Due to lower oil prices exports (the positive side of the balanceof trade) will most likely be lower than is stated in the Forecast;
If situation remains favourable (there will no critical fall of oilprices) the nominal exchange rate in 2002 will most likely be slightly lower(by approximately 5-7%), its direct influence on the inflation by means of moreexpensive imported goods will be small. Should oil prices drop considerablywhich will shortly after entail export cuts to keep the balance of tradepositive there will be a possibility of devaluation of the national currency,the government will be forced to restructure foreign debts and to resort to newloans;
Should oil prices remain on the level lower than 18 dollars perbarrel, a continuation of the real exchange rate strengthening can be expected,which will promote further increase of imports and decrease of the positiveside of the balance of trade, cutting foreign currency revenues of the country(seen together with par. 1 above);
Should the nominal rouble exchange rate change slightlystrengthening of rouble in real terms will become a major problem, because itworsens positions both of export-oriented extracting industries by loweringtheir competitive capacities and of a number of other branches that producetraded goods because of higher imports (see under par. 3 above);
Reduction of the norm of export revenues sales in September 2001from 75% to 50% allows to be more flexible in 2002 when fixing volumes offoreign currency bought on the market and to make money supply growth rate bythe Central Bank lower.
In case of a favourable situation of world oil prices the surplusof the federal budget accumulated in form of financial reserves for repaymentof foreign debts will allow the Central Bank to partially sterilize moneysupply growth by purchase of foreign revenues and use of the financial reservesto settle foreign debts (if payments are made according to the schedule), whichwill lead to a growth of the debit capital balance and reduction of the creditbalance in a favourable situation of the balance of payment;
If foreign debts’ repayments will be performed using a gradual buying-up of foreigncurrency by the government through the Central Bank and its agents maintainingthe nominal exchange rate constant, this can cause a non-speculativefluctuations of the gold and foreign currency reserves without changes in themonetary base and money stock (buying-up of revenues from foreign trade causesa greater money supply, concurrently tax receipts that are accumulated by thefinancial reserves on accounts with the Central Bank and later converted intoforeign currency sterilize this money supply increase).
4. Factors that can influence inflation in2002. Foreign policies, exchange rate policies andmonetary management are influenced chiefly by the situation of the world marketof natural resources and the policy of the Central Bank. The government whenproviding inflation reference point for the budget can influence price changesby the following:
Reforms and changes in tariffs of natural monopolies.
Rise in prices as a result of changes intariffs of natural monopolies (the maximum allowed increase index approved is35%) in year 2002 will to a certain degree be more controllable, it is assistedin particular by creation of a common tariffs agency. One of variants oftariffs increase can be a controlled indexation (e.g. using the pattern appliedto specific excise-duties). When increasing tariffs one should remember thatelectric power, gas and railway transport are resources and services that areused by practically all branches of the economy, thus increase of tariffs canlead to higher expenses and changes in the structure of costs reflecting onmanufacturers’ andconsumer prices (according to estimates by IET elasticity of CPI related toelectric power tariffs in 1995-2000 equalled to 0.2, elasticity related tohousing and communal services about one).
Reforms in housing and communal services.
Prices in the housing and communal servicessector largely depend upon tariffs of natural monopolies, chiefly on power andgas prices. Moreover a higher share of payments for housing and communalservices by the population can cause an extra increase of consumer price index(statistically inflation can make itself visible, for example, when there willmade a transfer from direct share of payments by the population to targetedsubsidies through higher service prices at the same level of effectiveness forthe state). Here it is also worth noting that against the background ofconsiderable wear of basic assets in the housing and communal infrastructurethe heating season can bring forward unexpected maintenance costs as well aspossible rehabilitation expenses.
Indexing of pensions, wages of employees of budget institutions,use of extra budget revenues to increase non-interest-bearing expenditures.
When extra budget revenues are not used forrepayment of foreign debts but for indexing of pensions and wages it leads notonly to a higher money supply but also to a higher demand and consumption (along-term increase with a shift in assessment of receivers’ constant incomes). As far as thenumber of receivers of pensions and wages according to the tariff scale isquite large, a general increase of demand for consumer goods can cause anincrease in consumer prices. In particular, use of extra revenues in 2000 forincrease of non-interest-bearing expenditures (principally for social expenses)is often called one of the main reasons for high inflation rates at thebeginning of 2001. For year 2002 this problem is less important, as far asextra revenues will in all probability be used to accumulate financial reservesfor repayment of foreign debts in 2002-2003. As far as extra revenues of thegovernment to a great degree are rental income, decrease of tax burden for theamount of these revenues will not cause inflation prerequisites by increasingthe demand, but will add up to capital outflow.
On the whole it should be noted that theinflation and inflationary anticipations are quite inertial, that is why in thepresent situation judging by the above mentioned one can hardly expect aconsiderable decrease of inflation. This is the reason why the guidelinessuggested by the government in the Forecast for 2002 can be viewed asunderstated estimates. Allow us to remind that in the Forecast ofsocio-economic development according to the first scenario inflation for2002-2003 remains at a permanent level of 10-13% and in 2004 falls to 8-10%.According to the second scenario, the optimistic one, inflation decreases andin 2002-2003 is equal to 9-12% and 7-9% in 2004.
Taking into consideration the inflationaryinertia (in 2001 increase of CPI equalled to 18.8%) and expected institutionarychanges that can cause at least on a short-term basis (in January 2002 theincrease of CPI equalled to 3.1%) a rise in prices of natural monopolists(electric power, gas, railroad transport, housing and communal services), weview an estimate of inflation rate at the level of 15-17% as a more realisticone. In case actual world oil prices will be close to the scenario values, ashas it already been said, exports can be lower than planned, and tax receiptswill be lower accordingly. In such a situation inflation higher than the givenreference points will on the contrary promote an increase in revenues and willallow to partially compensate the decrease.
Here it should also be noted that theForecast in both variants suggests equal inflationary reference points,monetary inflationary factors being stronger in the second scenario accompaniedby higher world oil prices. If actual oil prices will be even higher (at thelevel of 2000-2001) these factors will have a still stronger influence and theinflation can be even higher.
Nevertheless this kind of inflation forecast also has a positiveside, showing a slower development of inflationary processes because itsunderestimation in the Forecast assists lower inflation expectations both inthe current year and in future.
Prognosis for the GDP volume. In spite ofthe differences in inflation rate estimates (and the GDP deflator indexesaccordingly) estimates of the nominal GDP for 2002 (10950 billion roubles) areviewed by us as realistic. This result is achieved by an overestimated GDP for2001, as we see it. According to preliminary estimates the nominal GDP in 2001will reach approximately 9040 billion roubles (against 9130 billion roubles inthe Forecast). Thus a slightly overestimated GDP in 2001 (by 1%) allows givinga realistic prognosis for GDP in 2002 using underestimated price growthrates.
6. Estimates of the federal budget taxreceipts. To make our estimates of tax receipts of thefederal budget in 2002 we proceeded from the following:
nominal volume of GDP in 2002 will be equal to 10950 billionroubles;
estimates of tax receipts in 2001 in shares of GDP are calculatedon the basis of GDP equalling 9040 billion roubles;
estimates of tax receipts by types of taxes for 2002 are made intwo stages:
at the first stage estimates of tax receipts by types of taxes for2002 are calculated on the basis of the respective effective tax rate to thebasis of 2002 (in accordance with the draft budget) adjusted to changes in theGDP pattern;
at the second stage results of initial calculations are adjustedaccording to changes in nominal tax rates.
It should be noted that our assessments arerelative in that respect that we are not taking influence of the tax reforms onchanges in the tax base for each type of taxes into account and they candeviate from actual values in both directions. In particular, in makingcalculations for the profit tax we disregarded increment of the tax base due tocancellation of privileges, but took into account the low nominal tax rate.Thus, our estimates of profit tax receipts are in all probabilityunderestimated.
In % to theGDP
Taxes in foreign trade andforeign-economic operations
Payments for use of naturalrecourses
Other taxes, duties, dues andfees
Tax receipts, total
Nevertheless the results of our calculationsproved to be close to the reference points. As we see it, the level of taxreceipts estimated by the government as 15.77% is closer to the highestpossible level of tax receipts when oil prices are within the range of 17 to 20dollars per barrel, while our estimates are more likely to be close to thelowest level.
Hence, we estimate the total of federalbudget tax receipts in 2002 as equal to 15.5% of GDP or 1700 billion roubles.This is approximately 26 billion roubles less, than planned in the draftbudget. Thus, if oil prices will fall to the level of 17-18 dollars per barrelthe initial surplus of the federal budget can be lower, though budget revenueswill be enough to make all payments concerning foreign debts. The volume of thereserve fund, though, can appear to be appreciably lower than planned.According to our estimates the level of the planned tax receipts (15.77%) andincrement of the reserve fund as planned in the draft budget can be reached ifthe annual average of oil prices for Urals will not be lower than 20 dollarsper barrel.
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