High growth gives Russia inflation headache
By Andrew Hurst
MOSCOW, Sept 5 - High crude prices are fuelling Russia's oil-exporting economy, giving the country a spurt of growth, rising incomes and a big current account surplus.
Economic bonanza, with growth of up to seven percent expected this year, is also helping to fill state coffers and produce a budget surplus for the third year running. But there is one thing that is not quite going to plan -- inflation.
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Despite a surprise 0.4 percent fall in consumer price inflation in August from July, analysts expect the government to overshoot an annual 10-12 percent target this year.
"Inflation this year will be higher than 12 percent. I don't see a possibility to reduce inflation," said Natalya Orlova, an economist at Alfa-Bank.
With a current account surplus likely to be even higher than last year's $38.2 billion, Russia is getting too much of a good thing and has few means at its disposal to curtail inflation short of allowing the rouble to skyrocket.
"The oversupply of liquidity cannot be absorbed even by a growing economy," said Yevgeny Gavrilenkov, chief economist at Moscow investment bank, Troika Dialog.
Gavrilenkov said some degree of inflation was unavoidable and there was not much the central bank can do about it: "I think it's quite reasonable. There are no other options."
The Finance Ministry's 2004 budget plans, which were sent to the State Duma, Russia's main legislative assembly, are calling for 8-10 percent inflation next year, a target which few economists believe is attainable.
FAST MONEY GROWTH
With the money supply growing at a very fast clip, it is perhaps surprising that inflation is not even higher.
The broad M2 definition of money supply rose 22.6 percent in the first half of 2003, well in excess of the government's money supply growth target of 20 to 24 percent for the whole year.
The demands of a fast growing economy have absorbed some of the excess cash in circulation. "This year the central bank will avoid the full inflationary consequences (of higher money supply) because demand for money has increased as a result of higher than expected economic growth," said Yuliya Tseplayeva, an economist at ING in Moscow.
A major reason for the galloping growth of money supply is a flood of dollars into the country. The central bank is having to print roubles in order to buy up the foreign currency.
Russia's underdeveloped money markets do not give the central bank much of an armoury of instruments with which to mop up excess roubles and as a result the financial system is awash with liquidity.
"The central bank is pursuing a pragmatic policy. It would be good to keep everything under control but Russia's financial markets are not so sophisticated at the moment," said Tseplayeva.
A stronger rouble, which has gained some five percent against the dollar this year, has also taken some of the edge off inflation. "My impression is the government prefers modest inflation and maybe a stronger rouble," said Tseplayeva.
"They are playing it by ear. In an environment like this it is very hard to target inflation well," said Al Breach, an economist at Brunswick UBS Warburg in Moscow.
A faster appreciation of the rouble could take the edge of inflation, by driving down the cost of imports of foodstuffs and manufactures, but could hurt domestic producers if it goes too far.
"You have the danger of an overshoot. As more capital comes in it pushes up the rouble and attracts further inflows," said Breach. |
