Russia should avoid higher budget spending in the coming years and refrain from easing monetary policy to keep inflation under control, the International Monetary Fund said as it cut the economy’s growth forecast.
Increased infrastructure outlays have to be offset by cuts in other expenditure to rebuild fiscal buffers and save oil revenue, the Washington-based fund said in a statement after completing the Article IV consultation of Russia’s economy. It recommended that Bank Rossii keep interest rates on hold “with a tightening bias.”
The comments feed into a government debate over how to steer the $2 trillion economy out of its sharpest slowdown since 2009, with the central bank spurning calls by senior officials for lower borrowing costs by holding its main lending rates for a year. The IMF predicts Russia’s gross domestic product will grow 1.5 percent this year and 3 percent in 2014, versus July projections of 2.5 percent and 3.3 percent.
“The near-term outlook is for moderate growth and inflation at the upper end of the target range of the central bank,” the IMF said. “To protect growth-enhancing investment spending, adjustment efforts should primarily focus on rebalancing the mix of spending and enhancing its efficiency, and pursuing structural reforms, in particular pension reform.”
The ruble depreciated 0.4 percent against the dollar to 31.9290 as of 4:31 p.m. in Moscow. The Micex Index of 50 stocks retreated 0.5 percent to 1,460.85.
Slowing economic growth and worsening expectations for proceeds from state asset sales forced the government last week to widen its budget deficit forecasts through 2015 even as public salaries are frozen for next year. Spending in areas excluding pensions, welfare benefits and debt servicing will be cut by as much as 5 percent and dividends from state-owned companies are set to rise from 2015, according to the draft plan.
Bank Rossii Chairman Elvira Nabiullina, who’s overseeing the monetary authority’s planned shift to inflation targeting by 2015, last week raised the possibility of increasing interest rates because of government plans to exempt households from a tariff freeze, as she seeks to reduce inflation to 4.5 percent. Consumer-price growth, which remained at 6.5 percent from a year earlier in August, has exceeded the top end of the central bank’s target range of 5 percent to 6 percent for 12 months.
Russia’s general government budget deficit, the first in three years, may amount to 0.6 percent of GDP this year and 0.7 percent in 2014, the IMF estimates. Year-end inflation may slow to 6.2 percent this year from 6.6 percent in 2012, and decelerate to 5.3 percent in 2014, it said.
Russia would need more banking supervision measures to reduce risks from continued high growth in unsecured retail lending, according to the IMF. Russian banks should also strengthen corporate governance, creditor rights and competition, the fund said.