IMF Warns Russia Against Fiscal Stimulus as Forecast Cut

The International Monetary Fund cut its economic growth forecast for Russia, cautioning against the danger of stoking inflation with fiscal stimulus and urging policy makers to improve the business climate.

Gross domestic production will expand 2.5 percent this year and 3.25 percent in 2014, the Washington-based lender said in a statement today, compared with April predictions of 3.4 percent for 2013 and 3.8 percent next year. The Economy Ministry projects 2.4 percent growth this year and 3.7 percent in 2014.

“Fiscal stimulus at this time would likely be ineffective and merely intensify inflationary pressures, given that the economy is operating at full capacity,” IMF Mission Chief Antonio Spilimbergo said in the statement after completing the Article IV consultation of Russia’s economy. “Monetary policy should remain geared toward achieving inflation objectives.”

The IMF is inserting itself into a debate over a mix of policy tools needed to revive an economy growing at the weakest pace since a contraction in 2009. The government sees room to bolster the economy through a weaker ruble after rejecting calls to make the central bank partially responsible for growth, Finance Minister Anton Siluanov said in an interview last week.

The ruble weakened 0.5 percent against the dollar to 31.8950 as of 10:32 a.m. in Moscow. The Micex Index (INDEXCF) of 50 stocks fell 0.3 percent percent to 1,321.62.

‘Investment, Diversification’

The world’s largest energy exporter is hurting from slower growth in its biggest trade partners China and the euro area, which is mired in a record-long recession. A better business climate would be an “impetus to investment, diversification, and growth,” according to the IMF.

Mining output contracted 4.9 percent in the first quarter from a year earlier, while manufacturing growth slowed to 1.3 percent from 6.2 percent, the Federal Statistics Service in Moscow said yesterday. It reiterated that GDP grew 1.6 percent in the first three months, decelerating for a fifth quarter.

Russia remains vulnerable to a rapid drop in crude oil prices as well as an intensification in net capital outflows that may follow from a deterioration in financial and economic conditions, the IMF said in the statement.

“The pre-crisis growth model, based on increasing oil prices and rising use of spare capacity, is no longer viable,” Spilimbergo said. “Growth in the next decade will need to rely on improving efficiency and productive investment.”

While Russia is on target to see inflation slow to within the top end of the central bank’s 5 percent to 6 percent range this year, Bank Rossii may miss 2014’s goal of 4 percent to 5 percent without additional policy measures, the IMF said.

“Calls for near-term policy stimulus may jeopardize newly minted macroeconomic anchors, and financial stability risks from rapid unsecured consumer credit growth are rising,” Spilimbergo said. “Ambitious economic policy reforms are necessary to realize the Russian economy’s medium-term potential and reduce its vulnerabilities.”

To contact the reporter on this story: Scott Rose in Moscow at rrose10@bloomberg.net

To contact the editor responsible for this story: Balazs Penz at bpenz@bloomberg.net

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