Unhappy IMF holds back loan to Russia

Russia's prospects of achieving economic stability suffered a blow yesterday after the International Monetary Fund said it was dissatisfied with Russian government budget forecasts for this year and was withholding a multi-billion-dollar loan.

After three weeks of talks in Moscow, IMF negotiators flew out unconvinced that the government will be able to suppress inflation, hold down the budget deficit and reduce the flow of central bank credits to inefficient industries and collective farms. Talks on the $6.25bn (£4bn) loan will resume later this month, but the IMF will be pressing for firmer evidence that Russia is capable of meeting the financial targets deemed necessary to justify the credit.

Bankers discounted suggestions that Western countries, which dominate the IMF, are attempting to punish Russia for having used excessive force in Chechnya. However, the European Union has indicated its disapproval of Moscow's tactics by delaying the signature of a trade and co-operation agreement with Russia.

The IMF is concerned about the Chechen war insofar as it is likely to increase government spending this year by the rouble equivalent of several billion dollars. For the IMF to release its loan, Russia's budget deficit this year needs to be 7.7 per cent of gross national product, but Western bankers predicted it could rise as high as 10 per cent.

The Chechen war and central bank credits to state enterprises are two reasons for the expanding budget deficit. A third is the Russian Parliament's decision on 25 January to raise the minimum wage from 20,500 to 54,100 roubles (£3.30 to £8.80) a month.

The increase could "blow the budget apart," in the words of one Western banker, because Russian welfare payments and state sector salaries are calculated as multiples of the minimum wage. Russian finance ministry officials said parliament's action could add more than $7bn to the budget deficit.

President Boris Yeltsin has the power to veto the minimum wage increase, but such a step risks provoking the parliament into rejecting the government's 1995 budget as a whole. That, in turn, could mean more delays in the release of the IMF loan.

Inflation was becoming a serious problem even before parliament raised the minimum wage. After falling last August to 4 per cent a month, the lowest level since Russia freed prices in January 1992, inflation began rising again and reached 17.8 per cent last month.

Michel Camdessus, the IMF managing director, yesterday called the inflation figures "very dangerous and particularly disappointing". He added that monetary and budgetary aspects of the Russian economy had "deteriorated markedly in the second half of 1994".

Inflation averaged 10 per cent a month last year, and the government has set a target of 3 per cent for 1995. The IMF suspects that this goal, like the 7.7 per cent target for the budget deficit, is unrealistic.

Another obstacle to the loan deal is that the Russian government has calculated its 1995 budget deficit on the assumption that the rouble will average 4,400 against the dollar over the year. With the rouble already having crashed below 4,000 last month, this assumption looks too optimistic.

The 1995 budget also assumes that about $10bn of international credits, including the IMF loan, will flow into Russia this year. Other funding is supposed to come from sales of treasury bills. Without that cash, the budget deficit will soar above 7.7 percent of GNP.

Western governments would be dismayed if the IMF refused Russia its loan, believing that would convey the impression to pro-Western reformers and anti-Western nationalists alike that the West is leaving Russia to twist in the wind. The need for Russian political stability remains a dominant factor in Western thinking. "Russia needs this agreement. The world needs a Russian economy without problems," Mr Camdessus said.

However, time may be running out. Parliamentary elections are scheduled for the end of this year, and many reformers fear a drubbing at the hands of conservative nationalists and Communists, who routed the liberals in the last elections of December 1993.