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Among the reasons for the increment in arrears which took place lately are being often mentioned growing volumes of barter trade, wide spreading of multi-move clearing schemes for mutual settlement of debts between suppliers and their clients. The Ministry of Finance of Russia began actively participating in that process last year by way of using Treasury obligations, tax holidays, in kind credits, etc. As a result, enterprises can implement their economic policy having at their disposal minimum value of the current assets and correspondingly, lacking means for paying taxes. Unfortunately, available statistics do not allow us to estimate the scale of such dealaings and their significance for the economy. However, despite all negative consequences resulting from barter trade, especially when the Ministry of Finance is taking part in it (when the profit derived by enterprises is concentrating in the banking system; distortion of the price system; fall in budget revenue; extreme subjectivism in adoption of the budgetary decisions, etc.), one should not overestimate them. Taking into account the findings resulted from the surveys carried out by the Institute, despite the relatively wide spread of the barter dealings, the volume of the transactions serviced by different type money substitutes can not seriously influence at present both the inflationary indices and the volume of the budget revenue.

While adjusting the projection for the budget outlook for the second quarter and for 1996 as a whole, we were parting from the premise that the tight monetary policy will continue to be implemented and the parameters of the approved 1996 budget will be carried out. Adjusted valuation of the nominal value of 1996 GDP together with its growing real figure for the first quarter will make up 2,500 trillion rubles (with inflation rate for the whole 1996 of 42-47 percent--see chapter Monetary policy). We assume that the real volume of budget arrears will not grow over the next three quarters. The volume of tax revenue will somewhat increase due to the seasonal factors and be higher than in the first quarter (i.e. tax revenues between the second-forth quarters will amount to about 10 percent of GDP). Moreover, one can expect that the nominal volume of the nontax revenues will be increasing in proportion to the growth of nominal GDP (nontax revenues will make up 3-3.5 percent of GDP). According to such projections, the federal budget will receive 260-280 trillion rubles between April-December 1996. Taking into account the real execution of the budget in the first quarter, the federal budget revenues for the whole year will amount to about 320 trillion rubles which will be 10 percent lower than the revenue amount envisioned in the Law on the budget (347.2 trillion rubles).

The projected figure of GDP in the second quarter makes up 595 trillion rubles. If we suppose that the share of federal budget revenues in GDP in the second quarter will come to 12.5 percent then for the first half-year the revenues will amount to about 125 trillion rubles which is 25 percent less than the planned figure.

Taking into account unavoidable financing of nonenvisioned budget expenditures (Chechnya, compensations for the losses incurred by the importers from elimination of exemptions, wage, salary and pension indexations, etc.), the state of revenues will pose considerable difficulties for the budget expenditures. This will lead to a policy of sequestering state expenditures. The only way out for the Government is to improve the system of tax revenue-procurement which includes reduction in the number of tax exemptions and fighting tax evasion.

Despite the difficult budget situation, the State Duma is lately making attempts at adopting certain laws which will increase the burden on the budget. In particular, this relates to the Law on pension indexation, adoption of the Pension fund budget. Increase in pensions effective 1 May 1996 by 10 percent up to 75.9 thousand rubles will result together with early Presidential decrees on an increase in compensation payments in a monthly increase of budget expenditures by 1.8 trillion rubles. Now being discussed in the State Duma draft laws on the amendments to the 1996 federal budget envisage growth of spending on the science by 1.51 trillion rubles, on education--by 13.9 trillion rubles, and on the mass media--by 34.7 billion rubles.

On April 1 the President signed the Law of the RF On Making Changes and Amendments To the Law of the RF On the Value Added Tax, which came into force on April 9. Earlier this Las was rejected by the President because it did not include privileges on VAT for the housing construction and envisioned import privileges at the expense of credits extended by foreign countries. Among main changes which the Law is introducing, one should mention an inclusion in taxable turnover of the overall monetary means which an enterprise obtains from transactions related to the goods and services payment; VAT exemptions on export both of domestically produced goods and purchased elsewhere, extending privileges on import of a number of goods: import of goods in the framework of technical and humanitarian assistance on credits extended by foreign countries and international financial organizations, import of goods as a contribution to charter funds of enterprises with foreign capital, scientific publications and periodicals, objects of art, purchased at the expense of the federal budget, import of goods to the account of the repayment of state loans. Therewith, the Law restores privileges to the payment of VAT in case of the housing construction. VAT concessions are granted in case the budget funds or extra-budgetary funds amount to no less than 40 percent of the cost of the total amount of work; research organizations doing jobs under contract are exempt to the VAT; all bank transactions except bank encashment are exempt to the VAT. This Law is active for all legal aspects, beginning with January 1, 1996.

Moreover, on March 23, 1996, the government submitted to the State Duma the Draft Law On Making Changes and Amendments To the Law On Excises. This Draft is being assessed by the State Duma. This Draft increases the excise rate on petrol from 20 to 35 percentage points which, according to the assessment of the government, will increase the budget revenues by an estimated 3.7 trillion rubles annually. It also increases the list of excisable goods by including electricity supplied to the enterprises of the material production sector which will bring the federal budget an additional amount of 2.8 trillion rubles annually. There are suggestions to unify excise rates on domestic and imported goods. Present rates applicable to domestic goods will be taken as a base rate.

S.Sinelnikov-Murylev, S.Batkibekov,

V.Medoev, K.Resnikov, E.Shkrebela

Monetary policy

Growth rate of the consumer prices in March made up 2.8 percent, or 39 percent annualized. Preliminary assessment of the April pattern of consumer price index gives 2.6-2.8 percent growth annualized. Preliminary estimates of the April dynamics of the consumer price index makes up 2.6-2.8 percent of 36-39 percent in a year. April 1996 became one more month of continued of tough monetary policy targeted at monetary stabilization.

According to our estimates, the price growth in May contrary to the trend can increase to 2.7-3.1 percentage points. Consumer price index for 1996 will amount, according to our calculations, to 42-47 percent. The projection is based on the model which includes inflation inertia, change in the money stock M2 over the preceding half-year and the pattern of the exchange rate for the previous five months. Determined by the Joint Statement of the government and the RCB about the medium term strategy and economic policy for 1996 rates of net domestic assets and net foreign reserves of monetary organs (money stock) money multiplier at the level of the first quarter (2.15) set the aggregate growth of money supply at 39.3 percent in 1996. In the given model we fixed that the dollar will be growing in April-June at the rate of 1.91 percent a month or 25.5 percent a year (5,150 rubles for 1% as of July 1996). Beginning with July till December the dollar rate is fixed at half the growth rate of consumer prices for a corresponding month. According to out estimates, the dollar will growth by 21.1 percent in 1996, i.e. from 4,645 up to 5,630 rubles.

Beginning with the second half of March till mid-April there were considerable yield fluctuations on the GKOs-OFZs market for all issues. The trend of the fast yield growth on the secondary markets which was noticeable from the end of February (average yield rate grew from 59.1 percent level as of February 22-28, to 137.5 percent level as of March 21-27). At the beginning of April, the trend reversed to a dramatic decline in yields to 83.6 percent level as of April 10. Beginning with mid-April, yields again began increasing. By 17 April, yields nearly grew to their previous levels of 122.7 percent. An important factor was a decrease in the volume of sales on the secondary market that week by about 40 percent. If throughout the period beginning with the start of the year the value of turnover amounted to 9-11 trillion rubles a week, then on March 11-17 the value of turnover did not reach even the level of 6 trillion rubles.

Considerable amount of redemption of GKOs in April and shortage of funds required for the budget financing forced the Finance Ministry to energetically place new issues, whose maturity date fall beyond the presidential elections. Such situation resulted from an acute shortage in liquidity which was linked with the low withholding of taxes and the need to carry out election promises to pay off budget arrears in back wages.

While evaluating the future of the GKOs market, we in accordance with the chapter devoted to the budget policy, supposed that the deficit will not surpass 4 percent in the second quarter and that the foreign financing will amount to about 1.5 percent of GDP. In this case the budget deficit of about 2.5 percent needs to be financed by GKOs and OFZs. This signifies that the budget will need about 15 trillion rubles. As of 1 April the nominal value of outstanding GKOs and OFZ on the market amounted to 108 trillion rubles. Together with the servicing of this sum and the above mentioned budget required figure, nominal value of outstanding GKOs on the market as of July must amount to 145-150 trillion rubles (on condition that the present rate of servicing will remain--about 7.5 percent a month). Growth rates of outstanding GKOs and OFZs must make up to about 11 percent a month.

As out econometric estimates demonstrate, the pattern of state securities yield is determined to a considerable degree by inflationary expectations and by the rates of real emission of GKOs. Parting from the projected inflation rates of about 3 percent a month and rates of emission of state obligations of 11 percent a month, predicted yield on GKOs amounts to 8 percent a month which almost coincides with our projection about the rate of GKOs servicing which was used while determining the emission rates.

It should be noted that even now yields on GKOs with different maturity dates adequately reflect the level of political risks. Average weighted yield on securities with maturity date before June 16 makes up 40.6 percent annual. Yield on GKOs whose maturity date falls on the period between the first and the second rounds of elections stays at the level of 58.4 percent annualized, and for the period beyond July 10--89.6 percent annual.

Therewith, the Finance Ministry intention to increase the value of outstanding GKOs and OFZs at the rates which permit to finance the budget deficit which stays at about 2.5 percent of GDP, the yield on these financial instruments will amount to 8 percent a month. This calculation has been made without taking into account a possible increase of GKOs portfolio belonging to the RCB. According to the Joint Statement of the government and the RCB on the medium term strategy and economic policy in 1996, the volume of net credits to the federal government is limited to 12.5 trillion rubles. Taking into account the fact that the limits of the net credits to the government include ruble equivalent of the net international reserves of the government and the fact that the quarterly currency sales to the RCB amount to 5 trillion rubles, the possibility of the RCB in purchasing GKOs in the open market without violating the provisions of the agreement with IMF, will be limited by the sum of about 7-7.5 trillion rubles. In that case the increase in the face value of outstanding GKO-OFZ on the market can be limited to 8.5-9 percent a month which, according to our estimates using our model, will decrease the yield on GKOs down to about 7 percent.

It is worth noting that in case of mass shift in the structure of the financial portfolio of the economic agents in favor of dollar assets a serious reduction in the demand of GKOs-OFZs is possible. With the mentioned above yield on state securities a shift of assets to the currency savings can be caused not by the expectations of a devaluation (because it must be unrealistically big), but by the expectations of a default on the GKOs market (the state does not meet its obligations) and attempts to play on a reduction.

The growth trend of the interbank market turnover continued in March-April and reached 8-9 trillion rubles a month. Rates for over one week loans remained practically unchanged during that period. Their level was determined by yields on GKOs-OFZs (60-70 percent a year). Ruble surplus on the interbank market from the beginning of March has led to a reduction in the rates on one day loans down to 10-20 percent by mid-April. However, auctioning of government securities and active currency sales by the RCB resulted in short-term shortage of liquidity increased the INSTAR rate on 11 April on one day loans up to 140 percent level. Nevertheless, the average level of rates on the interbank loans at the end of April will surpass the March level by very small margin (See Table 2).

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