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. Last Updated: 07/27/2016

Tight Budget Approved With Eye to IMF

Russia's government has agreed on a tight anti-inflationary budget designed to persuade the International Monetary Fund to open a $1. 5 billion credit line, Finance Minister Boris Fyodorov said Thursday.


Fyodorov told a press conference that the cabinet had approved an economic policy for 1994 and the end of 1993 that aimed to cut inflation to 15 percent in January and to between 2 and 5 percent by the end of 1994. Inflation ran at 19 percent in October.


Fyodorov said that Thursday's budget plan might convince the IMF to open a $1. 5 billion credit line, which he said would in turn encourage other Western banks and countries to grant credits and reschedule Russian debts.


But diplomatic sources said that, by holding up the carrot of Western credits in his discussion of budget cuts, Fyodorov may have been talking more to his colleagues than to Western creditors.


Fyodorov himself said that he had warned fellow ministers, many of whom are actively campaigning for votes in the Dec. 12 elections, not to make spending promises or delay painful budget cuts.


"There are many decisions which are deadlocked today because everyone is going into politics", he said, adding: "No member of the government should decide on expenditures for which there is no money. This is nothing but fraud".


Western diplomats said that some painful reforms were still missing in Thursday's policy statement and these were unlikely to be introduced before the December elections.


They said that the government had yet to announce key reforms needed to convince the IMF, including a hike in value-added taxes and excise taxes on energy sources. Asked if the government was likely to raise taxes before the December elections, one diplomat said: "I'd be amazed". Fyodorov said that the government had decided on deep budget cuts that should help cut the budget deficit to 5 percent of gross national product by the end of 1994, down from over 10 percent this year.


He singled out moves to cancel import subsidies, cheap government credits to agriculture and to Russia's northern regions. He also expected that at least 30 percent of next year's deficit would be financed by selling government bonds.


This would be a revolution for the government, which has traditionally relied on inflationary credits from the Central Bank to finance its deficit. Government bonds take money out of circulation and slow down inflation.


The Finance Ministry only started issuing treasury bonds this year and recently also announced a special gold-backed loan.


For the fourth quarter of 1993, the budget deficit would reach 5. 5 trillion rubles ($4. 7 billion), higher than planned, but Fyodorov said that even this figure had only been possible because of the recent end to cheap credits to agriculture, Fyodorov said.


The Central Bank will still finance 4. 66 trillion rubles of this deficit, but sales of government bonds should already raise another 800 million rubles, according to Fyodorov.


The Central Bank lending rate, a key factor in controlling inflation and stabilizing the ruble, would gradually be raised to commercial bank rates but would stay stable for another few weeks because it had been raised sharply in recent months, Fyodorov said.


If this program convinces the IMF that Russia is serious about economic reform, Russia stands a chance of getting $1. 5 billion, the second slice of the Systemic Transformation Facility, after negotiations in late December or early January, Fyodorov said.


The IMF opened a first tranche of $1. 5 billion in June and had planned to open this credit line in September, but backed off when Russia failed to make promised spending cuts. An agreement with the IMF would be vital for Russia not only because of the $1. 5 billion, he said, but also because it might pave the way for additional IMF credits, as well as World Bank and commercial loans.


More importantly, an IMF endorsement of Russia's reforms might also break the deadlock on debt negotiations with Western countries and commercial banks, according to Fyodorov.


Talks with the group of Russia's commercial bank creditors on rescheduling $24 billion of debts have been deadlocked for the past two months.


"They all look toward the IMF", Fyodorov said. An agreement with the IMF, he said, "would be a recognition that our economic policy is heading in the right direction". With $11 billion in debt payments due next year, debt relief is more important than credits, he said.


The refusal of some republics and regions to remit tax revenues had strained the budget, but Fyodorov said the government had reached agreements with the three worst tax payers, Tatarstan, Bashkortostan and Sakha. Payments from other regions were not very significant to the budget, Fyodorov said.