IMF Touts Merits of Ruble Appreciation

The International Monetary Fund called on the government on Monday to allow the ruble to appreciate but said inflation might still reach 14 percent this year amid economic overheating.
“The ruble is appreciating steadily in real terms, but this is unavoidable, indeed desirable, in view of the large terms-of-trade and productivity gains,” the IMF said in a statement.
Ruble appreciation has been the Central Bank’s main anti-inflation tool in recent years, but the bank has refrained from revaluing the currency since last August on concerns that it may hurt the competitiveness of the export-oriented economy.
The bank has instead raised its key rates and mandatory reserve requirement for commercial banks, but such measures have failed to tame inflation, which is running at an annualized rate of 15 percent. It has said it may let the ruble appreciate in the next few months while inflation should abate in the second half of the year.
The IMF said a stronger ruble would not damage the competitiveness of Russian industries.
“Growth is led by non-tradable sectors, like construction and services, but the still strong growth in manufacturing suggests that the appreciation has not caused a serious deterioration in competitiveness,” the IMF said.
“This owes much to the sound policy of taxing and saving a large share of oil revenues in the oil stabilization funds, which has been key to preventing excessively fast ruble appreciation,” it added.
It said it expected the country’s gross domestic product to grow by 7.75 percent this year due to strong oil prices, large capital inflows and credit growth.
The World Bank echoed the IMF’s forecasts on Monday and said capital inflows would reach $40 billion to $50 billion in 2008, Interfax reported.
“If you assume that the trend of the first four months will continue, then inflation could grow 14 percent and GDP growth would be 8 percent,” the World Bank’s chief economist for Russia, Zeljko Bogetic, told reporters.
“But if there is a correction of macroeconomic policy, a tightening of fiscal policy, then inflation could be 12 percent and economic growth 7.5 percent,” Bogetic said, Interfax reported.
“We are expecting decent capital inflows to Russia in 2008 of around $40 billion to $50 billion, but lower than for 2007,” he said.
GDP grew by 8.1 percent in 2007. Inflation was 11.9 percent, exceeding the government’s 8 percent target by a wide margin due to record capital inflow, rising food prices and high social spending ahead of the national elections.
“The near doubling of inflation since last year goes well beyond what can be explained by global increases in food and energy prices. Moreover, wage increases are significantly outpacing productivity growth, causing rising unit labor costs,” the IMF said.
Finance Minister Alexei Kudrin has warned that the Russian economy is showing signs of overheating, a point of view shared by the IMF.
“The risk of overheating is, however, rising as domestic demand growth has accelerated to about 15 percent in real terms. … The very rapid rise in imports is also evidence of tighter domestic resource constraints,” the IMF said.