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Former U.S.S.R.: Economic Systems Still Fragile, Says IMF

Washington, 24 September 1996 (RFE/RL) -- While countries of the former Soviet Union have made "considerable progress" toward economic stabilization, the situation in these countries remains "fragile," says a senior official of the International Monetary Fund (IMF).

John Odling-Smee says the situation is fragile because of the "pressing need" to improve public sector finances and to resist pressure from interest groups hurt by the restructuring.

Odling-Smee heads the IMF department which deals with Russia, the Baltic Republics and other former Soviet republics. There are great differences between each of these countries, he says. But as a group, some areas of concern transcend individual countries� rates of progress.

Most important, he says, is the problem of tax revenue collection. Writing in the weekly publication, �IMF Survey,� Odling-Smee and Gonzalo Pastor -- a member of his staff -- say that tax revenue to gross domestic product (GDP) ratios have "fallen sharply" over the last three to four years. Tax evasion has become another means used by enterprises to avoid budget constraints and to delay adjusting to changes in the economy.

Russia has had serious problems with tax collections. They fell to below 60 percent of projections earlier this year and prompted the IMF to delay one loan drawing until the government improved collections. But the problem is striking all the nations of the region.

During the initial years of reform, says the article, enterprises used what is known as "rent-seeking behavior" -- searching for financial assistance from the government -- and proliferating inter-enterprise arrears as the primary means to avoid adjusting to new economic conditions.

Once governments started to tighten up on subsidies and easy credit, and enterprises became stricter about extending credit to each other. As reforms progressed, Odling-Smee writes, "non-payment of taxes, wages and energy bills became the major means of circumventing budget constraints."

The only way for governments to reduce this kind of activity, say the IMF officials, is to take "firmer corrective measures in the face of the mounting political and social costs of nonpayment."

Another area of concern is banking. Potential banking sector problems are "endemic throughout the region," say the IMF officials. This "fragility" stems mainly from inexperienced bankers trying to learn global banking and lending skills while working in a system that is in a constant state of change, further complicating risk assessment. The atmosphere is made even worse by the precarious financial situation of main borrowers, by directed lending by governments and "in some cases, fraud."

The officials say these underlying problems are being brought to a head by macroeconomic stabilization and the strengthened role of central banks in tightening supervision and raising prudential standards.

They also note that while each nation has agreed to a program of stabilization and reform to receive IMF loans, slippages in meeting agreed-upon targets, including privatization, land reform, trade policy and social safety nets, are "probably greater and more frequent than in other areas" of the world.

The officials say that these slippages "largely reflect the complexity of the measures involved and delays with policy implementation caused by the opposition of vested interests and the slow pace of the legislative decision-making process."

The IMF officials note that output declines throughout the region "appear to have bottomed out," with positive economic growth expected in most of the countries during the next year.

However, they say, actual growth rates in 1996 may be lower than initially expected owing "partly to political uncertainties in Russia and the effect of bad weather on agricultural output." Only the high-inflation countries of Tajikistan and Belarus are expecting further output declines.