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Russia: Economy Embarks On Recovery

  • Robert Lyle



The world's economy seems to be on the mend after two years of turmoil. That's the latest assessment of the International Monetary Fund (IMF), which says the biggest surprise in that is Russia. RFE/RL's Economics correspondent Robert Lyle reports on the IMF's World Economic Outlook:

Washington, 23 September 1999 (RFE/RL) -- Despite Russia's continuing troubles, the IMF says the country's economic decline is being reversed.

From a negative 4.6 percent growth rate last year, the Russian economy is projected to finish the year in much better shape at a 0 percent growth rate. By next year, however, Russia's growth rate should reach at least two percent.

The reason for the turn around, according to the IMF's Economic Counselor Michael Mussa, is what might be called the silver lining effect.

The country's sharp recession last year, after the devaluation of the ruble and the debt default, followed by a large dose of inflation, sent Russian industrial production into a tailspin.

But the effective devaluation of the ruble to less than 25 percent of its former value had a positive impact -- it made imports very expensive and thus domestically produced goods a whole lot cheaper. Mussa explained at a press conference in Washington Wednesday:

He said: "That has made a lot of domestic goods producing industries in Russia that had previously had difficulty competing with imports, much more price competitive. And there's been a surge of output in those import competing industries behind the protection of a very much depreciated real exchange rate and recovering from a collapse that occurred late last year."

Mussa said that is a normal reaction after a major devaluation. But the report itself warns Russia that this benefit to domestic producers won't last forever. It calls for "a reinvigorated effort" by Russian authorities to move ahead with banking rehabilitation and other major structural reforms.

Mussa said there is another positive side to what Moscow is doing -- improved tax collections and better implementation of fiscal policy:

Mussa said: "The fact is that fiscal policy has improved in Russia from what it was last year, in both total revenues, as a share of GDP (gross domestic product), and cash revenues as a share of GDP are up and the Russian government is now running a primary surplus -- not a huge primary surplus -- but a moderate primary surplus, which means that on balance they are paying back their creditors, not taking on net new credits."

Still, said the report, federal revenues remain low as a percent of the total economy and Moscow failed to "benefit fully" from the financial gains in the huge energy sector stemming from both the ruble devaluation and higher energy prices. It said that while revenues are up, the authorities have continued to fail to act decisively against tax delinquency and the use of non-cash or barter transactions in the economy -- transactions that escape all taxes. Russia's problems did cause additional difficulties for the other former Soviet countries, where close trade and other ties quickly transmitted troubles to Moscow's neighbors, including even the Baltic nations.

For all the nations in transition in the Central and East European and Central Asian region, the IMF says economic growth this year should average nearly one percent and rise to nearly three percent next year.

As usual within this diverse group, the IMF said the differences continue to widen between the stronger and weaker transition economies. Last year, for example, average per capita GDP (gross domestic product) in Central and Eastern Europe and the Baltics was more than twice the level elsewhere in the region.

The report singled out Bulgaria to show that disciplined economic and structural policies can pull a country through both a domestic economic crisis and strong external shocks.

For Russia, added Mussa, it is encouraging that there have been improvements in recent months.

He said: "Now that has not made all the problems of corruption and non-payment and all the rest of it disappear in the Russian economy and society, but I think the improvement we have seen is not inconsistent with what we would have expected in light of the developments."

Globally, the fund projects world economic growth to reach three percent this year -- that's a three-quarters of a percent improvement over the fund's last forecast in May, and it could easily top 3.5 percent in 2000.

The U.S. economy continues robustly, said the IMF report, providing critical engine power for the rest of the world economy. But now with growth resuming in Europe and Japan, and the Russian and Brazilian crises bottoming out earlier than expected, it is time for the American economy to cool off just a bit so it doesn't go into high inflation. A gradual slowing by the U.S. economy over the next year, would, argued Mussa, help keep inflation in check around the world. The fact that inflation is at a 40-year low is a major accomplishment that is paying off all over the world, said the IMF report.

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