Press Release: IMF Approves Stand-By Credit for Russia

IMF News, July 28, 1999

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Press Release: IMF Approves Stand-By Credit for Russia

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Bibliographic details

• Published: July 28, 1999

Approval and financing

• The IMF approved a 17-month Stand-By credit for Russia equivalent to SDR 3.3 billion (about US$4.5 billion) to support the government's 1999-2000 economic program.
• There will be seven equal disbursements of SDR 471.429 million (about US$640 million), with the first installment released immediately.
• Subsequent installments depend on completion of quarterly reviews and meeting of performance criteria and structural benchmarks.

Executive Board findings and key emphases

• Directors found the 1998 crisis was due mainly to failure to address longstanding fiscal problems and implement structural reform; Asia's crisis was an immediate cause.
• Directors endorsed the focus on fiscal consolidation and acceleration of structural reforms, and underscored the need for full and timely implementation.
• Directors urged authorities to promote broader support for, and understanding of, the program in Russia.
• On fiscal policy:
  • Directors found fiscal targets "appropriately ambitious."
  • They warned targets would not be achieved without strong political support to enforce large enterprises' compliance with statutory tax obligations.
  • They urged authorities to refrain from allowing tax arrears to be offset against current expenditures.
  • They emphasized delaying further cuts in tax rates until tax compliance measures yielded significant results.
  • Directors urged Russia and the World Bank to work together on a Public Expenditure Review focused on social and poverty alleviation needs.
• On monetary and exchange rate policy:
  • Directors emphasized that Russia was best served by a flexible exchange rate policy under current circumstances.
  • They welcomed the tightening of monetary policy since early 1999 and urged the government to resist pressures to curtail the independence of the Central Bank.
• On structural reform priorities:
  • Directors noted little progress since last August and some reversal in important areas.
  • Tackling barter and nonpayments and accelerating bank restructuring were flagged as key to sustainability.
  • Political resolve to advance bank restructuring would require resisting fierce opposition from vested interests.
• On debt and creditor relations:
  • Directors noted the de facto default on GKOs and OFZs was a regrettable setback and urged normalization of relations with domestic and external creditors through orderly and cooperative rescheduling.
• On Central Bank transparency:
  • Directors expressed strong disapproval of channeling by the Central Bank of domestic transactions through FIMACO and related transfers that gave a misleading impression of reserves and monetary/exchange rate policies.
  • They urged immediate steps to prevent reoccurrence and took note that the July 1998 tranche from the Fund had not been misappropriated.

Program summary: objectives and assumptions

• Main focus: fiscal adjustment and acceleration of structural reforms, to be tackled in tandem.
• Fiscal program targets:
  • Primary surplus at the level of the federal government of 2% of GDP in 1999.
  • This represents an adjustment of about 3½ percentage points of GDP compared to 1998.
• Inflation and reserves:
  • Program targets an inflation rate of 50% in 1999 (December to December), compared to 84.5% in 1998.
  • Net international reserves are targeted to increase by US$2.2 billion in 1999, with an increase in gross reserves of US$1.7 billion during the last three quarters of the year.
• Output:
  • Real GDP is assumed to decline by 2% in 1999.
• Monetary policy stance:
  • Monetary policy will be conducted in the framework of a flexible exchange rate policy.
  • Authorities will intervene to smooth exchange rate fluctuations but will not resist fundamental balance of payments changes.
• Debt and external support assumptions:
  • The 1999 program assumes rescheduling of nearly all obligations on Soviet-era debt falling due in 1999-2000.
  • Assumes provision of additional exceptional balance of payments support from the IMF, the World Bank, and Japan.
  • Assumes all Russian-era debt will continue to be serviced as scheduled.

Fiscal measures and revenue strategy

• Strategy to raise revenues:
  • Introduce new taxes and raise other tax rates to capture windfall gains from the large ruble depreciation and increase taxation of consumption.
  • Implement a wide range of measures to improve tax compliance.
  • Avoid recourse to tax offsets.
  • Cut the oil pipeline access of tax-delinquent oil companies.
  • Increase enterprise compliance with statutory tax obligations.
• Expenditure measures:
  • Further prioritize spending and control commitments by line ministries.
  • Conduct a planned comprehensive expenditure review.

Structural reform agenda

• Four broad categories:

1. Financial sector reform, including bank restructuring. 2. Private sector development, industrial restructuring, and liberalization of foreign direct investment and international trade. 3. Enhancement of fiscal management. 4. Improvements in competitiveness, transparency, and accountability of infrastructure monopolies.

• Measures will address problems of nonpayments and improve transparency of the Central Bank's operations and its relations with commercial banks.

Background: 1998 crisis and recent developments

• Russia's exchange-rate-based stabilization strategy (gains since 1995) was abandoned in August 1998.
• August 17, 1998: authorities announced a default on ruble-denominated treasury bills and bonds maturing before end-1999 and widened the exchange rate band.
• Early September 1998: the ruble was floated, leading to large depreciation, loss of access to international capital markets, virtual collapse of the banking sector, and accumulation of large external arrears.
• Aftermath:
  • Little progress in bank restructuring and standstill in other structural reforms.
  • Output contracted, government revenues fell, and inflation accelerated during Q4 1998.
  • Situation turned around recently: policies tightened, inflation came down to below 2% on a monthly basis in June, industrial output recovered, some restrictive foreign exchange control measures revoked, and some progress in bank restructuring.

External position, IMF membership, and financing stock

• Russia joined the IMF on June 1, 1992.
• Russia's quota is SDR 5.9 billion (about US$8 billion).
• Outstanding use of IMF financing currently totals SDR 12 billion (about US$16 billion).

Russian Federation: Macroeconomic Indicators, 1996-99 (selected figures)

• Production and prices (annual percentage changes)
  • Real GDP: 1996: -3.5; 1997: 0.8; 1998: -4.6; 1999 Est. Prog.: -2.0
  • Change in consumer prices, Annual average: 1996: 47.6; 1997: 14.6; 1998: 27.8; 1999 Est. Prog.: 92.5
  • Change in consumer prices, 12-month: 1996: 21.8; 1997: 11.0; 1998: 84.4; 1999 Est. Prog.: 50.0
  • Change in GDP deflator: 1996: 43.9; 1997: 16.6; 1998: 11.4; 1999 Est. Prog.: 74.9
• Public sector (in percent of GDP; revenues and expenditures on a cash basis; balances on commitment basis)
  • Federal government overall balance: 1996: -8.4; 1997: -7.1; 1998: -5.9; 1999 Est. Prog.: -5.1
  • Federal government primary balance: 1996: -2.5; 1997: -1.3; 1998: 2.0; 1999 Est. Prog.: (not separately listed beyond context)
  • Revenue: 1996: 12.5; 1997: 12.3; 1998: 10.7; 1999 Est. Prog.: 11.6
  • Expenditure: 1996: 20.9; 1997: 19.0; 1998: 15.6; 1999 Est. Prog.: 13.9
  • Interest expenditure: 1996: 5.9; 1997: 4.7; 1998: 4.0; 1999 Est. Prog.: 4.3
  • Noninterest expenditure: 1996: 15.0; 1997: 14.3; 1998: 9.6; 1999 Est. Prog.: (not separately listed beyond context)
• External sector (in billions of U.S. dollars unless otherwise indicated)
  • Total exports, f.o.b.: 1996: 90.6; 1997: 89.0; 1998: 74.8; 1999 Est. Prog.: 72.1
  • Total imports, f.o.b.: 1996: 72.8; 1997: 77.4; 1998: 56.8; 1999 Est. Prog.: 46.1
  • External current account (deficit -): 1996: 3.9; 1997: -3.0; 1998: 2.3; 1999 Est. Prog.: (not separately listed beyond context)
  • Federal government external debt service due: 1996: 17.5; 1997: 15.9; 1998: 17.4; 1999 Est. Prog.: 18.5
  • Federal government external debt service due as percent of exports of goods and services: 1996: 17.0; 1997: 15.4; 1998: 19.8; 1999 Est. Prog.: 22.3
  • Stock of federal government external debt: 1996: 136.1; 1997: 134.6; 1998: 152.4; 1999 Est. Prog.: 157.0
  • Stock of federal government external debt as percent of GDP: 1996: 32.6; 1997: 30.9; 1998: 48.7; 1999 Est. Prog.: 93.1
  • Gross reserves coverage (months of imports of goods and services) 1/: 1996: 2.2
• Memorandum items:
  • Nominal GDP (billions of rubles): 1996: 2,146; 1997: 2,522; 1998: 2,685; 1999 Est. Prog.: 4,600
  • Nominal GDP (billions of U.S. dollars): 1996: 417.4; 1997: 435.5; 1998: 313.0; 1999 Est. Prog.: 168.7

International Monetary Fund press release, July 28, 1999.

References

• Russian Federation and the IMF
• Press Releases
• PRESS CENTER
• https://www.imf.org/en/home