On September 18, 2013, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Russian Federation.1
Real GDP growth in Russia has slowed, amid weak investment and external demand. Yet, the economy remains close to full capacity, with unemployment at historic lows and capacity utilization at pre-crisis highs. Short-term indicators are mixed, but on balance suggest some recovery of activity in recent months, indicating a stronger growth outlook for the second half of this year. Inflation has remained above target on the back of food prices and regulated tariff hikes, but has started to decline gradually since June. Recent global financial market turbulence has put some pressure on the exchange rate, the local bond market, and equities, and may have contributed to an acceleration of capital outflows. The current account surplus has been shrinking, reflecting growing imports and deteriorating service and income account balances.
The near-term outlook is for moderate growth and inflation at the upper end of the target range of the Central Bank of the Russian Federation (CBR). Staff projects real GDP growth at 1.5 percent in 2013 and 3 percent in 2014, assuming that the global environment improves as expected, and no downside risks are realized. Inflation is projected to abate to 6.2 percent (year-on-year) by end-2013 as the effects of temporary supply-side shocks fade, but to remain above the authorities’ target range of 4 to 5 percent next year.
The fiscal policy stance has turned roughly neutral. The general government balance was in surplus in 2012, but is turning negative in 2013 as revenue growth has shown some weakness, but expenditure restraint has kept the non-oil balance roughly unchanged from last year. The Reserve Fund balance has increased following deposit of 2012 oil savings, but remains well short of the government’s 7 percent of GDP target.
Against the backdrop of continued high inflation, the monetary policy stance has remained on hold throughout the first half of 2013. The CBR has gradually lowered some secondary rates on longer-term facilities in an effort to strengthen monetary transmission. Money market rates edged up in 2013:Q2 and liquidity conditions have been volatile, driven by the budget cycle and seasonal factors. The increased flexibility of the exchange rate should help maintain external balances in line with medium-term fundamentals.
Overall credit growth has slowed, but unsecured consumer lending continues to expand at a rapid pace. The slowdown in corporate credit has been mainly demand-driven, reflecting low investment and working capital financing, due to slower economic activity, while declining bank capitalization and tightened prudential regulations beginning to constrain the supply of credit.
Executive Board Assessment2
Executive Directors noted that Russia’s macroeconomic policy framework has strengthened and that the economy appears to be operating at close to full capacity. However, growth is slowing down and risks are tilted to the downside on account of potential external and internal shocks. To address the challenges ahead and to increase potential output growth, Directors saw need for further strengthening of policies and decisive implementation of structural reforms, particularly supply-side reforms.
Directors considered the 2013 fiscal stance to be broadly appropriate and encouraged the authorities to resist pressures for higher government spending so as to avoid intensifying inflationary pressures. Additional spending needed for infrastructure projects should be offset by cuts in lower-priority expenditures. To rebuild fiscal buffers and to generate sufficient saving of oil revenue, Directors called for a gradual tightening of fiscal policy in the medium term. Some Directors saw merit in a cautious approach at the current juncture given the uncertain global environment. To protect growth-enhancing investment spending, adjustment efforts should primarily focus on rebalancing the mix of spending and enhancing its efficiency, and pursuing structural reforms, in particular pension reform. Directors welcomed the introduction of the new oil-price-based fiscal rule and highlighted the importance of strengthening it further. They encouraged the authorities to pursue policies consistent with the spirit of the fiscal rule and resist calls to circumvent expenditure limits.
Directors welcomed the improvements in the monetary policy framework and agreed that the current stance is consistent with achieving medium-term inflation objectives. However, to secure low and stable inflation, they generally recommended keeping monetary policy on hold with a tightening bias. Directors noted that completing the transition to a flexible exchange rate and inflation targeting by end-2014 should help anchor inflation expectations and long-term lending rates. Taking steps to strengthen the transmission mechanism of monetary policy will also be important.
Directors welcomed recent improvements in the financial sector supervisory framework. Against the backdrop of continued high growth in unsecured retail lending and still moderate but rising financial stability risks, they emphasized the need for additional prudential measures. Implementation of the past Financial Sector Assessment Program (FSAP) recommendations will help address weaknesses in the supervisory framework. To enhance the financial sector’s efficiency and its role in supporting economic growth, Directors advised further strengthening of corporate governance, creditor rights, and competition.
Directors stressed that ambitious supply-side structural reforms are necessary to raise Russia’s medium-term potential growth and reduce vulnerabilities. Noting that economic growth going forward will have to rely on more efficient use of resources and higher investment rather than increasing oil prices and use of spare capacity, Directors called for policies to boost productivity and improve the investment climate, governance, transparency, and property rights protection. They encouraged the authorities to draw on the OECD accession process for advancing and widening the reform agenda.
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Sources: Russian authorities; and IMF staff estimates
1 Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with members, 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.
2 At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country’s authorities. An explanation of any qualifiers used in summing up can be found here:http://www.imf.org/external/np/sec/misc/qualifiers.htm
3 Real GDP growth and prices for 2013-14 reflect updated staff projections.
4 Cash basis. Expenditures based on 2013-15 budget and the fiscal rule.
5 In months of imports of goods and non-factor services.
6 WEO through 2011, and Brent crude oil spot and futures prices for 2012-14.