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I. A. Rozhdestvenskaya Scenario based macroeconomic forecast for 2004 and The scenario based forecast of key macroeconomic indicators in 2004 and 2005 was made on the basis of a medium term forecast model elaborated in the framework of an USAID project17 and continues the series of quarterly forecasts of social and economic development of Russia in the medium term outlook carried out by IET18. Among the forecasted indicators are: GDP, CPI, tax revenues, export, import, Ruble / US $ exchange rate, gold and foreign exchange reserves, real effective Ruble exchange rate, retail trade turnover, level of unemployment, IPI, real cash household incomes.

The model used for the medium term forecasting is a system of structural econometric equations.

For the purposes of evaluation of the equations there were used quarterly data relating to the period from the 1st quarter of 1996, including the data registered in the 1st quarter of 2004, however, in certain cases the model was evaluated only basing on the data pertaining to the period from the 1st quarter of year 2000. The data were obtained basing on such sources as official information published by the RF Goskomstat, Bank of Russia, and the International Financial Statistics presented by the International Monetary Fund.

The equations describing the medium term dynamics of macroeconomic indicators include variables and respective lags, which have a significant and answering economic logic impact on the explained variable. Respective dummy variables permitting to take into account the quarterly seasonality of the used variables and structural shifts in their dynamics were also added to the equations. There were also used moving average terms permitting to eliminate the autocorrelation of residuals.

The calculation of forecasted values of the macroeconomic indicators was carried out proceeding from the set scenarios of the dynamics of exogenous variables: Brent oil prices, investment in fixed assets, money aggregate M2, and the US $ / Euro exchange rate.

At present, the study is being prepared for publication.

See: Russian economy in 2003. Trends and perspectives. IET. (Issue No. 25).

Table Scenarios of quarterly dynamics of exogenous variables in 2004 and Scenario 1 Scenario Investment (in % of the fig- Investment (in ures registered % of the figures US $ / in the respec- US $ / registered in Euro ex- Oil price M2 tive period of Euro Oil price M2 the respective change (US $ per (Rub. the preceding exchange (US $ per (Rub. period of the rate barrel) billion) year) rate barrel) billion) preceding year) 2 Q of 2004 1.24 33.0 3 673 112.0 1.24 33.0 3 673 112.3 Q of 2004 1.23 29.0 3 978 111.0 1.23 29.0 3 978 111.4 Q of 2004 1.22 28.0 4 337 110.0 1.22 28.0 4 337 110.1 Q of 2005 1.21 25.0 4 554 108.0 1.21 28.0 4 662 110.2 Q of 2005 1.20 24.0 4 771 108.0 1.20 28.0 4 988 110.3 Q of 2005 1.20 24.0 4 988 108.0 1.20 28.0 5 313 110.4 Q of 2005 1.20 23.0 5 205 108.0 1.20 28.0 5 638 110.Starting from the 2nd quarter and till the end of 2004, the dynamics of exogenous variables were assumed to be equal in the framework of both scenarios: the average annual Brent oil price is US $ per barrel, in 2004 the rate of growth in money aggregate M2 makes 35 per cent, the rate of increase in investment in fixed assets is at 11.5 per cent in comparison with the figures registered in the respective period of the preceding year, the average annual US $ / Euro exchange rate is 1.24. At the same time, it is assumed that Euro will gradually appreciate against the US dollar, while oil prices and investment in fixed assets will decline by the end of 2004.

Scenarios for year 2005 were designed proceeding from different levels of oil prices, investment in fixed assets and growth in the money aggregate M2. Thus, according to the pessimistic scenario (Scenario 1), the average annual Brent oil price is US $ 24 per barrel, in 2005 the rate of growth in money aggregate M2 will make 20 per cent, the rate of increase in investment in fixed assets will make 8 per cent. According to the optimistic scenario (Scenario 2), the average annual Brent oil price is US $ per barrel, in 2005 the rate of growth in money aggregate M2 will make 30 per cent, the rate of increase in investment in fixed assets will make about 10 per cent. In the framework of both scenarios the average annual US $ / Euro exchange rate in 2005 is assumed to be 1.20.

Table Scenarios for 2004 and 2005 in annualized terms 2004 Scenario 1 Scenario US $ / Euro exchange rate 1.24 1.20 1.Urals oil price (US $ per barrel) 30 24 Rate of growth in M2, % 35 20 Rate of increase in investment in fixed assets, % 11.5 8.0 10.Table Forecast for 2004 and 2004 Scenario 1 Scenario Rate of growth in real GDP, % 6.6 3.4 5.GDP (Rub. trillion) 15.79 17.55 17.Rate of increase in CPI, % 9.2 6.6 7.Tax revenues of the RF consolidated budget (Rub. tril- 3.86 4.24 4.2004 Scenario 1 Scenario lion) Tax revenues of the RF consolidated budget (% of GDP) 24.4 24.2 25.Gold and foreign exchange reserves (US $ billion) 102 112 Rates of the real effective Ruble appreciation, % 10.6 1.2 5.Rates of the real Ruble appreciation against US $, % 10.3 3.9 5.Export (US $ billion) 158 155 Import (US $ billion) 89 98 Rate of increase in retail trade turnover, % 7.2 5.9 7.Rate of increase in the industrial production index (in % of the figures registered in the preceding quarter) 6.5 2.7 4.Share of unemployed in the total economically active population, % 7.9 7.3 7.Rates of growth in real cash household incomes, % 12.6 10.7 11.According to the results of the macroeconomic forecasting (see Table 3), in 2004 the rate of growth in GDP will make 6.6 per cent. In 2005, respectively, the rates of growth in GDP may decline to 3.per cent in accordance with Scenario 1 and to 5 per cent according to Scenario 2. In the case the money supply increases by 35 per cent in 2004 and at the estimated rates of growth in GDP (6.6 per cent), in 2004 inflation rate will make about 9.2 per cent. Next year, depending on the scenario based changes in the money supply the rates of inflation may decrease to 6.6 per cent to 7.1 per cent in the annualized terms.

The forecast of tax revenues of the RF consolidated budget was made taking into account the actual and planned by the RF Government changes in the tax legislation for 2004 and 200519. In particular, as concerns the data for year 2004 it was taken into account the reduction in the rate of the value added tax by 2 p. p., the abolishment of the sales tax, and changes in the base rate of the mineral extraction tax. At the same time, in accordance with the scenarios of changes in the levels of oil prices there were taken into account the consequences of a growth in the tax burden on the oil industry in 2005. Thus, according to the new scale of export duties: at the oil price up to US $ 15 per barrel the duty should make 0 per cent; at the oil price from US $ 15 to US $ 20 per barrel the duty should make up to 35 per cent of the difference between the actual oil price and US $ 15; at the oil price from US $ 20 to US $ 25 per barrel the duty should be at or below US $ 29.2 and 65 per cent of the difference between the actual oil price and US $ 25. As concerns the tax on extraction of mineral resources, its base rate in 2005 should be increased from Rub. 347 per metric ton to Rub. 400 per metric ton, there was also increased the nontaxable oil price threshold from US $ 8 to US $ 9. Besides, the new formula of calculation of the mineral extraction tax included the revised Ruble / US dollar exchange rate: from Rub.

31.5 per US $ to Rub. 29 per US $ taking into account the trend towards the Ruble appreciation against the US dollar.

The respective quantitative changes in the amount of tax generated revenues were calculated basing on the data on tax revenues received in the preceding year as adjusted for a growth in the tax base, presented scenarios of changes in oil prices, and the forecast of changes in the Ruble / US dollar exchange rate. Therefore, as a result of amendments to the tax legislation, in 2004 the reduction of tax revenues of the RF consolidated budget will make Rub. 132 billion. According to Scenario 1, in the revenues should decline by Rub. 133 billion, while in the framework of Scenario 2 (at a higher level of oil prices) tax revenues should increase by Rub. 70 billion. As a result of adjustment of the forecasted data on tax revenues for the value of discretional changes, the amount of tax generated revenues of the RF consolidated budget in 2004 will make about 24.4 per cent of GDP, while in The indicator of the amount of revenues received by the RF consolidated budget does not include revenues generated by the SST. Therefore, the planned for year 2005 reduction of the single social tax, which according to the RF Government estimates should diminish the tax burden on enterprises by Rub. 280 billion, was not taken into account.

this indicator will be at 24.2 per cent of GDP in the framework of Scenario 1 and 25.3 per cent of GDP according to Scenario 2.

According to the forecasts, the amount of gold and foreign exchange reserves should make US $ 102 billion by the end of 2004. At a lower level of prices in 2005 (Scenario 1), the gold and foreign exchange reserves should increase by US $ 10 billion, while at the level of oil prices exceeding this figure by about US $ 4 the growth in gold and foreign exchange reserves in 2005 should make US $ 22 billion, i.e. be US $ 124 billion by the end of 2005.

The forecasted rates of real effective Ruble appreciation in 2004 will make slightly above 10 per cent, a similar value characterizes the Ruble appreciation against the US dollar. However, in 2005 the Ruble will more appreciate against the US dollar than the currency basket. Thus, according to Scenario 1 the real effective Ruble exchange rate should increase by 1 per cent, i.e. the Ruble appreciates by 3.9 per cent against the US dollar in terms of the real exchange rate. According to Scenario 2, similar rates of the Ruble appreciation will make 5.3 per cent and 5.8 per cent respectively.

By the end of 2004, the amount of exports should make US $ 158 billion, while in 2005 at a lower level of oil prices it will make US $ 155 billion, or US $ 161 billion in the framework of Scenario 2.

The estimated amount of imports in 2005 will exceed the data for year 2004 in the framework of both scenarios and increase by US $ 9 billion (Scenario 1) or by US $ 13 billion in accordance with Scenario 2. The forecast of amount of imports in 2004 is US $ 102 billion. Therefore, proceeding from the forecasts in 2005 the active balance of trade will be by US $ 10 billion below the figures registered in the preceding year.

The estimates of the rates of growth in the retail trade turnover, index of industrial production, and real cash household incomes on the whole correlate to the forecasted increase in GDP. At the same time, in the medium term outlook the real rates of growth in the retail trade turnover are on the average by 1 p. p. above the rates of increase in GDP, while the rates of growth in real cash household incomes are by 7 p. p. above and the rates of increase in IPI are, on the contrary, by 0.5 p. p. on the average below this value.

The forecast of the share of unemployed in the total economically active population in 2004 is at 7.per cent. In 2005, the share of unemployed will decline in comparison with the figures registered in the preceding year to 7.3 per cent in the framework of the pessimistic scenario and to 7.1 per cent in accordance with the optimistic scenario.

Table Forecast of the RF Ministry of Economic Development for 2004 and 2004 Scenario 1 Scenario Rate of growth in real GDP (in % of the figures registered in the preceding year) 6.4 4.8 6.Rate of increase in CPI (in % of the figures registered in the preceding year) 10 6.5-8.5 6.5-8.Rates of the real effective Ruble appreciation (in % of the figures registered in the preceding year) 7.9 0.4 5.Rates of the real Ruble appreciation against US $ (in % of the figures registered in the preceding year) 8.7 -0.6 2.Export (US $ billion) 146.7 130.4 148.Import (US $ billion) 89.8 96.6 101.Rate of increase in retail trade turnover (in % of the figures registered in the preceding year) 8.6 6.5 8.Rate of increase in the industrial production index (in % of the figures registered in the preceding year) 5.9 3.8 5.Rates of growth in real cash household incomes (in % of the figures registered in the preceding year) 10.5 7.3 9.As it is indicated by the data presented in Tables 3 and 4 (see above), the forecasts of base macroeconomic indicators on the whole match the similar estimates presented by the RF Ministry of Economic Development. The most significant discrepancy between the IET and Ministry forecasts was registered with respect to the real Ruble / US dollar exchange rate, the real effective Ruble exchange rate, and exports. Thus, according to the estimates of the RF Ministry of Economic Development, the Ruble appreciation against the US dollar is on the average by 2 p. p. below the figures predicted in the framework of IET forecasts. Similarly, the appreciation of the real effective Ruble exchange rate is on the average by 1 p. p. below the aforementioned figures. At the same time, the forecasted amount of exports (IET) is by more than US $ 10 billion above the respective estimates made by the Government. This discrepancy in the external economic indicators may be primarily explained by a lower level of oil prices (on the average, by US $ 2 per barrel) set forth in the initial assumptions of the RF Ministry of Economic Development used as the basis of its forecast.

Annex FIGURE Real rates of growth in GDP 15% scenario scenario 10% outcome 5% 0% -5% -10% FIGURE Rates of increase in consumer price index 40% scenario 35% scenario outcome 30% 25% 20% 15% 10% 5% 0% I Q I Q I Q I Q I Q I Q I Q I Q I Q III Q III Q III Q III Q III Q III Q III Q III Q III Q I Q I Q I Q I Q I Q I Q I Q I Q I Q I Q III Q III Q III Q III Q III Q III Q III Q III Q III Q III Q FIGURE Tax revenues of the RF consolidated budget (in % to the figures registered in the 1st quarter 1996) ( % I . 1996 .) 210.0% 190.0% 170.0% 150.0% 130.0% 110.0% scenario 90.0% scenario outcome 70.0% 50.0% FIGURE Gold and foreign exchange reserves (Rub. Billion) (.

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