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. Last Updated: 07/27/2016

IMF Targets Inflation, Urges Structure Reform

The International Monetary Fund said Friday that Russia's economy had strengthened considerably in 2003, but called for measures to bring inflation under control and faster structural reforms.

The fund also said Russia should focus on cutting inflation by allowing a more flexible exchange ruble rate -- meaning a stronger ruble. It urged the government to tighten fiscal policy to help the Central Bank bring price rises below 10 percent next year.

But at least one analyst said authorities, buoyed by the unprecedented awarding last week of an investment grade on its debt and Kremlin pledges to proceed more quickly with the repayment of its Paris Club debt, would politely ignore the recommendations.

"Real GDP is set to grow by 6.25 percent in 2003 and is expected to slow only marginally in 2004, to about 5 percent on the assumption of some decline in oil prices in world markets," said the IMF statement, issued at the end of a weeklong mission.

Russia's economy grew 7 percent in the first half of the year, thanks to booming oil exports, mounting investment amid record low interest rates and robust domestic demand.

Officials target growth for 2003 of 5.9 percent, with some private economists expecting the economy to expand by up to 7 percent if global prices for crude stay high.

But inflows of oil dollars, which spurred economic growth, have also strengthened the ruble and forced the Central Bank to intervene to curb its gains and keep exporters competitive. That has resulted in extra money supply growth because the Central Bank has had to print more rubles to buy up a flood of dollars, raising doubts whether officials could keep 2003 inflation within a 12 percent target.

The fund welcomed Russia's aim to cut inflation to 8 percent to 10 percent in 2004 but said officials should aim at the lower end of that range, encouraging the Central Bank's policy shift to inflation targeting rather than reigning in the ruble.

Stanislav Gelfer, an analyst at London-based consultant 4cast, said the Central Bank, which has paid off all of its debt to the international lender, was unlikely to change its stand and would continue to curb the ruble's rise.

"We believe the Central Bank will politely ignore this advice and continue to favor only gradual ruble strengthening," Gelfer said in a research note. "But recent dollar/ruble and foreign reserves and money supply dynamics indicate that the Central Bank has placed inflation control at the top of its agenda."

Russia has not borrowed from the IMF since 1999. The government said last March it was considering repaying ahead of schedule all or part of its debt, estimated by the Central Bank at $5.8 billion as of the end of June.

The IMF said the balance of payments was expected to remain strong as the award by Moody's of a coveted investment grade would help reverse a trend of private capital outflow.