Press Release: IMF Approves Stand-by Credit for Russia
April 11, 1995The International Monetary Fund (IMF) today approved a request by the Russian Federation for a 12-month stand-by credit, authorizing drawings up to the equivalent of SDR 4,313.1 million (about US$6.8 billion) to support the Government's 1995 economic stabilization and reform program.
Overall performance under Russia's 1994 economic program, which was supported by the second drawing under the Systemic Transformation Facility (STF)1 (see Press Release 94/29), was disappointing. The unexpectedly rapid fall in inflation in the first half of the year was not sustained--inflation at year-end was over twice as high as envisioned--and the program's net international reserve target was missed by a wide margin. From midyear onward, fiscal policy began to move significantly off-track as a result of continued weak revenue performance and a surge in expenditure, and monetary policy, while continuing to meet the net domestic assets ceiling, proved to be insufficiently tight. Actions taken by the Central Bank of Russia in late 1994 and early 1995 to tighten monetary policy have already begun to show positive results: inflation has declined and official reserves have begun to increase. However, without a major improvement in the underlying fiscal position, the burden of adjustment will fall too heavily on monetary policy, and is unlikely to prove sustainable.
The 1995 Program
In view of the generally disappointing performance in 1994, which followed limited progress in 1993 and 1992, the Russian authorities are aiming at decisive progress in stabilization and structural reform in 1995 to set the stage for a sustained recovery of output and living standards over the medium term. The key objectives of the 1995 program, which is supported by the stand-by credit, are: first to bring inflation down very quickly to an average monthly rate of 1 percent in the second half of the year, via a major tightening of monetary policy and a substantial cut in the fiscal deficit; and, second, to accelerate the move to a market economy through wide-ranging structural reforms,including, in particular, measures to liberalize the trade regime and the oil sector.
The program envisages a decline in real GDP of 9 percent, compared with 15 percent in 1994. Recent developments indicate that this projection may be on the cautious side; and in any event, GDP is likely to be stable or on a rising trend by mid- year. The sharp decline in inflation--and the attendant reduction in the erosion of wealth--is expected to lead to a decline in private saving out of current income, while private investment as a percentage of GDP is expected to remain roughly constant at just over 23 percent. However, with public dissaving programmed to fall sharply, an improvement in the external current account of about 1/2 percent of GDP--to a slight surplus--is expected, and gross international reserves are projected to increase to a level equivalent to nearly two months of imports by the end of the year.
The centerpiece of the Russian authorities' strategy is to reduce inflation rapidly through tight monetary and credit policies, which requires a definitive adjustment in the size of the budget deficit and the manner in which it is financed. Net credit from the monetary authorities to the enlarged government, which was almost 8 percent of GDP in 1994, will be restricted to less than 3 percent in 1995. A key element-- which marks a decisive break with the past--is the cessation of direct credits from the Central Bank of Russia (CBR) to finance the budget deficit, except for limited short-term, intra-year borrowing in the first quarter. Net credit to banks, which amounted to 0.6 percent of GDP in 1994, will be cut to zero. In addition, new instruments and facilities (including rediscount and Lombard credit facilities and REPO operations) will be developed to further strengthen the CBR's ability to conduct monetary policy through market operations, and steps will be taken to improve coordination of foreign exchange market intervention with the Ministry of Finance. These measures will complement new legislation which has been developed to modify the status of the CBR and to strengthen its regulatory and supervisory capacity.
The most crucial ingredient of the government's stabilization efforts is a near halving of the federal government's deficit to 6 percent of GDP from nearly 11 percent in 1994, and a major switch to reliance on non-inflationary sources for its financing. Under the fiscal plan, additional revenue-raising measures comprise increases in the excise rates on gas and crude oil combined with improvements in compliance, an increase in the gasoline tax, and a reduction in the coverage of zero-rated imports. The rest of the adjustment will be on the spending side, which will be achieved by limiting the increase in nominal spending to an amount which would entail real expenditure cuts of more than 15 percent. Such real cuts would bring the ratio of expenditure to GDP down to 19-1/2 percent.
Following limited progress in 1993 and 1994, the program envisages that the final steps in the liberalization of the export regime will be taken in 1995. It also aims to maintain an open policy on imports, and roll-back some of the increased dispersion of import tariff rates introduced on July 1, 1994. A key feature of trade policy is that there will be no quantitative restrictions on exports or imports or on the number of participants in trade, except in certain narrowly defined areas, consistent with international practice.
The trade measures have been designed to have a particularly significant impact on the oil market. Restrictions on the oil sector have artificially depressed domestic wholesale oil prices, discouraging investment and oil production, and reducing fiscal revenues. Following the abolition of oil export quotas, under the program the authorities are committed not to replace them by other restrictive measures. Effective April 1, 1995, a liberal system of access to oil export facilities was introduced. There is now a ceiling on contracts to export oil under intergovernmental agreements; domestic procurement of such oil will be based on competitive tenders; and contract prices will be set at world levels. These measures, together with the abolition of the system of special exporters of strategic goods (including oil) and a gradual reduction of the oil export duty, should increase domestic wholesale prices from around US$40 per ton at end-1994 to US$65-US$70 per ton by the end of 1995.
The authorities have reaffirmed their commitment to continue to develop and strengthen the privatization program. The sales of public enterprises for cash, which began in the second half of 1994, will be invigorated, involving a variety of privatization methods, including the sale of large blocks of shares to major investors seeking a long-term management interest in enterprises. The process will also be widened by significantly reducing the lists of prohibitions and limitations which currently apply, and by ensuring that the treatment of foreign investors participating in the privatization process is in line with internationally accepted standards.
The few remaining controls on prices and profit margins will be eliminated at the federal level by the end of 1995, except for certain clearly defined monopolies, where the aim will be to improve the methods of price regulation across regions.
The government and the CBR will not extend credits or government loans to clear interenterprise arrears. To help address the problem of such arrears, and as a way to promote wider and more efficient markets, the authorities are introducing standardized bills of exchange that can be used to securitize interenterprise debts. Together with the sales of shares in privatized industries to major investors, this should help accelerate the process of industrial restructuring.
In the area of banking sector reform, the program allows for the continued cleaning up of the CBR portfolio with respect to nonperforming centralized credit. Also, the authorities intend to monitor more closely the financial situation of the banks in light of their exposure to commercial risk. The government also intends to accelerate the process of land reform, which has been disappointingly slow so far. Measures include the issuing of certificates of ownership to all land owners, acceleration of land auctions, submission of laws on the registration of land titles and on mortgages to the Federal Assembly by May 1, 1995, legislation to permit the sale of land occupied by enterprises, and abolition of several other restrictions on the sale of land and commercial buildings.
Addressing Social Costs
To enhance the efficiency of social spending without jeopardizing the program's fiscal and inflation objectives, the government will begin comprehensive reforms of the pension system, social insurance, health care, unemployment benefits, and education, with the aim of targeting social benefits to the most needy. The government intends to submit to the State Duma a proposal to increase unemployment benefits and, at the same time, reduce the use of Employment Fund resources for the support of individual enterprises. It also intends to devise a program aimed at the privatization or gradual transfer to local governments of social services currently provided by enterprises, because the latter has tended to hamper the process of closing down or restructuring inefficient enterprises.
Monitoring the Program
It is recognized that the form and efficiency of monitoring the program are critical to ensuring its sustained implementation. Close cooperation among various parts of the government is essential for the program to succeed. In particular, the Ministry of Finance and the CBR are developing appropriate organizational structures to ensure adequate coordination of credit, monetary and budget policies, management of government debt, and foreign exchange policy. This will include regular consultations of department heads overseeing the major issues of macroeconomic policy, the exchange of information with regard to the execution of the budget, the financing needs of the government, the monetary situation, and the financial and foreign exchange markets.
To monitor the implementation of the program, a Working Group has been established under the aegis of the Government Commission on Financial and Monetary Policy. It will include representatives from the Ministry of Finance, the Ministry of Economy, the CBR, and staff of the IMF, which will meet to review macroeconomic developments and progress on structural reforms. Once a month, performance under the program will be discussed with IMF staff and reviewed by the IMF's Executive Board as the most timely way to indicate the progress made and to establish Russia's eligibility to draw on the stand-by credit.
The Challenge Ahead
Overall, the program is bold and ambitious. If fully implemented, it would mark a decisive break with an extended period of large financial imbalances, which have seriously distorted economic decision-making and inhibited domestic and foreign savings. The stage could be set for sustained investment and growth, in which private and official capital inflows would play an important part. In this process, Russia will continue to need consistent support from the international community for some time, including debt relief. There is little doubt, however, that, with appropriate policies, Russia has the capacity to unlock its huge productive potential and develop a strong external position over the medium term.
The Russian Federation became a member of the IMF on June 1, 1992; its quota2 is SDR 4,313.1 million (about US$6.8 billion); and its outstanding use of IMF credit currently totals SDR 2,875.55 million (about US$4.5 billion).
Sources: Russian authorities and IMF staff estimates.
1. The STF is a temporary IMF financing facility that provides assistance to member countries facing balance of payments difficulties arising from severe disruptions in their traditional trade and payments arrangements owing to a shift from reliance on trading at nonmarket prices to multilateral market-based trade.
2. A member's quota in the IMF determines, in particular, the amount of its subscription, its voting weight, its access to IMF financing, and its allocation of SDRs.