Press Release: IMF Approves Three-Year EFF Credit for the Russian Federation
March 26, 1996
The International Monetary Fund (IMF) today approved a credit for the Russian Federation totaling SDR 6,901.0 million (about $10,087 million) under the extended Fund facility (EFF). The credit, which is being made available over the next three years to support the Government's medium-term macroeconomic stabilization and structural reform program, is equivalent to 160 percent of Russia's quota in the IMF. Reflecting the expected improvement over time of Russia's external performance, disbursements under the EFF would be largest in the first year with 65 percent of quota, followed by 55 percent in the second year, and 40 percent in the third year.
Since the dissolution of the Soviet Union in late 1991, the primary objective of Russian economic policy has been to achieve financial stabilization while seeking to make rapid progress in transforming the economy to a market-based system. Until 1994, while progress toward stabilization and market reforms was made in a number of areas, the authorities were unable to sustain adjustment efforts and performance fell short of objectives set under several programs.
The overriding objective of the 1995 economic program, which was supported by a stand-by credit of SDR 4,313.1 million (about $6,304 million) approved in April 1995, was a substantial and sustained reduction in inflation since this was an essential condition for setting the stage for economic recovery. This inflation goal was to be achieved through a sharply tighter monetary policy, underpinned by a more restrictive fiscal policy. The authorities complied with all the program's monetary and fiscal targets and, as a result, inflation fell to low single-digit monthly rates by the end of 1995. Last year also saw the first signs of a recovery of industrial activity, particularly in areas such as energy, metallurgy and chemicals. Real GDP remained broadly stable in the course of 1995, at an average level roughly 4 percent below that recorded in 1994. On the external front, the current account surplus widened to $4.7 billion from $3.4 billion in 1994. The introduction, in July 1995, of an exchange rate corridor with the stated purpose, among others, of stabilizing exchange rate perceptions is generally judged to have been a success.
On the structural front, policy performance has been uneven; the restructuring of the banking sector has, for example, been slow, and the pace and scale of the privatization program has been below expectations. Much remained to be done in the area of land reform.
The authorities have decided to build on their policy accomplishments by adopting a bold and comprehensive medium-term program that is designed to accelerate the transformation of the Russian economy towards a fully-functioning market-based system, while consolidating macroeconomic stabilization.
Medium-Term Strategy and the 1996 Program
The Government's medium-term macroeconomic program, which is supported by the EFF, aims at laying the basis for sustained growth by a) lowering inflation further towards a single-digit annual rate; and b) achieving medium-term viability of the balance of payments. Real GDP growth is envisaged to accelerate to 2.3 percent in 1996 and 5 percent in 1998 and to be sustained at a relatively high rate of 6 percent a year over the rest of the decade. The program envisages a decline in the period average increase in consumer prices to 51.2 percent in 1996 and to 6.9 percent in 1998, from 190 percent in 1995. After a surplus of 1.2 percent of GDP in 1995, the external current account is expected to swing into modest deficits of 0.4 percent of GDP in 1996 and of 1.7 percent of GDP in 1998, as investment recovers and measured private saving declines. The coverage by gross foreign exchange reserves of imports of goods and nonfactor services is expected to rise from 2.5 months at end-1996 to the equivalent of 2.9 months by end-1998.
The critical element of the medium-term strategy is a further reduction in the overall fiscal deficit (of the enlarged government) from about 5 percent of GDP in 1995 to 4 percent of GDP in 1996 and to 2 percent of GDP in 1998. With the local governments and extra budgetary funds taken together programmed to maintain a balanced position, the federal fiscal deficit path would be set equal to that for the enlarged government. Deficits of the magnitude projected could be financed without recourse to direct credit from the Central Bank of Russia (CBR), and without undue pressure on interest rates or crowding out of the private sector.
The fiscal adjustment envisaged under the program depends on the ability of the Government to improve revenue performance, by about five percentage points of GDP over the medium-term. As well as helping to reduce the deficit, the higher revenues would allow for some increase in spending, including on unemployment compensation, the social safety net and infrastructure rehabilitation. An improvement in revenue will entail, in addition to selective increases in tax rates, a broadening of the tax base and improvements in tax administration, including through strong efforts to capture the rapidly growing private sector and through reducing tax delinquencies. The effort to broaden the tax base is focused on the elimination of exemptions, particularly with respect to the value-added tax, the profit tax, excises and import duties. Increases in tax rates under the program are concentrated in the energy sector, with higher excises envisaged on oil, gasoline and electricity. On the expenditure side, to achieve the program's fiscal target for the enlarged government in 1996, the Government intends to observe strictly the limits on outlays established under the 1996 budget law. In that connection, various spending initiatives announced by the President and the Government in early 1996 are either covered by appropriations authorized in the 1996 budget or will be handled by reallocating expenditures within the overall budgetary ceiling.
Achievement of the targeted reduction in monthly inflation to around 1 percent by the end of the year will require continued restraint in the conduct of credit policy. Accordingly, while the demand for money is expected to recover strongly with further stabilization, the pace of overall credit expansion is set to decelerate significantly. Although nominal interest rates are expected to continue to decline rapidly with lower inflation, real interest rates are expected to remain relatively high until well into 1996 because of lags in the full adjustment of price expectations. The program assumes the continuation of the present exchange rate band until the end of June 1996 and a broadly stable nominal exchange rate for the ruble thereafter.
Performance under the program will be monitored through its quantitative targets. Initially, this will be done monthly and, starting in early 1997, on a quarterly basis. In addition, the IMF's Executive Board will periodically review Russia's performance under the program. These program reviews will be conducted on a monthly basis during the first year of the EFF and on a quarterly basis thereafter. Disbursements under the EFF will also be made monthly until early 1997, and thereafter quarterly.
The program envisages a number of structural reforms that are crucial for completing Russia's transition to a market-based economy. These reforms seek to ensure that goods and factor markets operate efficiently, while taking steps to complete the establishment of the institutional and legal frameworks required by a market economy.
Under the program, Russia will complete the process of trade liberalization by concluding the liberalization of the export regime and by reducing the weighted average import duty rate. The authorities are assigning priority to accession to the World Trade Organization (WTO), a move that should help the Government resist pressures for protectionism, and would also help guarantee exporters nondiscriminatory treatment and access to the WTO's dispute settlement mechanisms.
Given the importance of strengthening the banking system, the program addresses issues related to liquidity and financial health/solvency of banks. New instruments to allow banks to better manage their liquidity are being introduced and further improvements to the payments system are being made. Various steps are being taken to strengthen further the supervisory capacity of the CBR, and to increase the effectiveness of prudential regulation.
The program incorporates steps to speed up the privatization process, while at the same time making sure that cash privatization is undertaken in a fair and transparent manner. The Government also intends to ensure that opportunities for foreign investors to participate in the privatization process are maintained.
Agricultural reform will be a key ingredient of the medium-term strategy, and the program seeks to address underlying problems with respect to uncertainties about private ownership and inefficient procurement practices. In addition, budgetary transfers to the agricultural sector will be better targeted.
Among other structural reforms, the program contains major initiatives in the areas of urban land and real estate, in order to establish a legal framework that allows for full private ownership and development of land and its utilization as collateral. In the area of the securities markets, the program envisages the development of a more effective legal framework for securities transactions, liquidation and reorganization of insolvent enterprises, and protection of outside investors, as well as strengthening of the independence and enforcement power of the Securities Commission.
As regards structural initiatives in the external area, the Government intends to take the steps necessary to accept by the end of the year the obligations of Article VIII, Sections 2, 3, and 4, of the IMF's Articles of Agreement.
Addressing Social Needs
The program includes measures to protect vulnerable groups during the transition and ensure that benefits of growth contribute to reducing poverty. A rationalization of subsidies, with the potential savings from it being significant, should create adequate room for a meaningful improvement in the social safety net. Minimum pension payments are to be increased along with a reform of retirement-age provisions, while minimum unemployment benefits are to be increased together with the elimination of enterprise employment subsidy schemes.
The Challenge Ahead
The task ahead is to build on the notable, but still fragile, steps towards macroeconomic stabilization achieved under the stand-by program by accelerating the transformation of the Russian economy to a fully functioning market-based system in the context of efforts to consolidate stabilization. The program to be supported by the EFF is highly ambitious and its success will require bold efforts on the part of the Russian Government. Such efforts deserve the support of the international community. It would be expected that IMF support for the medium-term Russian economic strategy through the EFF would be followed by a comprehensive external debt rescheduling, a development that would allow Russia to avoid a cash-flow problem caused by the bunching of debt service obligations between 1996 and 2000.
Russia joined the IMF on June 1, 1992, and its quota1 is SDR 4,313.1 million (about $6,304 million). Its outstanding financial obligations to the IMF currently total SDR 7,099 million (about $10, 376 million).
Sources: Russian authorities and IMF staff estimates
1. 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.