Statement by the 2012 Article IV Consultation Mission to the Russian FederationPress Release No. 12/220
June 13, 2012
A staff team from the International Monetary Fund (IMF), headed by Mr. Antonio Spilimbergo, visited Moscow during May 31 - June 13 to hold discussions for the 2012 Article IV consultation.1 The team met with Finance Minister Anton Siluanov, Central Bank of Russia (CBR) Governor Sergei Ignatiev, other senior officials, and representatives from the private sector, academia, and think tanks. At the conclusion of the visit, Mr. Spilimbergo issued the following statement:
“The Russian economy has recovered from the 2008-09 crisis and is now running close to its potential. High oil prices, strong wage growth, and robust consumption have supported demand. Meanwhile, the unemployment rate has fallen below 6 percent and capacity utilization in manufacturing has risen to its pre-crisis peak, suggesting that the remaining slack in the economy is small. While headline inflation slowed to 3.6 percent in May 2012, this owed mostly to a delay in administrative price increases and favorable food prices, and the IMF staff team’s measure of underlying inflation remains above 6 percent.
“The outlook is for continued moderate growth and a rebound in inflation. Under unchanged policies, we project growth of about 4 percent both in 2012 and 2013. With the economy moving above potential, the supply-side factors muting prices reversing, and the exchange rate recently depreciating, inflation is projected to increase to around 6½ percent in 2012 and to remain at that level in 2013.
“The ongoing turbulence in international markets is affecting Russia mostly through oil prices. The reliance on oil exports exposes Russia to declining oil prices, especially if accompanied by large capital outflows. The increased exchange rate flexibility has been a major policy advancement and is helping the Russian economy absorb external shocks, including spillovers from international developments.
“An ambitious fiscal consolidation is needed. This would help avoid overheating in the economy and depleting the wealth of future generations. Cutting the nonoil government deficit by some 1½ percent of GDP in 2012 to 9 percent of GDP, and further by about 1½ percent of GDP per year through 2015 would limit demand pressures in the short term and lay the basis for balanced economic growth and inter-generational equity over the longer term. The immediate priorities include withdrawal of the crisis-related enterprise subsidies and reduction in tax exemptions. Looking further ahead, pension reform is indispensible for fiscal adjustment. To stabilize pension spending at its 2010 level, the retirement age should be raised for both men and women to 63 years by 2030 and 65 years by 2050, in line with increases in life expectancy. In addition, the eligibility criteria for early retirement should be tightened, combined with a strengthening of disability and welfare programs to protect the vulnerable. Other budget measures, such as better targeting of social transfers and improving the efficiency of expenditures, will also be needed.
“A fiscal anchor should be promptly reinstated. Such an anchor would guide medium-term fiscal policy, decoupling the fiscal stance from short-term variations in oil prices and ensuring intergenerational equity. While reinstatement of the nonoil deficit target would be the first-best option, an oil price-based rule, if well designed, could broadly achieve the same objectives. In this regard, however, the specific oil-price rule under discussion would leave the nonoil deficit in excess of the level consistent with intergenerational equity, and a more conservative base oil price would be appropriate. Strong political commitment to the chosen fiscal rule is important; in this respect, continuing the long-standing practice of multiple supplemental budgets during the year would undermine the rule and should be discontinued.
“Monetary policy should be aimed at securing low and stable inflation. Timely tightening of monetary policy is necessary to contain the rebound in inflation and anchor medium-term inflation expectations. At the same time, the CBR should stand ready to provide emergency liquidity as needed if global financial conditions worsen. The greater exchange rate flexibility is a welcome development in this context as, besides helping absorb external shocks, it allows monetary policy to focus squarely on inflation. For the successful adoption of inflation targeting, continued steps to strengthen monetary policy tools are necessary. In addition, further enhancing communication policies, including the publication of inflation forecasts, will be important to improve transparency and convey the rationale for CBR’s policy measures to the public. Transparency would be improved by making the repo rate formally the primary policy interest rate.
“A stronger supervisory framework is key to facilitating sound financial intermediation. The financial system is improving, but concerns remain about asset quality in the context of rapid credit growth and volatile oil prices. Russia continues to improve its financial stability analyses and macro-prudential oversight framework. In this regard, the prompt passing of legislation on consolidated supervision and connected lending and the expansion of the CBR’s powers to use professional judgment remains a top priority.
“Delivering on structural reforms will promote economic growth. Structural reforms are crucial to increase investment, diversify the economy, and raise potential growth. Russia’s accession to the WTO should be seized upon to strengthen the momentum for reforms making the business environment more predictable and rules-based. Complementary steps to reduce corruption, strengthen the rule of law, and scale back state involvement in the economy―including through transparent and decisive privatization of state owned companies―are priorities”.
1 Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with its member countries, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board.