IMF Predicts Russia Recession, World Bank Loans on Hold
WASHINGTON -- (Reuters, Agence France Presse) International financial institutions dealt Russia a double blow on Wednesday,
predicting a lurch back into deep recession and warning that a $6 billion lending program was now in doubt.
The International Monetary Fund said it expected Russia's economy to contract by 6.0 percent in 1998 and 1999, after slim 1997
growth of 0.9 percent, for the steepest fall in output in the countries of Eastern Europe and the former Soviet Union.
Inflation, 15 percent in 1997, would rise to 48 percent in 1998 and 73 percent in 1999, it said in its World Economic Outlook, noting
that Moscow's decisions to devalue the ruble and default on some foreign debts had had wide repercussions.
"In August 1998, Russia replaced Asia as the center of the financial crisis affecting emerging markets," the IMF said.
The World Bank, which has already loaned Russia $6.5 billion over a six-year period, said conditions had changed dramatically
since July, when the bank agreed to lend Russia $6 billion over 18 months as part of a $23 billion IMF-sponsored international
lending program.
This meant the bank had no plans to press ahead with these loans until the government made its policy position clear, a senior
bank official said.
"Whether or not a total of $6 billion for the 18-month period makes sense is, I think, debatable at this point," Johannes Linn, World
Bank vice president for Europe and Central Asia, told a news conference.
"At this point we have no very specific plans to implement the $6 billion package as a whole, simply because conditions are very
different from what they were in July."
The changes in Russia center on the appointment of a new government to replace the reformist administration of Sergei Kiriyenko,
sacked by President Boris Yeltsin after the default and the devaluation.
New Prime Minister Yevgeny Primakov is still finalizing his economic plans, but proposals in a government draft include the
nationalization of most banks, a government-set ruble rate and the creation of a Reconstruction and Development Bank to extend
loans to domestic firms.
Value added tax would be cut to 15 percent from 20 percent, although there would be no changes to income or profit tax.
Russia's Kommersant newspaper said the economic proposal would cost 100 billion rubles ($6.7 billion) and would lead to
hyperinflation.
The IMF has repeatedly urged Russia to concentrate on improving tax collection, restructuring the banking system, raising interest
rates and improving relations with creditors in order to achieve sustainable economic growth. Officials have said no more IMF money
will be paid until things improve.
"They need a credible fiscal policy, they need a disciplined monetary policy and they need to get moving again with their structural
reform effort," IMF chief economist Michael Mussa said.
Russia, a member of the IMF for less than 10 years, has become the institution's largest borrower.
But the Russian government spent the first $4.8 billion payment from the IMF's $10 billion contribution to the July package in a
matter of weeks in a futile attempt to defend the ruble currency.
Linn said World Bank officials now needed to sit down with the new government and discuss what Russia would need and what the
government would be willing to do.
"If the government implements the conditions that legally entitle it to draw down those tranches we will work...constructively and
proactively with the new government to help it meet those conditions," Linn said.
But if the new government abandoned reforms "these tranches very likely will go unused and we'll have to look at other options
depending on what the new government wants to do," he added.
Linn also said the World Bank has no proof that its aid to Russia has been misappropriated. "We have no indication or evidence that
there is a misuse of the bank's resources."
But he said the bank was taking unofficial allegations that funds had been used improperly very seriously, stressing that its
independent auditing department was enabled to deal with such issues.
A recent report published by Russia's chief state auditor revealed that the Russian government had used loans from the World Bank
to pay off its national debt instead of using them to finance structural reforms.
Earlier this month state auditor Venyamin Sokolov accused Russia's central bank of stealing and wasting billions of dollars loaned
by the IMF.
Sokolov called on the West not to hand over any more money to Russia until "strict financial controls" had been put in place to
"overcome corruption." ( (c) 1998 Reuters, Agence France Presse)
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