Russian Deficit Teeters Near IMF Limits

Pre-election spending pledges by President Boris Yeltsin, widespread tax breaks and evasion and skyrocketing yields on state treasury bills have driven Russia's budget deficit to within a hair's breadth of violating limits that could stop a $10 billion loan dead in its tracks.


The issue is likely to weigh heavily upon officials with the International Monetary Fund, overseers of the loan who are in town this week to monitor the government's fiscal performance for April before approving a second $340 million tranche of credits.


But given the political nature of both the bond market and the loan, most analysts doubt that the IMF would stop payments before the June 16 election.


Economists instead take a broader view, some arguing that Russia's rapidly growing deficit is a time bomb waiting to go off should bond yields remain high after the election and tax revenues continue to go uncollected.


Currently, Russian finance officials have kept their fiscal plan within the IMF's limits -- but just barely.


"It's no secret, of course, that the budget situation is very tight," said Thomas Wolf, the IMF's chief representative in Moscow. "At the end of March they were within the IMF deficit ceiling, but it was close. There's no question of that." Citing confidentiality, Wolf declined to disclose the deficit ceiling agreed upon by the IMF and the government. However, the Russian-European Center for Economic Policy puts the ceiling at 31.5 trillion rubles for the first quarter.


The Finance Ministry, using what is says are international criteria similar to those used by the IMF, said the total deficit for January, February and March was 31.6 trillion rubles -- but maintains that it is within the IMF limit.


Under the three-year loan agreement with the IMF, Russian monetary policy must adhere to specific monthly criteria. The government must, among other things, regulate the amount of money in circulation, maintain high national reserves and reduce the size of the fiscal deficit.


Wolf said it is too early to know how the Russian deficit fared in April. However, one Finance Ministry official said he was confident the budget gap would not pose a problem.


"We think that so far, the deficit policy is not in violation of the IMF program," said Jochen Wermuth of the ministry-affiliated Economic Expert Group.


Russia is required to reduce its deficit to 4 percent of gross domestic product in 1996, 3 percent in 1997 and 2 percent in 1998. According to international standards, the 1995 deficit was 4.8 percent, higher than the 2.9 percent reported by the Finance Ministry, which does not count interest on T-bills as an expenditure.


Finance Ministry officials use the international standard because the IMF's criteria fluctuate, Wermuth said, adding that the fund is expected soon to adopt the international criteria for calculating Russia's deficit.


The issue highlights the difficulty with tracking Russia's economic progress in a land of unreliable statistics and varying methodologies.


Also, many of the criteria constituting the IMF's agreement with Russia are considered to be internal documents, leaving independent economists and analysts to seek the information through alternative means.


Wolf noted that in recent months, calculating revenue and expenditures also has been skewed by so-called "tax offsets" issued by the Russian government. The process involves paying government suppliers with tax rebates, which may not be submitted to the State Tax Service until months later.


"It's a very messy thing," said Wolf. "That's one reason we don't like them and have a commitment from [the government] to phase these things out as quickly as possible."


"It looks like the government ... is trying to swallow the principle behind the IMF targets," said Roland Nash, an economist with the Russian-European Center for Economic Policy. "They're keeping expenditures very, very low. It's just that they're having trouble gathering revenue."


Another economist familiar with the IMF's policies said the fund was likely to recognize pre-election fears as the driving force behind high T-bill yields -- running at a monthly average of about 8.6 percent for three-month paper in April.


The IMF will likely "take into account so-called ... political disturbances which may not entirely be due to policy," said the economist, who asked not to be identified.


In a report, the investment bank Deutsche Morgan Grenfell called the budget deficit "the key macroeconomic challenge confronting the Russian government this year."


Wermuth played down the deficit's importance, noting that the total deficit as of May 1 was 6.2 percent of GDP. Financing can continue through the bond market, he said, given that the face-value of outstanding T-bills and federal loan bonds is only 6 percent -- much less than in most Western countries.The key, he said, is not to finance the deficit through inflationary means, such as printing money.


Other economists argue that it is not the size of Russia's deficit that is worrying, but the speed with which it has accumulated, jumping from 5.3 percent of GDP in January to 5.8 percent in February and 7.8 percent in March in tandem with rising tax arrears and T-bill yields.


With a real interest rate of over 100 percent, Russia must double every six months the number of T-bills and federal loan bonds it issues just to cover the interest rate, according to Edwin Dolan, president of the American Institute of Business and Economics.


"The frightening thing about the Russian [debt] is the rate at which it's growing," Dolan said. "The only real outlet is to fix the tax system. But that's a long-term project. ... You'd have to be pretty much of an optimist to think that's going to be fixed in the next six months."