Expert: Realistically, wages can’t be raised by more than five percent

Belarusian leader Alexander Lukashenka warned the nation this week that people would see the foodstuff prices increased by 20-30 percent towards the end of the year. To sweeten the pill, he ordered the government to do everything possible in order to raise an average wage up to $1000 per month. Economist Leanid Zlotnikau tells the European Radio for Belarus why it is unrealistic and when Belarus stops borrow money from foreign lenders.

ERB: Politicians like to give beautiful promises. From your point of view, how is it realistic to fulfill this order and raise wages up to $1000 per month?

Zlotnikau: Wages can’t be raised more in the next 2-3 years than the country can afford. But the country’s gross domestic product grows 8-9 percent annually. Wages can be raised faster, if we reduce state expenditures for social security or social transfers. But today it doesn’t seen to be doable. Raising wages by more then 10 percent annually is not realistic. In the past ten years, Belarus has maintained higher wage growth rate than GDP growth. In the period from 1996 through 2006, GDP has grown 1.95 times, while wages have gone up 3.8 times. According to the official statistics, it means wages have grown by more than 50 percent against GDP. It is impossible to continue maintaining this leading. Moreover, even today’s income of the population is maintained at the cost of Russian subsidies which depending on the cost of oil fluctuate within the rage of $5-6 billion annually. It is also supported by foreign loans, their number growing.

ERB: It is not unusual for many countries in the world to live at the cost of loans. Why can’t we do the same?

Zlotnikau: If Russia continues to issue loans to Belarus – they gave us $1.5 billion in 2007 and plan to give $2 billion this year, these loans will have to be paid off only in 5-6 years. Of course, we can eat them up today and put the wage growth on the shoulders of the future generation. But even this external factor is being gradually exhausted. Belarus’s debt in early 2005 amounted to $5 billion. Later in the same year, Belarus borrowed another $700 million. In 2006, $1.8 billion was borrowed. In 2007, we received over $4 billion in loans. In the first quarter of 2008, Belarus’s foreign debt grew by $2.4 billion.

It means that the debt is increasing quickly up to a total of around $15 billion. Around $1billion is needed to pay off the interest, leave alone the loans. We are digging deeper into debt, so it becomes very costly to maintain wages and to support inefficient and loss-making enterprises. Besides, it is note worthy that the debt is accumulated by enterprises and banks, not the government, although under the government’s guarantees.  But 70 percent of loans are short-term. They must be paid off within one year. We are finding ourselves in a trap of financial pyramids to maintain wages and pay off the debts. I think it will become increasingly difficult to keep borrowing, because there are certain limits when foreign debts should not exceed 60 percent of the budget or export volume. If we increase debts by $5 billion up to $20 billion, we will have crossed the line when the country becomes insolvent. This is line when creditors will stop lending money.

ERB: Has US dollar inflation helped the government to accomplish the president’s program of raising an average wage?

Zlotnikau: Wages in dollars have grown not because it was growing in real terms but because the dollar was falling. The dollar exchange rate against Belarus rubel has not changed from Br2140 through the whole year of 2007. Therefore, if wages have grown by 10-15 percent, it has happened at the cost of inflation. Wages in dollars can grow further, if the dollar continues to fall. But real wages will not increase.

ERB: It appears doubtful that all those official statistics are true…

Zlotnikau: This problem does exist in Belarus. How reliable are the data about the wage growth issued by the Ministry of Statistics? There are methods that can suggest that these indicators do not match reality. How can it be that a pie from which a piece for wages has grown only at half in the course of 10 years, the wages have grown 4 times, but the size of the wages’ pie piece has remained the same? Practically, it is impossible, yet it is possible, according to the Ministry of Statistics.

ERB: It seems especially ridiculous at the background of the looming growth of food prices…

Zlotnikau: The situation is that the costs of some foodstuffs are indeed understated. Every household pays part of the food costs indirectly. There is a national fund to support agricultural production which accumulates around $1.5-2 billion. There are other forms of subsidies, when people pay their phone bills and mobile operators include duties to this fund in their call fees. Numerous enterprises directly subsidize certain agricultural companies. According to my calculations, three years ago, a family of three people additionally spent $600 to cover food costs indirectly. Today, they spend $700-750.

ERB: If not $1000, can we still expect an increase in wages?

Zlotnikau: It is not realistic to raise wages by more than 10 percent. Experts from IMF and World Bank advise us to reduce the wage growth rate, because economy becomes uncompetitive. The negative trade balance grows, thus showing that the country is growing against what it can afford. In order to reduce the negative balance and to curb inflation and to receive investments, one will have to cut the wage growth rate or even the wages. As an economist who must think where these wages can come from, I can say that they will not grow by more than 5 percent. Perhaps, the Ministry of Statistics will raise the figure by 10 percent.

ERB: Administrative measures could be powerful…

Zlotnikau: In a command economy or in an authoritarian system, these targets must be met at any cost. I know that at one enterprise, managers cut bonuses for night shifts and included them into a salary. Earlier, bonuses were not included into an average salary. The worker is not getting more, but the average wages at the enterprises have grown.

Photo: Radio Liberty