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Russia: IMF Warns Against Government Control Of Central Bank

  • Robert Lyle

Washington, 22 February 1999 (RFE/RL) -- The full impact of the International Monetary Fund's concerns about the status of the Russian Central Bank are expected to be felt this week in Moscow as the parliament mulls the IMF's warnings about proposals to bring the bank more under control of the government.

The Deputy Director of the IMF's department dealing with Russia, Jorge Marquez-Ruarte, wrote a letter to Russian Central Bank Chairman Viktor Gerashchenko on February 12, expressing concerns about parliamentary proposals to "seriously compromise the independence" of the Central Bank.

RFE/RL obtained a copy of the letter, which also began circulating around the parliament last Friday.

In the letter, Marquez-Ruarte warned that proposed amendments to the law on the central bank could both rekindle inflation and further undermine the stability of the ruble.

The Central Bank, said the IMF official, must be free at its own initiative to engage in all market operations, including buying and selling assets. It must not, he said, be constrained by other government departments having "right of economic administration" over state capital (money) and property.

Marquez-Ruarte went through a long list of proposed amendment's to Russia's central bank law, pointing out for example that a proposed statement of policy objectives be given the force of law would be "counter-productive." In carrying out its responsibilities, he said, a central bank has to be able to react to unforeseen market developments and judiciously use its monetary policy instruments to handle the situation.

The IMF official said the fund was "particularly disturbed" by the implications of a proposed amendment which would restrict the bank's ability to set interest rates. "Any guidelines prepared at the outset of the year cannot fully predict the evolution of market interest rates," wrote Marquez-Ruarte, and it would be "impossible" for a central bank to stick to any pre-specified levels and still conduct an effective monetary policy.

Limits on open market operations (buying and selling currencies), he added, would be "very dangerous" because they would leave the bank unable to cope with unforeseen threats to overall economic stability.

The IMF letter went on to warn against the parliament mandating inter-bank borrowing rates, or legislating incomes, expenditures and profits of the bank. "A central bank needs to stand ready to incur losses, if necessary, in fulfilling policy objectives," said the IMF.

However, the letter said, the government must ensure that the capital of the central bank is protected and that if the bank's expenditures exceed its income, the government should stand ready to provide the necessary capital.

Another proposed amendment which the IMF found disturbing would give the central bank control and the auditing function over the government's budget. That function, said the IMF, belongs only with the government's treasury.

Marquez-Ruarte did not address the controversy about the bank's secret use of a self-created private offshore firm to handle large amounts of the country's foreign exchange reserves in the mid-1990s. He did say the IMF comes down very much on the side of "increasing transparency and accountability of the central bank without placing limits on its independence in exercising monetary policy."

He told Gerashchenko that continued independence of the central bank is a "key element of an economic program that could be supported" by the IMF. Russian officials have not yet reacted.