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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On June 28, 2013, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Myanmar¹.

Recent economic developments have been positive. Growth is estimated to have risen to 6½ percent in fiscal year 2012/13 (April-May), driven by gas production, construction and services while inflation climbed to 4.7 percent in March 2013. The external current account deficit is estimated to have widened to around 4½ percent of GDP in 2012/13, but to have been largely financed by foreign direct investment. The recent depreciation of the kyat is contributing to aligning the exchange rate with longer-term fundamentals, after some apparent overvaluation during 2012. The auction-determined reference exchange rate, which is the rate used by the central bank, and the informal rate have converged. International reserves, some of which are still held by state banks, have increased to US$4.6 billion at end-March, covering 3¾ months of prospective imports. Broad money and private sector credit are growing rapidly. The fiscal deficit in 2012/13 is estimated to have declined to 3¾ percent of GDP, on account of higher tax revenues.

Over the past year, the government has successfully pursued wide-ranging economic reforms, including under their Staff-Monitored Program with the IMF, which is on track. It focuses on maintaining macroeconomic stability throughout the reform process and building the institutions and tools needed for the medium-term. Central elements of the government’s policy program have been the adoption of a managed floating exchange regime, and the establishment of a functioning formal foreign exchange market. The government has also liberalized imports and removed exchange restrictions, and steps to liberalize bank lending have been taken. In 2012/13, budget allocations for health and educations have been increased substantially, and efforts to reform tax policy and strengthen tax administration are underway. Legislation to improve the business climate and boost investment has also been passed.

The economic outlook remains favorable. Growth is expected to accelerate slightly in 2013/14, led by rising gas production and investment, including in the transport and telecommunications sectors, and a recovery in agriculture. Pressures from wage increases and asset prices are building, but inflation is expected to remain contained at around 6½ percent (year-on-year) assisted by global commodity prices which are forecast to decline. International reserves are projected to continue to rise. Financial intermediation is forecast to increase further, with broad money and credit to the economy continuing to expand at double-digit rates. Following a mid-year supplementary allocation, the budget deficit is projected at around 5 percent of GDP. In the medium-term, sustained and inclusive growth of around 7 percent is achievable, provided institutions and policies to manage the economy and supervise the financial system continue to be built. In addition, policies supportive of private sector investment, as well as public spending on infrastructure, health, and education are required. Risks to this outlook stem from limited macroeconomic management capacity, which is being strained by the rapid, broad-based economic transition and emerging domestic price pressures.

Executive Board Assessment

Executive Directors commended the authorities for the impressive progress in liberalizing the economy, which had facilitated development and poverty reduction. They welcomed in particular the advancement toward medium-term macroeconomic stability and institutional development objectives outlined in the government’s economic program. Directors noted, however, that the challenges ahead are daunting, requiring stronger institutions and prudent policies to preserve macroeconomic and financial stability during the economic transformation. Accordingly, they stressed the importance of proceeding with needed reforms in a carefully sequenced manner and at a pace consistent with administrative capabilities.

Directors considered that fiscal policy appropriately balances macroeconomic stability with development objectives. They supported plans to reorient expenditures toward health, education, and infrastructure, taking due regard to implementation and absorptive capacity, as well as the need to maintain debt sustainability following the recent rescheduling of external arrears. Directors encouraged the authorities to reduce the monetization of the fiscal deficit further, and to develop a medium-term fiscal framework aimed at smoothing expenditure and building fiscal buffers. This would require improved public financial management and a well-administered broad-based tax system to mobilize non-resource revenues.

Directors welcomed the far-reaching liberalization of the foreign exchange system. They observed that the adoption of a managed float regime has facilitated the convergence of the formal and informal exchange rates, and the recent depreciation of the kyat has helped align the exchange rate with longer-term fundamentals. Directors encouraged a further build-up of the central bank’s international reserves to more comfortable levels in support of the reform process. They looked forward to the full liberalization of current account transactions envisaged for this year.

Directors highlighted the urgency of improving monetary policy tools. Key priorities in this area are the enactment of a new central bank law to establish an autonomous and credible monetary authority and the development of instruments for effective monetary operations. Directors welcomed the resumption of regular deposit auctions and looked forward to the removal of financing constraints on open market operations.

Directors encouraged sustained efforts to develop a modern financial sector to support growth and the transmission of monetary policy. In this context, they emphasized the need to strengthen supervision, including of foreign exchange operations and state banks, enhance prudential regulations and regulatory capacity, and improve licensing procedures for banks. Directors also urged the authorities to address remaining deficiencies in their regime against money laundering and the financing of terrorism.

Directors recognized the importance of intensive technical assistance to support Myanmar’s reform process, and noted that technical assistance should be demand-led and tailored to Myanmar’s specific needs. The breadth of the reform agenda and the limited implementation capacity call for prioritization and close coordination with development partners. Directors stressed that particular priority should be given to improving economic statistics.

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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. 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 summings up can be found here:http://www.imf.org/external/np/sec/misc/qualifiers.htm.