Belarus devalues but not by enough

by Jan Cienski

Belarus’s government allowed a de facto 10 per cent devaluation of the rouble this week by letting banks trade the troubled currency in a 10 per cent band around the official exchange rate – but analysts feel it won’t be enough to rescue the economy.

“We think that the 10 per cent move is not sufficient and expect the official exchange rate to be devalued by at least 20 per cent,” says a research note issued on Thursday by Danske Banke.

The central bank imposed currency controls this month in an attempt to deal with a worsening balance of payments, shrinking currency reserves and an increasingly perilous fiscal imbalance.

The ex-Soviet republic’s troubles stem from its fragile economic model – the economy has grown quickly in recent years thanks in large part to cheap Russian oil and gas, which were used to support inefficient state industries producing for the ex-USSR and for developing countries like Iran and Venezuela.

However, a series of shocks has derailed that system. First, Russia demanded a steep increase in energy prices, killing off a lucrative trade in refining cheap Russian crude and selling it to western Europe.

The global crisis cut demand for Belarusian heavy machinery, trucks and tractors. Belarus’s trade deficit is growing rapidly, reaching $902m in January compared with $2.7m for the same month last year.

Added to that, Alexander Lukashenko, the country’s authoritarian leader for the last 16 years, cranked up spending to build support before last December’s presidential elections. In the event, the contest was marred by fraud and Lukashenko’s subsequent crackdown on opposition protesters (pictured) has led to EU and US sanctions against key regime figures – making it much more difficult to appeal for aid and investment from the west.

As a result, Belarus has seen its foreign currency reserves dwindle to only $4bn in March, a $1bn fall in the first two months of this year.

As the IMF notes:

Loose macroeconomic policies succeeded in increasing the growth rate of GDP to about 7.5 per cent [in 2010], but at the cost of an estimated further increase in the current account deficit to about 16 per cent of GDP and strong pressures on the international reserves.

Standard & Poor’s and Moody’s, the ratings agencies, have both downgraded Belarus, making it much more difficult for the country to borrow cheaply abroad.

Belarus got help from the IMF during the crisis. Now it is hoping for a $1.7bn loan from a grouping of ex-Soviet states – plus finance for a nuclear power station – to see it through. But even if the aid materialises it will likely be of only passing help.

With GDP set to grow by 6.2 per cent this year, and public debt sky-rocketing from 11 per cent of GDP in 2008 to 22 per cent last year, the government is running out of options.


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