Facing the economy
Bank loan availability determines business and, most especially, innovative activity
Banking legend Rothschild once said; ‘Give me control of the credit of a nation, and I care not who makes the laws.’ Of course, he was absolutely right, because controlling the country’s money gives banks tremendous advantages and opportunities. Last year, organisations and enterprises across Belarus received a total of Br73.4 trillion in net profit; of this, 32 Belarusian banks claimed 5.4 trillion or 7.4 percent. As of last year, there were more than 126,000 organisations and the average net income of each Belarusian bank was almost 300 times that of a non-banking sphere enterprise. Banks can largely ignore rising prices for raw materials and energy, purchasing the latest sophisticated technological equipment and employing the best personnel across many spheres.
Such impressive results do not stem from bankers being so much more capable or hard-working than auto-mechanics or doctors; their success is borne from their monopoly control of the country’s money, which allows them to claim income from excessive interest rates, despite loans being guaranteed reliably by collateral, bail guarantors, state guarantees and other fail-safe mechanisms. With wise risk assessment, even in the crisis of 2011, when the national economy as a whole ‘sunk’, Belarusian banks increased their profit by almost 75 percent.
Of course, from time to time, the banking sector is called upon to aid social development, with wider aims. America’s first Finance Minister, appointed in 1789, Mr. Hamilton, proposed a system of public (non-commercial) loans, to drive forward the economy. In his famous report on public credit, he emphasised that this aimed to build the foundations of the future; rather than making short term profit, the banks needed to invest in the nation’s economic development, supporting manufacturers’ growth rather than acting as a parasite on their backs via high borrowing rates. Of course, the Bible prohibits profiteering from money lending, saying: ‘Do not profit from your brother!’
Today, not so much to overcome the crisis, but rather in a transition to a new (sixth) technological order, the refinancing rate is dropping around the world: from 6 to 0.25 percent in the USA; in the EU, from 4 to 0.75; and in Japan, to just 0.1 percent. Of course, business development — especially that related to innovative activity — is largely determined by the availability of loans. Western companies with access to cheap money have unprecedented competitive advantages in comparison with those from Belarus, Russia and Ukraine, where loans are expensive. In particular, last December, with the refinancing rate at 30 percent, the average full rate on new loans granted in Belarusian Roubles (with a 12 month repayment term) stood at 36.7 percent per annum. As domestic enterprises enjoy profitability of just 10-15 percent, the use of such loans is problematic, especially for financing long-term modernisation projects.
We can’t expect domestic enterprises to successfully modernise and achieve global competitiveness without creating conditions similar to those enjoyed by their competitors. The Russian President’s advisor, academician Sergey Glaziev, explains, “Unless a scheme of long-term loans can be offered at low interest rates, our enterprises will remain uncompetitive. Today, in the West and East, there is no problem in enterprises gaining cheap money for long periods.”
Despite agreeing that the refinancing rate should be lowered to 13-15 percent (with corresponding cheapening of loans), at a recent meeting of the Council of Ministers, Alexander Lukashenko demanded, “It’s time for the banking system to face the economy!” He wishes to see loan rates reduced in all spheres — from buying consumer goods and housing to loans for domestic enterprises’ modernisation. The result should be a wider range of desirable domestic products on our shelves, and a corresponding rise in export income.
By Valery Bainev, Doctor of Economics and a Professor of the Economics Faculty of the BSU