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-6642

-4748

1999

I

II

III

IV

V

VI

VII

VIII

IX

X

XI

XII

taxes

21766

21622

30452

36691

32072

36152

37183

37947

33622

37038

48002

62535

revenues

24864

24555

34416

42411

38693

43643

43953

45894

42105

44934

56431

76974

expenditures

23174

28026

40726

44441

42940

46870

43805

45186

42243

42101

48357

94741

deficit

1690

-3471

-6310

-2030

-4247

-3227

148

707

-138

2834

8075

-17767

S. Batkibekov

Monetary Policy

The final rate of consumer price growth in January 2000 appeared to be lower than the values projected in the beginning of the month. In January 2000 consumer price index grew by 2.3% (31.4% annualised). In January 1999 the inflation rate was 8.5%. Such low rates of price growth in January were recorded only twice: in 1997 (2.3%) and 1998 (1.4%). However, the dynamics of weekly CPI (see Fig. 1) raises some doubts as to whether the values of inflation are true.

The increment of price growth in January 2000 was mainly attributed to the growth of prices for services (3.4%), though prices for consumer goods grew slower, than the aggregated indicator. Thus, the food stuffs price index made up 102.2%, and the non-food goods price index – 101.6%.

In February, 2000 one should expect a further slowdown of inflation rate. According to results of the first three weeks, the consumer price index has risen by 0.9%. Thus, the price growth amounts 1.2–1.3% for the whole month (15.5–17% annualised).

Figure 1.

In February 2000, the Russian Central Bank continued to pursue the policy of accumulating of foreign reserves (see Fig. 2). The policy was supported both by the further increase in supply of foreign exchange by exporters, who benefited from current high prices at the world market, and thanks to overfulfilment of revenues to the Federal Budget. The latter allowed the RF Ministry of Finance made the current payments on the Russian external debt without any borrowing from the Bank of Russia. By mid-January 2000, the volume of the foreign reserves reached $13.4 bln. That has been the highest volume since November 1998.

In February 2000, the money supply resumed its growth resulting from ruble interventions at the foreign exchange market. For the first 20 days of the month the narrow monetary base increment alone made up about 10 bln. rubles. On the base of dynamics of monetary aggregates in 1999, the total volume of emission (increment of the reserve money – the broad monetary base) is estimated about 20–25 bln rubles.

Figure 2.

To estimate the inflation pattern in 2000, we considered several macroeconomic scenarios depending on budget and monetary policy options.

The first scenario is based on accurate implementation of assumptions laid out in the Federal Budget Law 2000 and The Main Principles of the Single State Monetary Policy in 2000. The results are obtained using the model presented earlier (The Russian Economy in 1998. The Trends and Perspectives (Issue No. 20). – M.: IET, 1999) (see Tab. 1). The dynamics of inflation in 2000 is given in Fig. 3. Our estimates appear being only slightly different from the official figures, provided in the Federal Budget Law and the Monetary Program for 2000.

Table 1.

1999

Official

Forecast

Scenario 1

Scenario 2

Scenario 3

Scenario 4

Inflation (%)

36.7%

18%

17.9%

24.4%

26.3%

34.7%

GDP (bln. rubles)

4165*

5350

5246

5370

5588

5821

The M2 growth rate (%)

57.9%*

20–38%

26.9%

36.0%

37.5%

46.1%

The US$/Ruble exhange rate (End of the year)

27.0

36.0–38.0

32.9

32.8

35.3

39.4

M2/GDP

14.63%

18.5–19.5%

16.39%

16.65%

15.62%

14.86%

Figure 3.

In our view, however, the assumptions provided in the first scenario as well as in the official forecast are not fully realistic. In the first line, the level of the Federal Budget revenues laid out in the Budget 2000 Law (14.9%) seems to be high. In 1999 the Federal Budget revenues amounted to 13.7% of GDP. Thus, our second scenario is based on the assumption that the Federal Budget revenues would be at the level of 13.5% of GDP. The other assumptions are the same as in the first scenario. Besides, we assumed that:

The volume of emission in 2000 would be determined as a difference between the Federal Budget revenue and its total expenditure (including the redemption of the Russian external debt, the external financing considered). Thus, we assumed that the RCB would issue money within the total amount of the Ministry of Finance's needs in foreign exchange (about $4 bln.);

The money multiplier in 2000 would be between 2.35–2.45;

The oil prices in 2000 would be on the level of late-1999, i.e. within $25–28 per barrel. That would ensure the positive trade balance of Russia at the level of $30–35 bln.;

The positive trade balance and external loans would provide the supply of foreign exchange at the domestic market, which would make the ruble real exchange rate rise, despite purchases of foreign exchange by the RCB for the purpose to pay off the Russian foreign debt. We assume that the Bank of Russia would pursue the policy of accumulation of its foreign reserves and would not allow the ruble to appreciate more than 5% in 2000;

To sterilise the ruble interventions at the foreign exchange market, the RCB would pursue the policy of deposit operations with the commercial banks, or issue the RCB’s bills and expand its operations at the secondary market for the government securities. That would allow to limit the growth of the narrow monetary base by 30–35% for the whole year.

The results (see Tab. 1 and Fig 3) show that the price growth amounts to about 24.5%, the GDP – 5370 bln. rubles, the US$/Ruble exchange rate (in the end of 2000) – 32.8 rubles per US dollar. Low inflation rates will contribute to growth in demand for money. Thus, the real money balances would grow by 13.8% for the year and attain 16.7% of GDP.

The scenario considered above could be regarded as too optimistic: the negotiations between Russia and the International Monetary Fund prejudice the probability of granting Russia with the external financing at the claimed volume (about $5 bln.) in 2000. Thus, in the third scenario we assume that foreign loans would not be provided, but the Russian Government would continue to pay off the foreign debt in duly volume (up to $10.2 bln.) The shortage of foreign exchange will be covered by the Russian Central Bank at the expense of additional purchasing of hard currency. The increase in the demand for hard currency on the part of the RCB will allow to compensate for the pressure on the ruble real exchange rate, and it would remain constant over the whole year. The money multiplier would keep the level of end-1999 and would amount to 2.35.

Our calculations (see Tab. 1 and Fig. 3) show that the price growth may make up 26.3%, the US$/Ruble exchange rate would be 35.3 rubles per US dollar by the end of the year, while the GDP – 5588 bln. rubles. Despite the fact that the RCB would sterilise the ruble interventions, the inflationary impact of additional (compared to the second scenario) money emission (about 130 bln. rubles) will not be completely neutralised. The GDP deflator would grow at a higher pace than inflation rate, and the real money balances would grow over the year by 6.8% at most, i.e. up to 15.6% of GDP.

Nevertheless, we consider such a scenario bearing no danger for the Russian economy. The increment of inflation rate in 2000, due to the lack of external refinancing of the Russian foreign debt, amounts to not more than two percent points (26.3% vs. 24.4%). At the same time, the pressure at the real ruble exchange rate would ease, the incentives to restrictive monetary and budget policy will be in place. Thus, in the medium- and long-run the contraction in the foreign debt would have a positive influence at the Russian economy, while the costs would be relatively low in the short-run1.

In all the aforementioned scenarios we assumed that the oil prices and prices for other commodities exported by Russia (gas, ferrous and non-ferrous metals) will keep the current high level. This prerequisite ensured the inflow of foreign exchange and high profitability of export-oriented enterprises, which provided a significant part of tax and non-tax revenues to the Federal Budget. In the fourth scenario, we alleviate the said assumption and allow possibility of decline in prices for the Russian export up to 30% by the end of the year.

The estimates show that in this case a decline in the Federal Budget revenues could make approximately 1% of GDP, i.e. up to 12.5% of GDP. Consequently, the trade balance would deteriorate, the supply of foreign exchange would come down, and the Russian Central Bank would have to devaluate ruble again for the purpose of purchasing the required sum of hard currency. Our estimates show that should other assumptions under the third scenario realise (no new external loans), the ruble would depreciate up to 8%.

As Tab. 1 and Fig.3 show, under such preconditions in 2000 inflation rate may reach 35%, given that it may accelerate then up to 3–3.5% a month (40–50% annualised). The nominal increment of money aggregate M2 exceeds 46% over the year, but it grows only at 1.6% in real terms (from 14.6% to 14.9% of GDP).

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