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Russia: IMF Official: Systems Still Fragile in Ex-USSR

Washington, 25 September 1996 (RFE/RL) -- A senior official of the International Monetary Fund (IMF) says that while all the countries of the former Soviet Union have made "considerable progress" toward economic stabilization, the situation remains "fragile."

John Odling-Smee says that is because of the "pressing need" to improve public sector finances and to resist continued strong pressures by interest groups hurt by the restructuring.

Odling-Smee heads IMF's department which deals with Russia, the Baltic Republics and other former Soviet republics. He says that there are large differences between each of these countries but that as a group there are areas of concern that transcend their individual rates of progress.

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

Russia had serious problems with tax collections falling to below 60 percent of projections earlier this year and prompting the IMF to delay one loan drawing by Moscow until the government took steps to get collections going again. But the problem is hitting all the nations of the region.

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

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

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

Another area of concern is banking. Potential banking sector problems are "endemic throughout the region," say the IMF officials, a "fragility" stemming 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 now 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 get IMF loans, slippage's in meeting agreed targets, including privatization, land reform, trade policy and social safety nets, are "probably greater and more frequent than in other areas" of the world.

"These slippage's 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 officials say.

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.