Belarus as one of developing and transition countries greatly suffered from high inflation rate since its independence after the collapse of the Soviet Union in 1991. Moreover, the average inflation rate measured by the Consumer Prices Index has been extremely high in Belarus compared to other former Soviet Union countries. For example, according to the World Bank (WB), Belarus’ average inflation rate reached 214.92% from 1993 until 2016, which is the highest rate among the member states of the Eurasian Economic Union. In particular, during the reporting period, the average inflation rates in Armenia, Kazakhstan, Russia, and Kyrgyzstan amounted to 159.79%, 102.61%, 73.03%, and 11.31%, respectively.
After the introduction of its own currency, the Belarusian ruble (hereafter ruble), in May 1992, due to the insufficiency of the new country’s fiscal and monetary policies, Belarus was not able to keep its currency stable experiencing a high rate of inflation until today. For instance, Figure 1 shows that during the 1990s inflation rate in the country averaged 596.55%, reaching an all-time high of 2221.71% in 1994. According to statistical data, the inflation rate in the country was less than 73% from 1996 until 1998, while the figures began to rise again in 1999, reaching 293.68%. The rise of inflation rate was caused by the 1998 financial crisis in Russia, which has been and remains Belarus’ main trade partner.
Figure 1: Inflation in Belarus, 1993-2016 (%)
Source: World Bank
It also can be seen that the inflation rate in the country experienced a downward trend from 2001 until 2006, declining from 61.13% to all-time lowest annual level of 7.03%. This was mainly because of positive external factors. During this time, economies all over the world, including Russia’s economy, were growing very fast because of constantly growing oil prices.
However, the global financial crisis of 2008-2009 changed the situation. The flow of investments to developing countries disrupted and largely resource-based economy of Russia started to experience significant problems affecting the stability of the Belarusian economy. Being in single digits in 2006-2007, the inflation level in the country grew at double-digit rates, reaching 14.84% and 12.95% in 2008 and 2009, respectively. In 2010, the inflation rate in the country fell to 7.74%. However, due to the currency crisis in the country resulting in the second currency devaluation the inflation rate soared to 53.23% in 2011.
The main ground for high inflation in 2011 was the soft monetary policy of the National Bank of Belarus (NBB) along with external fluctuations that affected external debt, trade balance and budget deficits of the country (Romanchuk, 2011; Luzgina, 2012). For instance, the NBB reduced its refinancing rate from 13% in the beginning of 2010 to 10.5% at the end of the year. This, along with other problems noted above, decreased credibility of the national currency. However, despite the fact that the loss of credibility and trade balance deficit put the national currency under pressure in the beginning of 2011, the NBB did not allow the currency to depreciate and kept a fixed band for the ruble value of the currency basket consisting of the U.S. dollar, euro and Russian ruble. However, in May 2011, the NBB devalued its currency from about 3100 rubles per $1 to 4900 rubles per $1.
In order to decrease the soaring inflation, the NBB increased its refinancing rate from 10.5% to 12% in March 2011. Unfortunately, the rise was not sufficient to maintain inflation stability and the monetary authority had to raise the rate 11 times during 2011, which reached 45% at the end of the year. Moreover, despite the bank kept the rate above 30% in 2012, it also did not help to reduce inflation, which totaled 59.21%. However, the high rates eventually helped to decrease the level of inflation in subsequent years. The inflation rate decreased to 18.31% and 18.12% in 2013 and 2014, respectively. Meanwhile, the national currency continued its depreciation. The deteriorating economic situation in Russia caused by the international sanctions and low oil prices also had a negative effect on the economy of Belarus and its currency. The WB shows that the average exchange rate in Belarus in 2012, 2013 and 2014 amounted to 8,336.9, 8,880.1 and 10,224.1 rubles per $1, respectively.
Since 2015, the country has made some significant changes in its monetary policy. First, in January 2015, the floating exchange rate regime was adopted in Belarus. Later in 2016, the country decided to redenominate its currency. On July 1, 2016, Belarus sliced four zeros off the ruble in accordance with the decree on redenomination of the national currency signed by President of Belarus Alexander Lukashenko on November 4, 2015. As a result, new banknotes and coins designed in 2009 were introduced. It is worth mentioning that it was the third denomination in Belarus. The first 1:10 denomination took place in August 1994, while the second 1:1000 denomination was held in January 2000.
It is expected that changes in the monetary policy and high refinancing rates could finally result in the single-digit inflation rate in the country in 2017. In June 2017, First Deputy Minister of Economy Dmitriy Krutoy announced that the annual inflation rate in the country in 2017 would not exceed 7%, while in the beginning of the year the Ministry expected inflation to be at the level of 9%. First Deputy Minister also noted that in first eight months of 2017 inflation in the country declined to its all-time lowest level of 2.7%, reaching 4.8% year-on-year. Since the country has been having low inflation rates in 2017, the NBB decided to gradually reduce its refinancing rate. In 2017, the regulator seven times decreased its rate from 17% in January 2017 to 11% in October 2017. Moreover, the refinancing rate reduction was based on the need to minimize negative effects on economic growth. For instance, according to the International Monetary Fund forecasts published in April 2017, it is expected that the economy of Belarus would decline by 0.8% in 2017 (IMF, 2017).
Overall, it might seem like the country had finally been able to keep inflation low. However, it remains to be seen if Belarus will be able to keep low inflation rates, while gradually decreasing its refinancing rate. The decision of the NBB to continue to maintain flexible exchange rate might increase its credibility, meaning that the currency will be much stronger and inflation rate will be lower. However, a return to expansionary policies will again lead to high inflation and financial instability.
Daniyar Nurbayev is a research fellow at the Eurasian Research Institute. Daniyar completed his bachelor’s degree in Finance in the Kazakh-British Technical University in 2013. In addition, he holds Masters degree in Finance from the Kazakh-British Technical University (2015).