Press Release: IMF Approves Stand-by Credit for Russia
IMF News, April 11, 1995
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- Published: April 11, 1995
Overview
- The International Monetary Fund (IMF) 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.
- Background noted disappointing overall performance under Russia's 1994 economic program: inflation at year-end was over twice as high as envisioned; net international reserve targets were missed; fiscal policy moved significantly off-track due to weak revenue performance and a surge in expenditure; monetary policy, while meeting the net domestic assets ceiling, proved insufficiently tight.
- Actions by the Central Bank of Russia (CBR) in late 1994 and early 1995 to tighten monetary policy had begun to show positive results: inflation declined and official reserves began to increase. The statement warns that without major fiscal improvement, adjustment burdens would fall too heavily on monetary policy and likely be unsustainable.
The 1995 Program — Objectives and Macroeconomic Projections
- Key objectives:
- Bring inflation down very quickly to an average monthly rate of 1 percent in the second half of the year via major tightening of monetary policy and a substantial cut in the fiscal deficit.
- Accelerate move to a market economy through wide-ranging structural reforms, including measures to liberalize the trade regime and the oil sector.
- Macroeconomic projections and expectations:
- The program envisages a decline in real GDP of 9 percent, compared with 15 percent in 1994.
- Recent developments indicate the 1995 GDP projection "may be on the cautious side"; GDP likely stable or on a rising trend by mid-year.
- Private investment as a percentage of GDP expected to remain roughly constant at just over 23 percent.
- Improvement in the external current account of about 1/2 percent of GDP—expected to a slight surplus.
- Gross international reserves projected to increase to a level equivalent to nearly two months of imports by end-1995.
Fiscal and Monetary Measures
- Monetary tightening and credit controls:
- Net credit from the monetary authorities to the enlarged government, almost 8 percent of GDP in 1994, will be restricted to less than 3 percent in 1995.
- Cessation of direct credits from the CBR to finance the budget deficit, except for limited short-term, intra-year borrowing in the first quarter.
- Net credit to banks, 0.6 percent of GDP in 1994, will be cut to zero.
- Development of new instruments and facilities (including rediscount and Lombard credit facilities and REPO operations) to strengthen CBR market operations.
- Steps to improve coordination of foreign exchange market intervention with the Ministry of Finance.
- New legislation to modify CBR status and strengthen regulatory and supervisory capacity.
- Fiscal consolidation:
- Federal government deficit targeted to fall to 6 percent of GDP in 1995 from nearly 11 percent in 1994—a near halving.
- Additional revenue measures: increases in excise rates on gas and crude oil combined with improvements in compliance; an increase in the gasoline tax; reduction in coverage of zero-rated imports.
- Spending-side adjustment: limit the increase in nominal spending to yield real expenditure cuts of more than 15 percent, bringing the ratio of expenditure to GDP down to 19-1/2 percent.
Structural Reforms
- Trade and oil sector:
- Final steps in liberalization of the export regime to be taken in 1995; maintain an open policy on imports and roll back some tariff dispersion introduced July 1, 1994.
- No quantitative restrictions on exports or imports or on the number of participants in trade, except narrowly defined areas.
- Oil sector measures: abolition of oil export quotas; effective April 1, 1995, a liberal system of access to oil export facilities introduced; ceiling on contracts to export oil under intergovernmental agreements; domestic procurement of such oil based on competitive tenders; contract prices set at world levels.
- Abolition of the system of special exporters of strategic goods (including oil) and gradual reduction of the oil export duty expected to increase domestic wholesale prices from around US$40 per ton at end-1994 to US$65-US$70 per ton by end-1995.
- Privatization and market opening:
- Reaffirmed commitment to develop and strengthen privatization program; sales of public enterprises for cash to be invigorated, including sale of large blocks of shares to major investors.
- Reduce prohibitions and limitations; ensure treatment of foreign investors aligns with internationally accepted standards.
- Price controls and enterprise arrears:
- Eliminate remaining federal-level controls on prices and profit margins by end-1995, except for certain clearly defined monopolies where improved price regulation across regions is aimed.
- Government and CBR will not extend credits or government loans to clear interenterprise arrears.
- Introduction of standardized bills of exchange to securitize interenterprise debts to help address arrears and promote market efficiency.
- Banking and land reform:
- Continued cleaning up of CBR portfolio with respect to nonperforming centralized credit.
- More closely monitor banks' financial situation in light of commercial risk exposure.
- Accelerate land reform: issue certificates of ownership to all land owners; accelerate land auctions; submit laws on registration of land titles and on mortgages to the Federal Assembly by May 1, 1995; legislation to permit sale of land occupied by enterprises; abolition of several restrictions on sale of land and commercial buildings.
Addressing Social Costs
- Comprehensive reforms planned to enhance efficiency of social spending while preserving fiscal and inflation objectives:
- Reform pension system, social insurance, health care, unemployment benefits, and education to target benefits to the most needy.
- Submit to the State Duma a proposal to increase unemployment benefits while reducing use of Employment Fund resources for support of individual enterprises.
- Devise program to privatize or gradually transfer to local governments social services currently provided by enterprises to facilitate closing or restructuring inefficient enterprises.
Monitoring and Implementation
- Implementation requires close cooperation among government parts; Ministry of Finance and CBR developing organizational structures for coordination of credit, monetary and budget policies, management of government debt, and foreign exchange policy.
- A Working Group under the Government Commission on Financial and Monetary Policy established to include representatives from the Ministry of Finance, the Ministry of Economy, the CBR, and IMF staff to review macroeconomic developments and progress on structural reforms.
- Performance under the program to be discussed with IMF staff once a month and reviewed by the IMF's Executive Board to determine Russia's eligibility to draw on the stand-by credit.
The Challenge Ahead
- The program described as bold and ambitious; if fully implemented, would mark a decisive break with extended large financial imbalances and could set the stage for sustained investment and growth with private and official capital inflows.
- Russia will continue to need consistent international support for some time, including debt relief.
- With appropriate policies, the press release states Russia has the capacity to unlock its huge productive potential and develop a strong external position over the medium term.
Selected Economic Indicators (as presented)
- Real GDP (percent change): 1992: –19; 1993: –12; 1994*: –15; 1995**: –9
- Consumer prices (average): 1992: 1,353; 1993: 896; 1994*: 302; 1995**: 143
- Current account balance, (deficit –) (percent of GDP): 1993: 1.6; 1994*: 0.4; 1995**: 0.2
- Federal government deficit (percent of GDP): 1992: –10.7; 1993: –6.7; 1994*: –10.9; 1995**: –6.0
- Russia became an IMF member on June 1, 1992; its quota is SDR 4,313.1 million (about US$6.8 billion); outstanding use of IMF credit currently totals SDR 2,875.55 million (about US$4.5 billion).
Press Release No. 95/21, April 11, 1995 — International Monetary Fund