The 15th anniversary of the Belarusian national currency is a good occasion to summarize the National Bank's performance. The rubel is a litmus test for monetary policy and for the country's financial system in general.
No doubt, a lot of people who work in the National Bank are professionals. But it has failed to achieve real institutional independence in the past 15 years. Politics is the first and foremost components in Belarusian finances. The professionalism of National Bank expert is often reduced to efforts to neutralize voluntarism of top government agencies and try to achieve more or less decent monetary indicators. But the price of such compromises is immense. Policy-makers and government functionaries still use the National Bank purely as an instrument for fulfilling their plans.
It is good, of course, that the National Bank managed to convince Belarusian policy-makers after so many years that high inflation is evil, especially for the poor. However, the process of this enlightenment seems to be too long. The National Bank has not prevented a single scheme of large-scale re-distribution of resources in favor of the nomenklatura and government businesses. The Belarusians have endured the test of hyperinflation, multiple exchange rates and high interest rates in the financial market closely controlled by oligopolies. The country has not managed to avoid the monopolization of insurance market and destruction of first sprouts in stock market. There are no mistakes or forms of state robbery from which people of Belarus were defended by the country's monetary authorities. Each year the price of training the government in real-time mode is growing.
High politicization of monetary system is the major problem of Belarus' monetary policy. Bureaucrats arrogantly believe that they know the future and that they can predict what and on which conditions will be produced in five or ten years. They order to launch a new phase of the old business cycle, and the National Bank modestly agreed to follow the order. As a result, the money goes to wrong places and on wrong conditions.
Discrimination against private sector and business plans that are not considered by government among its priorities is another serious drawback of the National Bank. While regulating the price of money and intensity of competition, the National Bank obstructs natural renovation and modernization of the economy. On the one hand, it squeezes all it can from hard currency proceeds from the export of petroleum products, metals, fertilizers and petrochemicals. The money is then re-distributed in favor of government priorities. At the same time, the National Bank does not think that it should defend financial or insurance companies. When discount rate is 11 percent, it is simply ridiculous to speak about monetary stabilization and developed financial system.
On the other hand, the National Bank's policies result in a situation where small and medium businesses, as well as non-strategic companies, have to work in the environment of expensive money, almost unaffordable loans and lack of other affordable financial instruments. Households are deprived of profitable savings instruments, mortgages and low-interest loans.
Companies face the issue of excessive earnings, as they have very limited opportunities for investment. Households also have a certain amount of savings but they do not know what to do with them. The National Bank leaves only two options for them: saving deposits, either in rubels or in hard currency. A few interest rate manipulations help the monetary authorities to draw people's money into rubel deposits.
The National Bank has built such a financial system that it is almost unrealistic to take money to those outside markets that promise 10 to 25 percent of annual income. It is a typical situation of a dog in the manger: there are no conditions to develop stock market in the country but it is not allowed to earn money abroad. Each year the features of a financial pyramid are getting clearer, and the National Bank is taking part in building its foundation.
The National Bank believes that reducing inflation to eight percent per year is an achievement. It is a political or ideological statement but not economic. Stability of money is inflation less than three percent per year within at least three years, as well as full liberalization of current and capital accounts, market-based exchange rates, competitive financial market and free prices. The Belarusian rubel still has to travel a long way to reach that situation.
The central bank also has a very special policy with respect to exchange rate regulations. The US dollar got weaker against the Belarusian rubel in the past fives, which are a period of relative USD/Br stability. The bank reacted in a mechanical way to larger hard currency proceeds, by increasing money supply and its reserves. The stabilization of the Belarusian rubel exchange rate became a form of supporting exporters of mineral resources and recipients of public budget money, and discriminating against all other sectors.
In terms of the amount of windfall revenue earned by Belarus from the export of mineral products, it is very close to countries rich in oil. Oil processing has higher value than oil extraction in the current situation. With so much revenue in their hands, the National Bank and the government should have taken out excessive resources and send them into a stabilization fund to prevent the increase in the price of the rubel for non-mineral exporters and not to corrupt public budget.
Revenue from selling 13.5 million tons of mineral products in 2005 amounted $5.655 billion ($360 per ton). For comparison: the respective figure in 2002 was $1.675 billion (7.96 million tons, $183 per ton). The National Bank and the government should have saved in a stabilization fund about $3.3 billion between 2003 and 2005. It is nearly three time more than the National Bank has in its gold and foreign exchange reserves. Accordingly, growth of money supply and public budget spending should have been adjusted. Stabilization fund resources could be used in the future for pension reform or for increasing reserves up to three-month export amount (recommended minimum).
However, the National Bank has made another mistake, and its price is much higher than $3 billion. The size of lost profits which could have been made by non-mineral exporters and their lost markets and lost investments - Belarus will have to pay for all that when business cycle inevitably turns to the opposite direction. And the National Bank will have to be held responsible for blocking structural reforms and making investment mistakes. But National Bank experts and top government officials prefer to keep silence about that now while celebrating the 15th anniversary of the Belarusian rubel.