Economy At Its Best Since 1991, Analysts Say

The outlook for Russia's economy is the best it has been since the start of economic reforms and an investment boom could be around the corner, due to the government's tight monetary policies, senior economists said Tuesday.


"The general outlook in Russia is better than it has been at any time since the reform began," Richard Layard, a professor at the London School of Economics, told a news conference at a monthly briefing by the government's Center for Economic Reform.


"If we look ahead to the next year or two, it seems clear that inflation will improve, there will be an improved legal framework," he said. "Given that, plus the underlying upturn in the economy, we can indeed expect the beginnings of an investment boom fairly soon."


Layard pointed to the stabilization of industrial production in the first two months of 1995, when it reached the same level as a year before, and falling inflation as signs that the economy is improving.


Sergei Pavlenko, the center's director, added that the months of February and March are traditionally a time of the worst economic performance in Russia with a 15 percent production slump last year.


"The fact that the index of industrial production is now swirling around zero means that the growth potential is very strong," Pavlenko said.


One prominent government critic, however, said the government's tighter monetary policy is likely to result in a slight production slump this year.


"The present tight monetary policy may lead to a production decline in the coming months," said Andrei Illarionov, director of the independent Institute of Economic Analysis and a former government adviser, speaking by telephone from Japan. "However, it will not be as deep as a year ago."


Pavlenko said he expected the trend toward stabilization to continue for some time, with inflation falling to around 8 percent in March, much lower than February's inflation of 11 percent and January's 17.8 percent. Inflation for the first two weeks of March amounted to 4.4 percent, Economics Minister Yevgeny Yasin said Monday.


Layard said the reason for the stable economic situation was a relatively low expected budget deficit and the government's commitment to non-inflationary financing of the deficit.


Last week the State Duma passed the fairly austere 1995 budget, including a deficit of 73 trillion rubles ($15.2 billion), or 5.5 percent of gross domestic product.


For comparison, in 1993 the formal budget deficit amounted to 10 percent of GDP but the Central Bank also issued further quasi-budgetary credits to the value of 5 percent of GDP, said Layard.


This year, the government plans to cover the budget deficit with a package of domestic and foreign loans, including a $6.5 billion stabilization facility that is expected to be granted by the International Monetary Fund next month. Without Central Bank credits, the government aims to reduce monthly inflation to 1 percent by the end of the year.


"The Russian economy is now set for a period of sustained deflation. For the next few months the main factor will be the tighter monetary policy of the last six months. Between October and December, monetary growth averaged 6 percent per month, and in the first two months of the year there has been no growth at all in the monetary base," the joint press release says.