Public Information Notice: IMF Concludes Article IV Consultation with Russia
IMF News, August 2, 1999
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- Published: August 2, 1999
Background and crisis origins
- The severe financial crisis that erupted in mid-1998 was due primarily to failure to tackle underlying fiscal problems, in particular to halt the erosion of federal government revenues, and to advance structural reforms.
- Stabilization from 1995 onwards based on maintaining the exchange rate within a band proved tenuous and unsustainable when:
- the external environment deteriorated in 1997-98, and
- political turmoil increased doubts about resolve to address fiscal problems.
- Key pre-crisis fiscal and external conditions:
- Large federal fiscal deficits of 7-8½ percent of GDP in 1996-97.
- External terms of trade deteriorated by almost 18 percent by mid-1998 compared to a year earlier.
- Net financing of the federal government deficit by nonresidents in the form of Eurobonds and ruble-denominated debt declined by 1.8 percent of GDP during July 1997–June 1998, compared with the previous 12-month period.
- Domestic interest rates were increased sharply from late 1997; large losses of external reserves followed under the existing policy mix.
- Policy actions and immediate effects in August–September 1998:
- Restructuring of ruble-denominated government debt and widening of the exchange rate band in August 1998; ruble allowed to float in early September.
- Servicing of Soviet-era external debt halted and talks for rescheduling 1999–2000 debt initiated.
- Financial sector fallout: large number of banks collapsed, domestic payment system impaired, access to international capital markets severed, and trade financing disrupted.
- Output and government revenues contracted sharply; monetary policy stance became lax and inflation rose.
Turnaround in 1999 and macroeconomic developments
- Evidence of recovery (1999):
- Industrial output during April–June 1999 exceeded levels of one year earlier by over 5 percent on average.
- Recovery driven primarily by import substitution following ruble depreciation.
- Foreign exchange market pressures eased; the ruble stabilized.
- Monthly inflation came down to under 2 percent in June 1999.
- Fiscal and monetary outcomes:
- Federal cash deficit fell to 4.7 percent of quarterly GDP during Q1 1999, compared to 5.4 percent during Q4 1998.
- Revenues recovered by 2 percentage points of GDP during the same period; improved revenue performance sustained during Q2 1999.
- External current account (cash basis) swung from a deficit of $2.7 billion in Q1 1998 to a surplus of $4.8 billion in Q1 1999.
- Structural reform status:
- Structural reform agenda suffered a setback in 1998 with administrative foreign exchange measures and a standstill in reforms.
- Some recent reversals of 1998 exchange measures and adoption of a bank restructuring law in June 1999; licenses of a number of large insolvent banks recently withdrawn.
- Authorities’ macroeconomic framework for 1999:
- Output for 1999 envisaged to decline by 2 percent.
- Annual inflation projected to come down to 50 percent in 1999, compared to over 84 percent in 1998.
- Government budget projected to generate a primary surplus of 2 percent of GDP in 1999, compared to a deficit of 1.3 percent in 1998.
- External position expected to strengthen, enabling a small increase in foreign reserves.
Executive Board assessment and priorities
- General view:
- The proposed program represented an appropriate policy response under current circumstances.
- Most Directors judged the August 1998 crisis to have been caused mainly by failure to tackle longstanding fiscal problems and to implement agreed structural reforms; Asia’s crisis was an immediate trigger.
- Directors warned that recent limited recovery would be unsustainable without strenuous efforts to reduce the fiscal deficit and accelerate structural reforms.
- Political economy concerns:
- Past program implementation had been disappointing; many proposed measures had been presented before but not carried out.
- Lack of political support was a factor in previous failures; Directors urged strengthened efforts to build broader support and deeper ownership.
- Fiscal policy emphasis:
- Fiscal consolidation is central to adjustment.
- Target of a federal primary surplus of 2 percent of GDP in 1999 was considered warranted; a further increase would be required in 2000.
- Main fiscal objective: halt and reverse prolonged decline in federal revenues.
- Several Directors cautioned against any reduction in tax rates at present, especially a reduction in the basic value-added tax rate, until tax compliance measures yield significant results.
- Some Directors concerned that heavy reliance on expenditure compression could harm social and economic stability; called for a Public Expenditure Review with the World Bank to address social and poverty alleviation needs and improve accountability.
- Directors stressed need for strong political support to enforce statutory tax obligations and warned that many large enterprises used political influence to avoid seizure of assets in tax delinquency cases.
- Cutting oil pipeline access for tax-delinquent oil companies viewed as potentially very effective; full political support for this measure would be a key test.
- Directors urged refraining from offsetting current expenditures against tax arrears in the future.
- Importance attached to improving budgetary relations between federal and other levels of government, with an appropriate legal framework to clarify responsibilities.
- Monetary and exchange rate policy:
- A flexible exchange rate policy was endorsed as best for current circumstances.
- Directors welcomed monetary tightening since early 1999 and urged resistance to demands for preferential central bank credits to ailing banks and specific sectors.
- Government should pay a market-determined interest rate on central bank credits.
- Directors expressed concern about pressures to curtail central bank independence and recommended resisting such moves.
- Structural reform and financial sector:
- Little progress since August 1998 with some reversals; Directors urged acceleration of reforms.
- Priority structural areas: addressing barter and nonpayments, accelerating bank restructuring.
- Recent strengthening of legal framework for bank restructuring, including establishment of ARCO, and the decision to liquidate six large insolvent banks were welcomed.
- Authorities should continue to liquidate insolvent banks or refer them to the bank restructuring agency and amend the Bank Bankruptcy Act to deal properly with insolvent banks.
- Central Bank of Russia (CBR) should shoulder responsibilities in encouraging bank restructuring.
- Political resolve to advance reforms despite vested interest opposition is a key test; external competition and a level playing field for domestic and foreign banks were encouraged.
- External debt and creditor relations:
- De facto default of GKOs and OFZs noted as a regrettable setback.
- Normalization of relations with domestic and external creditors should be a main objective.
- Under current circumstances, Russia would be unable to service its external debt in full; exceptional balance of payments support in the form of rescheduling payments due in 1999 and 2000 would be unavoidable.
- Directors urged authorities to seek orderly and cooperative rescheduling agreements and welcomed discussions under Paris and London Clubs.
- Each program review under the Fund arrangement will include an examination of financing assurances until arrears are eliminated.
- Transparency, reserves reporting, and cooperation with the Fund:
- Strong disapproval expressed regarding channeling by the CBR of domestic transactions through FIMACO and a fictitious claim on FIMACO, which gave a misleading impression of reserves and policies in 1996.
- Directors viewed these transactions as an episode of fundamental lack of cooperation and a serious violation of Russia's obligations to the Fund.
- Directors strongly urged actions to prevent recurrence and welcomed publication of the PricewaterhouseCoopers report as a potential signal of willingness to enhance transparency.
- Several Directors felt corrective actions to date were insufficient; willingness of the Fund to continue support under the requested Stand-By Arrangement would hinge on Russia taking more forceful actions.
- Several Directors strongly suggested commitment to subscribe to the SDDS, or at least to publish reserves data that fully meet SDDS reporting requirements on reserves.
- Directors urged broader enhancement of timely and comprehensive economic data availability.
Selected economic indicators (as presented)
- Production and prices (annual percentage changes)
- Real GDP: 1996: -3.5; 1997: 0.8; 1998 Est.: -4.6; 1999 Prog.: -2.0
- Change in consumer prices — Annual average: 1996: 47.6; 1997: 14.6; 1998 Est.: 27.8; 1999 Prog.: 92.5
- Change in consumer prices — 12-month: 1996: 21.8; 1997: 11.0; 1998 Est.: 84.4; 1999 Prog.: 50.0
- Change in GDP deflator: 1996: 43.9; 1997: 16.6; 1998 Est.: 11.4; 1999 Prog.: 74.9
- Public sector (in percent of GDP; primary balance and overall balance are on a commitments basis)
- Federal government overall balance: 1996: -8.4; 1997: -7.1; 1998 Est.: -5.9; 1999 Prog.: -5.1
- Federal government primary balance: 1996: -2.5; 1997: -1.3; 1998 Est.: 2.0; 1999 Prog.: 2.0
- Federal government revenue: 1996: 12.5; 1997: 12.3; 1998 Est.: 10.7; 1999 Prog.: 11.6
- of which: cash: 1996: 9.2; 1997: 10.0; 1998 Est.: 9.0
- Federal government expenditure: 1996: 20.9; 1997: 19.0; 1998 Est.: 15.6; 1999 Prog.: 13.9
- Federal government interest: 1996: 5.9; 1997: 4.7; 1998 Est.: 4.0; 1999 Prog.: 4.3
- Federal government noninterest: 1996: 15.0; 1997: 14.3; 1998 Est.: 9.6
- External sector (in billions of U.S. dollars unless otherwise indicated)
- Total exports, fob: 1996: 90.6; 1997: 89.0; 1998 Est.: 74.8; 1999 Prog.: 72.1
- Total imports, fob: 1996: 72.8; 1997: 77.4; 1998 Est.: 56.8; 1999 Prog.: 46.1
- External current account (deficit -): 1996: 3.9; 1997: -3.0; 1998 Est.: 2.3
- Federal government external debt service due: 1996: 17.5; 1997: 15.9; 1998 Est.: 17.4; 1999 Prog.: 18.5
- As percent of exports of goods and services: 1996: 17.0; 1997: 15.4; 1998 Est.: 19.8; 1999 Prog.: 22.3
- Stock of federal government external debt: 1996: 136.1; 1997: 134.6; 1998 Est.: 152.4; 1999 Prog.: 157.0
- As percent of GDP: 1996: 32.6; 1997: 30.9; 1998 Est.: 48.7; 1999 Prog.: 93.1
- Gross reserves coverage (months of imports of goods and services): 1996: 2.2; 1997: 2.6; 1998 Est.: (blank)
- Memorandum items:
- Nominal GDP (billions of rubles): 1996: 2,146; 1997: 2,522; 1998 Est.: 2,685; 1999 Prog.: 4,600
- Exchange rate (rubles per US$ period average): 1996: 5.1; 1997: 5.8; 1998 Est.: 9.7; 1999 Prog.: ...
Public Information Notice: IMF Concludes Article IV Consultation with Russia — August 2, 1999.