IMF emphasises fiscal policy and banking sector reform in latest Article IV consultation with Russia

BOFIT Viikkokatsaus / BOFIT Weekly Review 2016/29

In its latest country report for Russia based on the annual Article IV consultation, the IMF emphasised the importance of balancing government budgets in the next few years. Still, it noted that Russia’s current fiscal consolidation may be too steep and hoped for better targeting of spending cuts. IMF experts recommend that Russia rely more on borrowing to finance its budget deficits in order to preserve more assets in the Reserve Fund to deal with unanticipated liquidity crises. The IMF further encouraged Russia to reinstate its three-year budget framework and a budget rule, and stressed that pension system reform was inevitable to creating balanced budgets.

On the monetary policy side, the IMF noted that the Central Bank of Russia could proceed with gradual easing as inflation risks subside, but should proceed prudently.

Among its recommendations for the banking system, the IMF would like to see enhancements in stress testing of banks, a review of banks’ asset quality, as well as further development of banking supervision and bank regulation. In particular, the operations of state development bank VEB deserve improvement. The IMF estimates that capital support needed to prop up the Russian banking system could reach 0.5−1 % of GDP at oil prices broadly around $50 a barrel. If the oil price falls to $20−$30 a barrel, it could push, according to IMF stress tests, that requirement to 4.5 % of GDP. In addition, the support needed for VEB could reach 2 % of GDP in coming years.

The IMF repeated its call that structural reforms are inevitable to support future growth and encouraged e.g. to reduce unwarranted administrative pressures on businesses, strengthen property protections, improve education and sustain infrastructure investment.

Russian authorities were largely in agreement with the IMF when it comes to balancing budgets, pension system reforms and the importance of structural reforms.

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