Sept. 22 – Russia must make fundamental changes to its fiscal and monetary policy in the next few years to reach stable economic growth and reduce the country’s vulnerability to external shocks, the International Monetary Fund said Wednesday.
Under the current economic scenario, Russia will remain vulnerable to shocks, with GDP showing modest growth of 3.8 percent annually through 2016 and remaining below 4 percent in the long term, said Odd Per Brekk, the IMF’s senior resident representative in Russia.
To achieve annual economic growth of up to 6 percent, the government needs to cut its non-oil budget deficit to 4.7 percent of gross domestic product by 2015, Brekk said.
Under the IMF’s worst-case scenario for the country’s post-election economic growth, the country might enter a recession for a year or two if oil prices fall to US$50 a barrel next year and capital flight continues.
According to the Central Bank, the capital flight in the first half of this year amounted to US$31.2 billion.
The regulator expects the capital outflow to reach about US$35 billion by the end of this year, but is predicting an inflow of US$10 billion to US$15 billion in 2012.
According to Brekk, the capital inflows will remain insignificant for the next few years.
The IMF concurs that the government should proceed with reforms to diversify the oil export-driven economy, as Russia has faced severe economic instability over the last 10 years due to its excessive reliance on the energy sector.
“Both fiscal policy and monetary policy have contributed to the instability over the past decade. And on both, the fiscal policy front and the monetary policy front, you need firmer anchors,” Brekk said.
The collapse of Russia’s economy in 2008-2009, when GDP fell nearly 8 percent, laid bare the shortcoming of an economy that remains heavily skewed towards consumption and has very low investment rates.
Many economists have warned that Russia faces stagnation unless it rationalises a budget process that is politically beholden to special interests and focused on social spending.
Alexei Kudrin, finance minister, said last year that tax breaks given to Russian companies alone were equivalent to 5 percent of GDP.
“We could cure our budget deficit without increasing rates just by getting rid of tax breaks,” he said at the time.
The IMF recommends “a more ambitious, but also a more growth-friendly” fiscal consolidation. Taxes need to be reformed, without raising rates, while subsidies and tax breaks should be curbed, Brekk said.
“There’s a fairly substantial scope for raising revenues without raising tax rates in the sense that you can improve tax administration, you can reduce exemptions,” he said.
On Tuesday, the IMF cut its 2011 GDP growth forecast for Russia to 4.3 percent from previous 4.8 percent and next year to 4.1 percent from 4.5 percent.
The IMF expects inflation to come in at 7.5 percent this year.