The Emperor’s New Money
On July 1, 2016 Belarus gets new currency to carry out a redenomination, and introduces its first coins. The Belarusian economy is in recession, but Minsk hopes that this rebranding might at least improve its image.
Currency redenomination is a serious political event, said Belarusian President Alexander Lukashenko. And it definitely is. Belarusian money – “bunny money” in popular parlance due to wildlife images the first bills showed in 1992 – has a history of redenomination: a tenfold one already in 1994, and thousandfold in 2000. This time, one new ruble (BYN) will be equal to 10,000 old rubles (BYR), $0.5 at the National Bank’s current exchange rate. Until the end of the year, both currencies will be used at the same time, and afterwards the old money can be exchanged at the bank.
The new bills were printed already in 2009 but at that time economic situation didn’t allow for their introduction. They are quite colorful, depicting famous cultural and historical monuments from around the country. The coins bear ornaments that were traditionally used in weaving as symbols for vitality and human pursuit of happiness and freedom; ironically the smallest coins have “prosperity” as a symbol.
Taking into account that new currency is usually meant to restore public confidence in the national economy, its colors match the money of the neighboring countries that are viewed as efficient and friendly partners. The new money is already being called “eurorubles.” Even Lukashenko confirmed that new bills are “pretty, and look like euros.” Again, ironically, when euro is at a low ebb.
The euroruble alone, will do as much as the Emperor’s new clothes to solve the problems of Belarusian economy, which is struggling with its first recession since mid-90s.
The Belarusian economy is state-controlled and state dominant with up to 80% of enterprises and companies either belonging to the state or depending on state contracts. 26 percent of enterprises in the public sector are loss-making, despite being partly refinanced through increased domestic debt. A special agency will be created to take care of the loans from the agricultural industry, which are the most troubled borrowers of Belarusian banks. As troubled assets have exceeded 12%, a liquidity crisis is looming.
5.4% of Belarusians survive on less than $85 per month, 23% live on circa $125 (a further 30% has up to $175/month, the rest earns more). However, as incomes fall, wage cuts occur in such traditionally high-paying areas as construction and industry, and it is currently the middle class that is becoming poorer.
Part of the problem is the neighborhood. Belarusian export to its main sales markets saw decreases in 2016; both to Russia (-6.4%) and the EU (-32%). The Russian market is in a serious recession too and can’t consume the same amount of goods made in Belarus; but at the same time Russia is trying to substitute export products with local competitive equivalents that adds to the trade glitch. Belarusian export to Europe is comprised of products from Russian oil; and these have fallen together with the oil price.
Meanwhile, the gross foreign debt of Belarus increased to 73.6 percent of GDP. To cover $3.3 billion foreign debt due in 2016, Minsk is currently negotiating with the IMF a $3 billion loan and hoping to receive 1.1 billion from the Russia-controlled Eurasian Fund for Stabilization and Development.
The new currency comes to Belarus amid economic crisis that officially doesn’t exist. The government refers to present hardships as “a period of instability,” and having invested more than $40 billion to modernize its industry and agriculture, it remains resolute to overcome problems quickly enough.
No wonder that the recently presented socioeconomic development program for 2016-2020 foresees no profound structural reforms. Under pressure from the IMF, Minsk had to reduce budget expenses and raise the utility services tariffs, which are already very unpopular social measures and a kind of a red line for authoritarian governments. But the IMF wants to see more and is urging Belarusian authorities to cut support for the real sector of the economy and forget concessional loans to state-owned enterprises.
As previous IMF loan was negotiated against the background of rapprochement between Belarus and the West in 2008-2010, chances are high that Minsk will receive financial help again after Brussels lifted almost all its sanctions against Belarus last year. However, this doesn’t increase the chances of the much-needed reform in the country.
In cultural circles there is an alternative theory about how not the euroruble but the newly introduced coins will mend Belarusian economy. As dealing with the coins will develop the fine motor skills of Belarusians, their brain activity will be boosted and make them realize the urgency of structural reforms and modernization in an authoritarian state where rights and freedoms are limited.
But one way or the other, rebranding of Belarusian economy will not mend it.
The views expressed in GMF publications and commentary are the views of the author alone.