Russian Federation and the IMF
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Russia: Stabilization and ReformAddress by Michel Camdessus
Managing Director of the International Monetary Fund
at the U.S.-Russia Business Council
Washington, D.C., April 1, 1996
Ambassador Strauss, ladies and gentlemen, it is a pleasure to have this opportunity to address the U.S.-Russia Business Council again this year. I must say that the timing of your invitations—each of which has come just as the IMF and Russia have been embarking on an important new phase of their cooperation together—is impeccable!
I recall that when I spoke to you at this time last year, Russia was entering a critical stage in its stabilization and structural reform efforts. The Russian authorities, in cooperation with the staff of the IMF, had formulated an ambitious macroeconomic stabilization and structural reform program, and I was about to recommend that our Executive Board support this program with a conditional commitment of loans amounting to roughly $6.6 billion over the following 12 months. As you may remember, Russia had already made an important start on reducing inflation, among other stabilization tasks, and on the structural reforms needed to transform the country into a market-oriented economy. Nevertheless, as of a year ago, stabilization remained elusive—to say the least—and economic transformation still had a very long way to go. Moreover, the program on which the Russian authorities were then embarking was more demanding—and the criteria for continued Fund support more exacting—than any they had undertaken previously.
This year, you have invited me back at another critical moment—both in Russia's reform efforts and in its relations with the Fund. As perhaps you are aware, last week our Executive Board agreed to support a more far-reaching, three-year program of stabilization and reform under the IMF's extended Fund facility. The Fund has conditionally agreed to provide up to roughly $10 billion over the next three years, of which about $4 billion will be available over the next 12 months. It is a bold program, and I would be less than candid if I did not mention that many probing questions have been raised about it. So let me take this opportunity to bring you up-to-date on the developments of last year that have made this broadening and deepening of Russia s reform program possible, and to discuss the course that Russia and the Fund have laid out for 1996 and beyond.
In many respects, 1995 marked a turning point in Russia's reform efforts. To begin with, it was a year in which the Russian authorities established a strong record of policy implementation. Before the program was approved in April 1995, the authorities carried out a tough set of prior actions, including a tight monetary program for the first quarter of the year that helped reduce inflation from a monthly rate of 18 percent in January to about 9 percent in March. After the program was approved in April, the authorities met all of its monthly fiscal and monetary targets, generally with large margins. I should point out that Fund programs customarily contain quarterly performance targets, which, when satisfactorily met, trigger quarterly disbursements. In Russia's case, however, it was felt that monthly monitoring and monthly disbursements would be helpful. Indeed, despite strong political pressures leading up to the Duma elections in December 1995, and some policy relaxation in the last months of the year, the authorities continued to meet all program targets, and the program remained on track.
As a result of these efforts, the federal government deficit fell from over 11 percent in 1994 to less than 5 percent of GDP in 1995—by more, in fact, than had been agreed under the program. Inflation also dropped substantially—to a monthly rate of 3.2 percent in December, and later down to 2.8 percent in February—albeit not by as much as the authorities and the Fund had hoped. Nevertheless, as early as the second quarter of 1995, the obvious improvement in Russia s domestic policies had begun to attract strong capital inflows. Although these inflows complicated the conduct of monetary policy and the achievement of the program s inflation target, they were a sure sign of increasing confidence in the Russian economy. And, despite the upward pressure that they put on the exchange rate, export performance—and, indeed, the overall balance of payments situation—was strong. At the same time, 1995 saw the first signs of recovery in industrial activity, particularly in such areas as energy, metallurgy, and chemicals.
Looking back on the record of last year, I can say without hesitation that the 1995 program achieved considerable success, despite the economic and political risks that were noted at its inception and, indeed, persisted throughout the year. By sticking to a tough adjustment program, the Russian authorities succeeded in paving the way toward lasting stabilization. The challenge now is to keep up the momentum of policy reform and, in so doing, consolidate and build upon the achievements of last year.
Indeed, this is precisely the objective of the three-year EFF program agreed with the Fund. Specifically, the program envisages that real GDP growth will resume in 1996 and be sustained at an annual rate of over 5 percent thereafter. At the same time, the program aims to reduce inflation to about 1 percent per month by the end of 1996, and to a single-digit annual rate by 1998. How can these ambitious objectives be met? The experience in 1995 points to three imperatives: maintaining restrained monetary and fiscal policies; building up the institutions and policy instruments needed to conduct effective macroeconomic policies; and accelerating structural reform. Let me explain how these fit together—under the 1996 program and for the medium term.
First, with regard to restrained macroeconomic policies, all our experience in transition economies shows that there must be a further reduction in inflation in order to achieve sustainable growth. In this regard, a key prerequisite is to strengthen fiscal performance, which, in turn, will require increasing fiscal revenue. Last year, revenue shortfalls forced the authorities to reduce spending on an ad hoc basis well below the already constrained levels agreed with the Fund. The new program seeks to overcome this problem by eliminating tax exemptions, strengthening tax administration, introducing selective increases in tax rates, and combating the "culture of non-payment." Not only will this permit further deficit reduction, it will also allow for more satisfactory levels of expenditure on high priority items, such as unemployment compensation, the social safety net, and the rehabilitation of basic infrastructure.
Second, as last year's revenue shortfall illustrates, it is hard to conduct effective macroeconomic policies without well-developed institutions and appropriate policy tools. Thus, another key element of the EFF program is to build up efficient institutions and effective policy instruments. With regard to fiscal policy, I have already mentioned the measures being taken to enhance revenue collection. In addition, steps are being taken to improve cash management and expenditure control, establish proper budgetary and procurement procedures, and strengthen auditing. Likewise, a number of steps are being taken to strengthen the Central Bank of Russia—by giving it more instruments with which to manage short-term liquidity of the banking sector, and increasing its capacity to supervise banks. At the same time, the program seeks to improve the domestic payments system and to develop and implement a program for bank restructuring.
Third, while restrained macroeconomic policies and more effective institutions and instruments of macroeconomic policy will go a long way toward enabling the authorities to build upon the reduction in inflation they achieved in 1995, they are not sufficient to ensure a strong and sustained turnaround in economic activity. Russia also needs a major push to accelerate structural reform. Accordingly, the three-year program contains a comprehensive and detailed agenda of structural reforms, developed in intensive collaboration with the World Bank. Let me mention a few of the most important ones:
So these are the broad outlines of Russia's strategy for adjustment and reform, which the Fund has agreed to support under the extended fund facility. I think you will agree that it is a strong and comprehensive program that corresponds to Russia s economic needs. Still, you have heard the many questions raised about the program: Is it too risky? Are the Russian authorities receiving exceptionally favorable treatment from the IMF? Or, on the contrary, does all this "policy rigor" just strengthen domestic support for those who oppose reform? And why is the IMF lending to Russia now, just three months before a highly contested presidential election? Let me give you my perspective on these questions.
Is the program risky? I would venture that all programs supported by the Fund have some risk—indeed, if a country were not encountering balance of payments difficulties, it would not borrow from the Fund. I would like to emphasize, however, that the Russian program contains a number of safeguards, including the strong track record established last year, the extensive amount of preparation that has gone into the new program, and the continuation of monthly monitoring and disbursements during 1996, in addition to broader quarterly reviews. I would note in passing that the Russia program is the only Fund-supported program that is subject to monthly monitoring. Moreover, during my trip to Moscow last month, President Yeltsin and the senior members of his economic team confirmed that they are fully committed to the program. And notwithstanding some of the statements you may hear during Russia s election campaign, the authorities are continuing to fulfill all their commitments under the program. For example, you may have read about pressures to raise import tariffs; in fact, once the authorities realized the complications that such action would cause for their IMF program, this course was not pursued. In the last analysis, we can never eliminate all the risks to any program. Nevertheless, the safeguards built into the Russian program are substantial.
Are the Russian authorities receiving exceptionally favorable treatment from the IMF? The size of the loan is large in absolute terms, but as with all Fund loans, it is based on the member's quota in the Fund, which, in turn, is based on the size of its economy, and other economic factors. As a percentage of quota, the EFF program is fully in line with the Fund's established lending limits. Given the degree of macroeconomic discipline and structural reform required under the program, not to mention the strict monitoring, it is hard to argue that Russia is receiving exceptionally favorable treatment. Furthermore, when a member of the Fund has established a sound track record, has an obvious need for Fund assistance, and has negotiated a rigorous program worthy of IMF support, that member is entitled to draw on the Fund's resources.
Actually, I think that it is the recognition that this is a tough program that has led some to question whether it is not too demanding—whether the continued macroeconomic adjustment and sweeping structural change that the program entails will irreparably undermine domestic support for reform. Indeed, this is a danger we must try to guard against—in the first instance, by ensuring that there is an adequate social safety net in place and that the fiscal program produces sufficient budgetary resources to support it. Beyond this, we must encourage the Government to do all that it can to ensure that the benefits of reform emerge—and become evident to the Russian people—as soon as possible. Our vast experience with all of the other transition economies strongly indicates that the best way to get economies moving on a sustainable basis is to bring down inflation and complete a sufficient mass of structural reform. Half measures and tepid adjustment only prolong the transition period, and postpone the benefits of reform. Thus, I am convinced that the most promising approach is to persevere with adjustment, while protecting the most vulnerable segments of the population as best as possible. This is what we are trying to do in Russia.
This brings me to the final question: why embark on such a program now? I have already explained why the Fund cannot equivocate on the basis of the electoral timetable. Moreover, to postpone a program simply because of elections would be a political act in itself. Worse, it would invite policy drift during the pre-electoral period, making the inevitable renewal of adjustment all the more painful. The point is that the Fund does not support individuals, it supports economic programs. As long as the duly constituted authorities continue to fulfill the requirements of the program agreed with the Fund, the Fund will continue to support that program.
Role of the international community
The Fund has an essential role to play in Russia in helping to map out a strategy for economic transformation, catalyzing other external resources, and providing an improving policy framework in which other initiatives can flourish. But clearly other parts of the international community are also helping Russia to become a full-fledged market economy: the World Bank and the EBRD, in improving sectoral policies and basic infrastructure; official and private creditors, in providing comprehensive rescheduling consistent with Russia s budgetary and debt service prospects; and individual countries in providing generous bilateral support for Russia s reform efforts and in keeping their markets open to Russian exports. This is equally true of the private sector. By taking up profitable opportunities to invest in Russia, participate in joint-ventures with Russian companies, and trade with Russia, you are helping to develop a Russian constituency for a more market-oriented, outward-looking economy. At the same time, you can help keep up the pressure for greater regulatory transparency, better business practices, and the strict application of the rule of law; the Russian authorities recognize the need for this and know that this will be key for Russia's lasting prosperity.
As you know, Russia is a country with vast natural resources, a skilled
labor force, and competitive wage levels. As such, it has tremendous economic
potential. It is my very great hope that with appropriate policies on the
part of the Russian authorities, the continued strong support of the international
community and increasing private sector activity, this potential will soon
be unleashed, both for the benefit of the Russian people and for the greater
prosperity of the international economy.
IMF EXTERNAL RELATIONS DEPARTMENT