This Selected Issues paper describes labor market trends in Belarus and the role of labor market institutions in the outcome. The paper examines the current status of the tax system in Belarus and assesses recent efforts to reform it. It argues that the current tax system in Belarus is distortionary, and that it weakens the competitiveness of the economy. The paper also provides preliminary estimates of the pass-through from the nominal exchange rate (for the U.S. dollar and the ruble) to inflation in Belarus.

Abstract

This Selected Issues paper describes labor market trends in Belarus and the role of labor market institutions in the outcome. The paper examines the current status of the tax system in Belarus and assesses recent efforts to reform it. It argues that the current tax system in Belarus is distortionary, and that it weakens the competitiveness of the economy. The paper also provides preliminary estimates of the pass-through from the nominal exchange rate (for the U.S. dollar and the ruble) to inflation in Belarus.

III. Estimates Of Exchange Rate Pass–Through18

1. Although Belarus formally has a crawling band exchange rate regime defined against the Russian ruble, in practice the authorities have usually targeted the U.S. dollar rate, arguing that dollarization is high and the pass-through effect to prices is significant. This chapter provides preliminary estimates of the pass-through from the nominal exchange rate (for the dollar and the ruble) to inflation in Belarus. The main results are:

  • The nominal exchange rate pass-through to headline inflation is estimated at around 0.4 percent from the dollar and 0.3 percent for the ruble for a one percent change in the exchange rate, and is much higher for producer price inflation, and

  • Half of the exchange rate change is transmitted to prices within the first two quarters, and the impact effect of depreciation (felt within one quarter) is relatively high (about 0.2 percentage points).

A. Background

2. The pass-through effect normally operates through three basic channels: (i) the direct effect through prices of imported goods in the CPI; (ii) the indirect effect through prices of imported intermediate goods; and (iii) the effect through expectations, including also the expected response of monetary policy.

3. Several characteristics of the Belarusian economy suggest that the pass-through effect will be significant:(i) the high degree of openness of the economy; (ii) the high degree of dollarization; and (iii) the relatively low credibility of monetary policy, given that Belarus has had the highest inflation in the region for about five years. Indeed, the pass-through effect tends to be higher during high inflation periods. At the same time, the passthrough effect could be mitigated by several factors: (i) the influence of price controls; (ii) the fact that the high openness ratio predominantly reflects transit activities; and (iii) the possibility that dollarization in Belarus is limited to asset dollarization (i.e., prices are generally not fixed in dollars19).

4. The exchange rate regime is also conducive to a strong pass-through effect. Exchange rate unification was achieved in October 2000, and the authorities employ a crawling band regime defined in de facto terms against the dollar. By using the exchange rate to anchor expectations, the authorities have gradually brought inflation down to moderate levels.

5. Exchange rate pass–through is high in Russia.20 The nominal exchange rate passthrough is estimated at between 0.5–0.7 percentage points for a 1 percent-change in the exchange rate, and is transmitted within roughly two to three quarter. The impact effect of depreciation on inflation is (within one quarter) also relatively high (about 0.3 percentage points). It takes roughly three quarters for approximately 60 percent of the shock from the nominal exchange rate to inflation to be absorbed.

uA03fig01

Belarus: Inflation and exchange rates

(1995-2003)

Citation: IMF Staff Country Reports 2004, 139; 10.5089/9781451805086.002.A003

uA03fig02

Belarus: Year-on-Year Inflation and Exchange Rate Depreciation

Citation: IMF Staff Country Reports 2004, 139; 10.5089/9781451805086.002.A003

6. The nominal exchange rate is highly correlated with inflation in tradable goods prices, producer prices and headline inflation. As expected, the correlation is the lowest with services price inflation (Table 1). The correlation is much stronger with the US dollar than with the Russian ruble, and seems to have increased since October 2000. However, differences between the correlations with the Russian ruble and the US dollar have narrowed, as have those with the nominal exchange rate and producer price inflation.

Table 1:

Correlations Between the Nominal Exchange Rate and Different Measures of Inflation

(monthly data)

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Below the diagonal: Jan.95-Dec.03; above the diagonal: Oct.00-Dec.03

B. Methodology

7. Vector auto-regressions (VARs) are estimated to assess exchange rate passthrough coefficients from the US dollar and the Russian ruble, and the speed of exchange rate pass-through in Belarus. The period covered is 1996–2003. The following endogenous variables are used: (i) seasonally-adjusted inflation (CPI and PPI); (ii) seasonally–adjusted broad money; and (iii) exchange rates (USD and RUR). We focus on bilateral rates rather than the nominal effective exchange rate for two reasons:

  • in order to gain a better understanding of the respective roles of the dollar and the ruble in an economy that is highly dollarized, but in which most external transactions take place with Russia; and

  • because available nominal effective exchange rate data reflect official exchange rates during the early part of the period (though parallel market rates were in existence until late 2000).

Exogenous variables should represent two types of shocks: supply shocks and demand shocks. Supply shocks are usually proxied by oil prices or commodities prices, and we take the IMF all–commodities index as a proxy. Demand shocks are usually proxied by industrial production or by the output gap. In the case of Belarus, national accounts data are problematic, hence we use wages as an indicator of demand shocks, as in other transition countries.21 After proceeding with augmented Dickey-Fuller tests, we use first differences of log-transformed levels to achieve stationarity of the series. Pass-through coefficients are estimated by using impulse responses in VAR (Lehigh and Rossi, 2001, Belaisch, 2003, Gueorguiev, 2003). The exchange rate pass-through coefficient can be estimated by dividing coefficients on the inflation response to exchange rate by exchange rate responses to the exchange rate.

uA03fig03

Belarus: Official and Parallel Exchange Rates Against the USD

(1995-2003)

Citation: IMF Staff Country Reports 2004, 139; 10.5089/9781451805086.002.A003

uA03fig04

Belarus: Official and Parallel Exchange Rates Against the Russian Ruble

(1995-2003)

Citation: IMF Staff Country Reports 2004, 139; 10.5089/9781451805086.002.A003

8. The estimates take into account the prevailing parallel market exchange rates for the period until October 2000. We also allow for a break in the series at that point. First, we use a subsample starting in October 2000 to estimate exchange rate pass–through effect after exchange rate unification; second, we use parallel exchange rates in the period prior to exchange rate unification.

9. In addition to CPI and PPI, we use median–core inflation in our sample. The most common measure of core inflation simply excludes food and energy prices from the headline inflation rate. Another measure is median–core inflation.22 Median–core inflation based on median price change in the cross section of commodities contained in the CPI basket, measures the price change of a typical commodity.

C. VAR Results

Exchange rate pass-through to the CPI is high—about twice the level that is typically estimated in industrial countries. However, it is not significantly different from the passthrough coefficients in Russia, and is also very close to results obtained for Romania. For a one percent change in the dollar exchange rate, about 0.4 percent is transmitted to prices (Table 2). The exchange pass–through coefficient with the ruble is, as expected, lower than that with the dollar. Given the persistent macroeconomic instability in Belarus, one might have expected an even higher pass–through coefficient. However, the widespread use of price controls during most of the period may offer an explanation for these estimates.23

Table 2:

Belarus: Exchange Rate Pass-Through Coefficients

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Using parallel market exchange rates prior to October 2000.

10. Exchange rate pass-through has been both fast and long lasting in Belarus. As in Russia, the impact on prices is felt mostly in the first three months. About half of the shock is transmitted within the first two quarters. However, the effects of the exchange rate on inflation seem to be longer lasting in Belarus.

11. Exchange rate pass-through to the PPI is high, and is stronger with the Russian ruble than with the dollar. As in other countries, the exchange rate pass-through to producer price inflation is higher than with the CPI. But the influence of the ruble reflects Russia’s importance in Belarusian foreign trade.

12. Since October 2000, exchange rate pass-through to core inflation has been significant. Although caution should be applied to VARs performed on a short sample, these estimates indicate that more than a quarter of exchange rate shocks are transmitted through core inflation.

13. Variance decomposition also shows a significant effect of exchange rate changes on inflation volatility. Inflation dynamics remain dominated by past inflation, but dollar exchange rate changes have a significant role and more so than in Russia for instance.

D. Conclusion

14. The estimates presented in this chapter are preliminary. In particular, persistent macroeconomic instability, the short sample and the use of parallel market exchange rates suggest that the results should be interpreted with caution. For the more recent period, use of core inflation to estimate exchange rate pass-through coefficients is another reason to consider the results preliminary.

15. Nevertheless, these results suggest that exchange rate pass-through is significant in Belarus. Notably, the estimates show the impact of dollarization on inflation in Belarus. Despite strong economic links with Russia, inflation is significantly influenced by the exchange rate vis-à-vis the dollar, rather than the ruble, a fact that could be taken into account in the conduct of exchange rate policy in Belarus.

uA03fig05

CPI: Responses to Cholesky One Standard Deviation Innovations +/-2 Standard Errors

Citation: IMF Staff Country Reports 2004, 139; 10.5089/9781451805086.002.A003

uA03fig06

Core inflation: Responses to Cholesky One Standard Deviation Innovations +/-2 Standard Errors

Citation: IMF Staff Country Reports 2004, 139; 10.5089/9781451805086.002.A003

uA03fig07

Variance Decompositions

Citation: IMF Staff Country Reports 2004, 139; 10.5089/9781451805086.002.A003

Table 3.

Vector Autoregression Estimates for US dollar

Sample (adjusted): 1996:02 2003:09

Included observations: 92 after adjusting endpoints

Standard errors in () & t-statistics in []

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Table 4:

Vector Autoregression Estimates for Russian ruble

Sample (adjusted): 1996:02 2003:09

Included observations: 92 after adjusting endpoints

Standard errors in () & t-statistics in []

article image

References

  • Belaisch, Agnes (2003), “Exchange Rate Pass-Through in Brazil,” Working paper No. 03/141, Washington DC: International Monetary Fund.

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  • Billmeier, Andreas, and Leo Bonato (2002), “Exchange Rate Pass-Through and Monetary Policy in Croatia,” Working paper No. 02/109, Washington DC: International Monetary Fund.

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  • Gueorguiev, Nikolay (2003), “Exchange Rate Pass-Through in Romania,” Working paper No.03/130, Washington DC: International Monetary Fund.

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  • Leig, Daniel and Rossi, Marco (2002), “Exchange Rate Pass-Through in Turkey,” Working paper No. 02/204, Washington DC: International Monetary Fund.

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  • Stavrev, Emil (2003): “The Pass-Through from the Nominal Exchange Rate to Inflation,” Chapter II of Russian Federation: Selected Issues, IMF Country Document No. 03/146, Washington DC: International Monetary Fund

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18

Prepared by Jérôme Vacher.

19

However, there is anecdotal evidence that dollars are used for transaction purposes, at least for large transactions (apartments, automobiles).

22

See chapter III of IMF Country Report No. 03/119.

23

Econometric results are provided in tables 3 and 4 and the associated figures.

Republic of Belarus: Selected Issues
Author: International Monetary Fund
  • View in gallery

    Belarus: Inflation and exchange rates

    (1995-2003)

  • View in gallery

    Belarus: Year-on-Year Inflation and Exchange Rate Depreciation

  • View in gallery

    Belarus: Official and Parallel Exchange Rates Against the USD

    (1995-2003)

  • View in gallery

    Belarus: Official and Parallel Exchange Rates Against the Russian Ruble

    (1995-2003)

  • View in gallery

    CPI: Responses to Cholesky One Standard Deviation Innovations +/-2 Standard Errors

  • View in gallery

    Core inflation: Responses to Cholesky One Standard Deviation Innovations +/-2 Standard Errors

  • View in gallery

    Variance Decompositions