IMF Sees Subdued Growth in Russia

Thursday, June 23, 2005

The International Monetary Fund (IMF) sees subdued growth in Russia. The mission estimates that real GDP will grow by about 5.5 percent in 2005, close to the government's revised estimate of 5.8 percent, and well below the 7.1 percent recorded in 2004. The main reason for this is the assumption that growth in oil extraction will not regain the fast pace of recent years, but also that investment growth will fail to recover fully as well.
NOTE:
As oil has pushed through the 60-dollar mark today this concluding statement from June 6, published today at the IMF website may not be 100 percent accurate anymore.
I have omitted the advisory part as I am critical of the IMF recipes. Bolivia has come close to civil strife recently after they had implemented the IMF's advice of more privatization that ultimately led to the installation of coin operated water meters amongst other measures by the new owners of vital resources of the country. Bolivia has since reversed most of the policies the IMF had requested in return for international loans.
Concluding statement of the IMF mission to Russia 2005
Russia has had several years of high GDP growth, partly due to high oil prices, but also good macroeconomic policies, notably that of taxing and saving oil revenues. This policy is now being relaxed, however, as a much larger share of oil revenues is being spent by the government, despite continued buoyancy in other demand and a slowdown in potential growth. This risks exacerbating the slowdown by increasing the already high inflationary pressures and causing the real ruble appreciation to overshoot its long-term path. Moreover, while there is scope for relaxing fiscal policy once inflationary pressures ease, the fact that the increased spending is used overwhelmingly for public sector wages and pensions suggest that the oil wealth is not being harnessed in support of reforms that could raise potential GDP growth. At best, Russia risks missing an opportunity to accelerate growth over the long run; at worst, it may have to undertake a painful and prolonged fiscal tightening if oil prices drop substantially. If it is becoming politically impossible to continue to resist pressures to spend the oil wealth on wages and transfers, it becomes a matter of urgency to raise potential growth by reinvigorating structural reforms, which have lost the momentum that they had a few years back
GDP growth has slowed. While growth in all the main components of demand accelerated notably in 2004, GDP growth decelerated and the higher demand spilled over entirely into higher imports and increased inflationary pressures. This points to emerging supply constraints in some sectors and in local labor markets, after 6-7 years of robust GDP growth but relatively low levels of investments. The deceleration in GDP growth was pronounced since mid-2004, when oil production weakened notably, due to disruptions associated with the break-up of Yukos and capacity constraints in both extraction and transportation. The Yukos affair appears also to have taken a toll on the investment climate as investment growth began to decelerate from mid-year as well, suggesting that the slowing of GDP growth has reflected an interplay of demand and supply factors. Recent data confirm that GDP has continued to grow more slowly in 2005 and that inflationary pressures have remained high.
GDP growth is likely to remain subdued. The mission estimates that real GDP will grow by about 5.5 percent in 2005, close to the government's revised estimate of 5.8 percent, and well below the 7.1 percent recorded in 2004. The main reason for this is the assumption that growth in oil extraction will not regain the fast pace of recent years, but also that investment growth will fail to recover fully as well. Consumption growth, on the other hand, is expected to remain buoyant, and could possibly even accelerate compared to 2004, due to the continued strong growth in real wages, record high oil prices, and a much more expansionary fiscal policy stance. As in 2004, it is expected that a further boost to consumption will elicit only a limited domestic supply response, causing mainly a further sharp rise in imports. Achieving even a modest decline in inflation under these conditions will require a change in monetary and exchange rate policies, as discussed below. The projections are admittedly subject to much uncertainty, especially with regard to the investment climate and the extent of supply constraints in the economy, not least in the energy sector.
Oil Price Should Not Be the Problem for Russian Budget
As to 2006, plans discussed with the mission entail a further relaxation on a constant oil price basis by, at least, 1.3 percent of GDP. This assumes that the government will be able to maintain expenditure constant as a share of GDP, despite allocations for a new investment fund, additional transfers to the regions, and the need to make a down payment on the President's promise to raise pensions and public wages by 50 percent in real terms over the next three years. The mission estimates that the oil price required to balance the budget at the federal level is set to increase from $23 per barrel in 2004 to $28 per barrel in 2005 and to $31 per barrel in 2006

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