercial lenders to severely scale back their local currency credits because they were being used to buy foreign cash.

"Regulators believe that the short-term ruble credits are primarily being converted into foreign currencies on the back of devaluation expectations," one unnamed banker told the news agency.

The news agency said two top banks -- BPS-Bank and Belagroprombank -- have already restricted private lending and are no longer issuing mortgage and auto loans.

The effective devaluation follows a series of desperate government efforts to stave off a move that could prove politically costly to Lukashenko -- a strongman leader who prides himself on ensuring stability.

An earlier government policy issued in 2009 allowed commercial banks to trade hard currency at a two per cent discount to an official rate that now stands at 3,038 Belarus rubles to the dollar.

The government on March 15 halted open market currency trading and the following day ordered all businesses seeking to buy hard currency to place an order in Belarus rubles 30 days ahead of the sale.

The state later thought about introducing a priority list that allowed businesses involved in medicine and energy trading easier access to cash.

"This is happening because no one wants to sell (hard currency) at the official rate," said economist Sergei Chaly.

Analysts said businesses were already privately using rates of 3,800-3,900 Belarus rubles to the dollar.

Open market currency trading was due to resume in Minsk on Friday.


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