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Russia: Asian Financial Crisis Kills Economic Growth

  • Robert Lyle



Moscow, 16 March 1998 (RFE/RL) -- The Chief Economist of the World Bank's Moscow Office, Brian Pinto, says the Asian financial crisis will lower Russia's economic growth this year to about one percent.

Pinto says the country recorded its first real growth in 1997 with a GDP (gross domestic product) growth rate of 0.4 percent. He says the bank had been expecting growth in 1998 to rise above 1.5 percent overall, with much higher figures recorded toward the end of the year.

But he told a group of financial journalists in Moscow Sunday, the Asian crisis caused global investors to pull back from developing nations like Russia. To counter the impact of that pullout, Russia was forced to raise interest rates to unusually high levels.

That checked the flight of capital from Russia, says Pinto, but killed growth. It also "brought to the fore" the fact that Moscow must undertaken serious fiscal reforms if it wants to resume solid economic growth.

He says it also has shown that while it is absolutely necessary for Russia to lower inflation and cut interest rates, the combination of the two moves -- while essential -- is not necessarily all that is required to get the economy moving in the right direction.

Pinto noted that inflation in Russia actually broke through the single digits in February, recording an annual rate of 9.5 percent -- an accomplishment he says reflects well on Russian authorities.

In addition, interest rates are beginning to come down, he said, noting that the central bank last Friday announced it was cutting its key refinancing rate from 36 to 30 percent.

That is a good trend, says the World Bank official, but it is not enough because the private sector has now focused on the need to bring the federal budget deficit down. And to do that, he says, the government needs to launch serious fiscal reforms.

Pinto praised the Duma's passage last week of the 1998 government budget, calling it a great short-term action because it means for the first time that the government and the Duma will be using the same figures in calculating budget statistics.

Now the next item on the fiscal reform agenda, he says, has to be Duma passage of the tax reform package. This is necessary for the private sector in Russia -- and investors elsewhere around the world -- to believe that the government's fiscal reform efforts are for real.

Pinto praises the Russian government for embarking on a "very good process" of not only putting together reforms, but also of signaling the private sector, through such actions as protecting minority stock holder rights.

However, he said, the fiscal reform agenda is long and in need of continued strong attention. For example, he said, almost no one has really begun to deal with sub-national level fiscal reforms -- at the oblast level for example -- where many of the problems already dealt with in the federation remain to be tackled on the local level.

The head of the World Bank's Moscow office, Jane Holt, says a part of the local problem yet to be fully dealt with is the huge drain on the federal budget caused by the assumption by local communities of social programs previously paid for by state enterprises. She says many of the local communities are now effectively bankrupt from taking over schooling, health care and other services with no real increase in revenues. She says the bank is discussing potential loan programs to help Russia deal with the problem.
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