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. Last Updated: 07/27/2016

World Bank: Reforms Needed

GDP growth may slow down to 1.6 percent this year if the economy is not fed a healthy dose of reforms that allow increased corporate profitability and the start-up of new companies, the World Bank's Russia office warned Tuesday.

But if the government steadily implements reform -- and oil prices remain stable -- the economy should see growth of 3.8 percent, the World Bank said in its Russia forecast for 2002.

In any case, worrisome factors seen in recent months -- such as sliding industrial output, growing inflation and a weakening ruble -- suggest that the economy will have a tough time coming close to last year's expected gross domestic product growth of 5 percent, said Christof R?hl, the World Bank's chief economist in Moscow.

"We saw the economy slowing down at the end of last year, but to a minor extent," R?hl said at a news conference. "Maybe it is just the winter, but bigger problems will arise sooner or later."

Industrial output was flat in November, and preliminary data for December and January suggest that output declined, the World Bank report said.

At the same time, the unemployment rate started to rise in November along with inflation, itself a result of a faster-appreciating exchange rate.

The State Statistics Committee said last week that 2001 economic growth was expected to reach 5 percent, compared to 8 percent in 2000.

The GDP slowdown in itself was not cause for concern, the World Bank said in its report. The microeconomic factors, however, are.

In its optimistic scenario, which places the oil price at $18.1 per barrel, the report puts 2002 inflation at 15.4 percent, the average ruble rate at 33.7 to the U.S. dollar and GDP growth at 3.8 percent.

In its pessimistic scenario of $12.8 per barrel, inflation would be 18.5 percent, the ruble 36.2 and GDP 1.6 percent.

The government, which is forecasting GDP at 4 percent, needs to make sure than it steadily implements reforms on taxes and banking to fight a slowdown, the report said.

But doing so will probably be difficult, Rühl said.

Main IndicatorsGrowth (%)
Oct.Nov.Dec.2001
Industrial Prod.5.14.72.64.9
Inflation1.11.41.618.6
Unemployment8.78.88.99.0
Source: World Bank


"The consistent implementation of reform is one of the obstacles the World Bank foresees," he said.

Other key challenges will be boosting overall productivity and the diversification of the economy by creating conditions for growth in the private sector, R?hl said.

The report said capital investments continue to be concentrated in the extractive sectors, in particular fuel and energy.

Those sectors account for 30 percent of total investments of 1.6 trillion rubles ($53 billion) last year. Other sectors mainly got investment from budgetary expenditures and public companies.

Other than the food industry, which easily bounces back after crises, only fuel and energy production have been able to maintain their growth rates over the last three years, according to government statistics.

The fuel sector, which is leading in terms of production and new investments, accounts for only 1 million jobs, while the country's workforce consists of 70 million people, according to United Financial Group.

"What we saw in 1999, 2000 and 2001 was mainly catch-up growth based on excessive industrial capacity, which resulted from a prolonged recession in 1992-98," said Alexei Zabotkine, economist with UFG.

"But we are close to reaching the point of full capacity utilization, which might happen anytime in the next 12 to 18 months," Zabotkine said.

Top 6 IndustriesGrowth (%)
199920002001*
Fuel and energy2.45.06.2
Machine building15.915.58.0
Food7.57.18.0
Electricity0.21.81.2
Nonferrous metals 8.511.35.0
Ferrous metals14.415.60.0
*Data for Jan-Nov
Source: Goskomstat