IMF Executive Board Concludes 2012 Article IV Consultation with the Russian FederationPublic Information Notice (PIN) No. 12/90
August 2, 2012
Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case.
On July 27, 2012, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with the Russian Federation.1
Russia’s economic recovery continued in 2011 with growth of 4.3 percent, the same as in 2010. Economic activity rebounded in the second half of the year on the back of a favorable harvest and high oil prices. The momentum continued in the first quarter of 2012 with strong real wage and consumption growth supporting demand. Unemployment has continued to decline to pre-crisis lows, the capacity utilization in the manufacturing sector has recovered its 2007–08 level, and the output gap is estimated to now be closed. Inflation has come down significantly in recent months, largely due to one-off factors, and staff’s measure of core inflation—a good proxy of trend inflation—remains high at around 6 percent. The current account has strengthened in 2011 aided by high oil prices, but net capital outflows persist, broadly mirroring the current account surplus.
Following two years of stagnation, credit growth rebounded strongly in 2011. This partly reflected a switch by the corporate sector from external to domestic funding. Consumer credit also grew strongly. On the credit supply side, improving bank balance sheets (with declining nonperforming loan ratios and improving profitability) and funding conditions (reflecting solid deposit growth and the Central Bank of Russia’s liquidity provision) allowed for the expansion of lending.
Fiscal policy tightened in 2011, but it remains procyclical. The federal nonoil deficit declined from 12.7 percent of GDP in 2010 to 9.8 percent of GDP in 2011. This improvement was due to both nonoil revenue overperformance and expenditure underexecution. Some of the windfall oil revenues from 2011 were deposited in the Reserve Fund in early 2012. However, the 2012 budget implies an increase in the federal nonoil deficit of about 1 percent of GDP.
The Central Bank of Russia (CBR) tightened monetary policy significantly during 2011, including by gradually steering the interbank market rate from the CBR deposit rate of 2¾ percent in January to the CBR repo rate of 5¼ percent by the end of the year. Since then, however, monetary policy has effectively been on hold. Meanwhile, the CBR has continued to increase exchange rate flexibility as the intervention band was widened further, and intervention amounts have been relatively modest.
The near-term outlook is for continued moderate growth and a rebound in inflation. Real growth is projected at around 4 percent in 2012 and 2013, with potential GDP growing at a slightly lower rate. Inflation is projected to rebound to 6½ percent by end-2012, reflecting output rising above potential, the base effect, and the delayed increases in administered prices in mid-2012. The external current account surplus is projected to decline, amid slightly weaker oil prices. Capital outflows will likely continue, albeit at a moderating pace.
Executive Board Assessment
Executive Directors welcomed Russia’s recovery from the 2008–09 crisis and noted that the output gap is estimated to have been closed. The challenge in the short term is to manage domestic demand in order to avoid overheating and in the medium term to fully realize Russia’s significant growth potential by maintaining macroeconomic stability, further strengthening the policy framework, and making decisive progress on structural reforms.
Directors recommended an ambitious fiscal consolidation path to reduce overheating pressures and vulnerabilities and ensure intergenerational equity. Some Directors saw merit in a cautious approach at the current juncture given the uncertain global environment. Directors stressed the importance of a strengthened fiscal framework to anchor medium-term fiscal policy. They welcomed the plan to introduce a new fiscal rule to decouple the fiscal stance from short-term variations in oil prices, but saw scope for further improvements to allow for the effective rebuilding of the Reserve Fund. While the immediate priority would be to unwind crisis-related stimulus, Directors underscored that durable consolidation will need to be underpinned by structural reforms, including pension reform.
Directors welcomed the improvements in the monetary policy framework, especially greater exchange rate flexibility which is helping absorb external shocks and allows monetary policy to focus on inflation. They noted the significant decline in inflation, but generally recommended a gradual further tightening of monetary policy to contain underlying pressures and anchor expectations. Directors also encouraged continued strengthening of monetary policy tools and enhanced communication policies to prepare for the successful adoption of formal inflation targeting by 2014.
Directors welcomed the improvements in the financial system and its resilience to a variety of shocks. They called for continued vigilance with regard to asset quality in the context of rapid credit growth and volatile oil prices, and commended the authorities’ ongoing efforts to improve financial stability analyses and the macroprudential oversight framework. Directors called on the authorities to expedite the implementation of FSAP recommendations that strengthen the regulatory and supervisory framework. Important priorities are the prompt passing of legislation on consolidated supervision and connected lending and the expansion of the central bank’s powers to use professional judgment.
Directors underscored that structural reforms are crucial to increase investment, diversify the economy, and raise potential growth. Welcoming Russia’s accession to the WTO, they encouraged the authorities to seize this opportunity to strengthen the momentum for reforms and make the business environment more predictable by strengthening the rule of law, reducing corruption, and scaling back state involvement in the economy, including through transparent privatization of state-owned companies.