The International Monetary Fund on Monday urged Russia to consider raising interest rates and to start withdrawing stimulus measures now to bring public finances under control. Russia's central bank, when it met last week, left key interest rates unchanged after 14 rate cuts aimed at reviving sluggish domestic lending.
In its annual review of Russia's economy, the IMF said the next move should begin a tightening cycle the next time the central bank meets. While the Russian authorities agreed the monetary easing cycle should be paused, the IMF said officials in Moscow expressed concern that raising rates might be premature and could prompt a surge in capital inflows.
The IMF also urged Russia to start fiscal consolidation immediately, given pressures to spend more of the country's oil saving to shore up public finances. "Staff recommended that the fiscal consolidation start now and be stepped up in 2011-12," an IMF staff report, published alongside the review, said. The IMF said cuts needed to be done through long-stalled public-sector reforms, although it noted that the authorities acknowledged there was little appetite for restarting them at this stage.
"Staff expressed concern that delayed implementation of reforms would make it impossible to withdraw the stimulus in a timely manner, noting that the associated macroeconomic risks would increase as cyclical conditions improved," the report said. IMF staff suggested a gradual withdrawal of stimulus measures - something in line with the government's original 2010-2012 medium-term budget, which would cut the non-oil deficit to 9.5 percent of gross domestic product in 2012.
The government, however, passed a supplementary budget in June, which increased the federal non-oil deficit in 2010. A second supplementary budget, which includes public service wage increased, could be passed in the fall, the IMF added. Meanwhile, IMF staff analysis showed that Russia's exchange rate was broadly in line with fundamentals.
The IMF board was divided over whether Russia should introduce more exchange rate flexibility, with some directors saying it would deter speculative capital inflows and others contending the economy would not be able to cope with the volatility that would accompany more flexibility. Following a deep recession, the IMF said Russia's economy was on the mend, although it noted the recovery was fragile and increasingly driven by consumption.
It forecast growth would reach 4.3 percent this year following a contraction of 7.9 percent last year. "Absent sustained increases in oil prices, underlying growth momentum is expected to recover only slowly, causing annual growth to fall back to around 4 percent in 2011," the Fund added. The IMF urged the Russian authorities to deal decisively with non-performing and restructured bank loans, warning they could deter economic growth by hampering credit expansion. The banking system is still under strain and credit is likely to recover only gradually, the Fund said.
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