Press Release: IMF Approves Three-Year EFF Credit for the Russian Federation
IMF News, March 26, 1996
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- Published: March 26, 1996
Approval and Credit Details
- The IMF 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 is for three years and is equivalent to 160 percent of Russia's quota in the IMF.
- Disbursement profile reflecting expected improvement in external performance:
- 65 percent of quota in the first year
- 55 percent in the second year
- 40 percent in the third year
- Disbursement frequency:
- Monthly until early 1997
- Quarterly thereafter
- Program monitoring:
- Quantitative targets monitored monthly initially and, starting in early 1997, on a quarterly basis
- IMF Executive Board reviews: monthly during the first year of the EFF and quarterly thereafter
Background and 1995 Performance
- Primary objective since late 1991: achieve financial stabilization while transforming to a market-based system.
- Stand-by credit approved in April 1995: SDR 4,313.1 million (about $6,304 million).
- 1995 program objective: substantial and sustained reduction in inflation via sharply tighter monetary policy and restrictive fiscal policy.
- Outcomes in 1995:
- Inflation fell to low single-digit monthly rates by end-1995
- Real GDP remained broadly stable in 1995, at an average level roughly 4 percent below 1994
- Current account surplus widened to $4.7 billion from $3.4 billion in 1994
- Introduction in July 1995 of an exchange rate corridor generally judged a success
- Structural progress uneven:
- Banking sector restructuring slow
- Privatization pace and scale below expectations
- Much remained to be done on land reform
Medium-Term Strategy and the 1996 Program
- Program aims:
- Lower inflation further towards a single-digit annual rate
- Achieve medium-term viability of the balance of payments
- GDP and inflation projections:
- Real GDP growth envisaged: 2.3 percent in 1996; 5 percent in 1998; sustained at 6 percent a year over the rest of the decade
- Period average consumer price increases envisaged: 51.2 percent in 1996; 6.9 percent in 1998; from 190 percent in 1995
- External sector projections:
- After a surplus of 1.2 percent of GDP in 1995, current account expected to swing into deficits of:
- 0.4 percent of GDP in 1996
- 1.7 percent of GDP in 1998
- Coverage by gross foreign exchange reserves of imports of goods and nonfactor services expected to rise:
- 2.5 months at end-1996
- 2.9 months by end-1998
- Fiscal strategy:
- Reduce overall fiscal deficit (enlarged government) from about 5 percent of GDP in 1995 to:
- 4 percent of GDP in 1996
- 2 percent of GDP in 1998
- Local governments and extra budgetary funds programmed to maintain a balanced position; federal fiscal deficit path set equal to enlarged government
- Financing of deficits projected without recourse to direct credit from the Central Bank of Russia (CBR)
- Revenue and expenditure measures:
- Government aims to improve revenue performance by about five percentage points of GDP over the medium-term
- Measures to broaden tax base and improve tax administration, including:
- Elimination of exemptions (value-added tax, profit tax, excises, import duties)
- Selective increases in tax rates, concentrated in the energy sector (higher excises on oil, gasoline and electricity)
- Efforts to capture the rapidly growing private sector and reduce tax delinquencies
- Expenditure control:
- Strict observance of outlay limits under the 1996 budget law
- Spending initiatives either covered by 1996 appropriations or handled by reallocating expenditures within overall ceiling
- Monetary and exchange rate assumptions:
- Targeted reduction in monthly inflation to around 1 percent by end-1996 requires continued restraint in credit policy
- Pace of overall credit expansion set to decelerate significantly
- Nominal interest rates expected to decline rapidly with lower inflation; real interest rates expected to remain relatively high until well into 1996
- Program assumes continuation of the present exchange rate band until end of June 1996 and a broadly stable nominal exchange rate for the ruble thereafter
Structural Reforms
- Trade:
- Complete liberalization of the export regime and reduce weighted average import duty rate
- Priority assigned to accession to the World Trade Organization (WTO)
- Banking and financial sector:
- Address liquidity and solvency issues
- Introduce new instruments for bank liquidity management
- Improve payments system
- Strengthen supervisory capacity of the CBR and prudential regulation
- Privatization:
- Speed up privatization while ensuring cash privatization is fair and transparent
- Maintain opportunities for foreign investor participation
- Agriculture:
- Address uncertainties about private ownership and inefficient procurement practices
- Better targeting of budgetary transfers to the agricultural sector
- Urban land, real estate, and securities markets:
- Major initiatives to establish legal framework for full private ownership and use of land as collateral
- Develop effective legal framework for securities transactions, liquidation and reorganization of insolvent enterprises, and protection of outside investors
- Strengthen independence and enforcement power of the Securities Commission
- External obligations:
- Government intends 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
- Measures to protect vulnerable groups during transition and ensure growth reduces poverty
- Rationalization of subsidies to create room for improving the social safety net
- Specific measures:
- Increase minimum pension payments along with reform of retirement-age provisions
- Increase minimum unemployment benefits and eliminate enterprise employment subsidy schemes
The Challenge Ahead and External Support
- Program described as highly ambitious and requiring bold efforts by the Russian Government
- IMF support through the EFF expected to be followed by comprehensive external debt rescheduling to avoid a cash-flow problem from bunching of debt service obligations between 1996 and 2000
- Russia's IMF membership and financial position:
- Russia joined the IMF on June 1, 1992
- Russia's quota is SDR 4,313.1 million (about $6,304 million)
- Russia's outstanding financial obligations to the IMF currently total SDR 7,099 million (about $10, 376 million)
Russia: Selected Economic Indicators (as presented)
- Real GDP (percent change):
- 1993: -12.0
- 1994: -15.0
- 1995: -4.0
- 1996*: 2.3
- 1997*: 3.5
- 1998*: 5.1
- Consumer prices (period average):
- 1993: 896
- 1994: 302
- 1995: 190
- 1996*: 51.2
- 1997*: 13.3
- 1998*: 6.9
- Enlarged government fiscal account balance (deficit –) (percent of GDP):
- 1993: -7.6
- 1994: -10.1
- 1995: -4.9
- 1996*: -3.0
- 1997*: -2.0
- External current account balance (deficit –) (percent of GDP):
- 1993: 1.6
- 1994: 1.2
- 1995: -0.4
- 1996*: -1.4
- 1997*: -1.7
- Gross reserves (in months of imports of goods and non-factor services):
- 1993: —
- 1994: 1.1
- 1995: 2.6
- 1996*: 2.5
- 1997*: 2.8
- 1998*: 2.9
Press Release No. 96/13, March 26, 1996.