ALEXEI VEDEV: WHY ACCELERATION OF THE ECONOMY IS INFEASIBLE WITHOUT THE NWF’S FUNDS
The RBK Information Agency published an op-ed column by Alexei Vedev, Leading Researcher of the Gaidar Institute, dealing with the future of the National Welfare Fund (NWF).
According to the author, further conservation of the National Welfare Fund will not deliver stability to the Russian economy, but facilitate its sliding into recession, the author notes. The debates on the prospects of utilization of the NWF’s funds intensify as its volume approaches 7% of GDP. With the surplus above this level being available, the government can use the savings for various investment projects.
The opponents of spending of the NFW’s funds claim that this level is not sufficient enough to guarantee budget commitments and say there is a risk of an inflationary pressure on the back of growth in expenditures. Actually, lots of experts agree that the threshold of 7% of GDP should be applied only to liquid assets because a portion of the NWF’s funds has already been invested into investment projects. As regards the inflationary pressure, in our opinion the risk is insignificant. The Russian economy sooner faces the risk of deflation or the prolonged staying of the inflation rate index below the target level of 4%, rather than appreciation of the price index.
Unreasonable toughness
The relevance of the debates on the fate of the NWF’s funds is justified both by Russian economic results which are not good enough in H1 2019 and the revision by the government and lots of experts of the forecasts for the current and subsequent years. The frontal reduction of the key macroeconomic parameters is triggered by the slowdown of domestic demand and worsening of external conditions.
According to the latest version of the forecast of the Ministry of Economic Development, consumer lending growth rates are expected to decline fr om 24% to 4% year on year as early as next year. If the contribution of consumer lending to final demand growth amounts as per the estimate of the Ministry of Economic Development to Rb 1.7 trillion in 2019, in 2020 it will be equal to the mere Rb 0.4 trillion. As a result, the dramatic slowdown of consumer demand growth to 0.6% is expected. Amid the expectations of the slowdown of external demand (by virtue of the depreciation of prices of oil and slowdown of the global economy) the GDP growth rates of 1.7% in 2020 appear quite unrealistic.
The further slowdown of domestic demand, which is recognized at last by the Ministry of Economic Development, has been caused by the prevalence of the tough monetary policy with simultaneous tightening of the budgetary policy; experts have been talking about the risks associated with such a policy for two years.
At the same time, the budget plan suggests maintenance of the federal budget surplus in the mid-term prospect. Based on the results of H1 2019, the surplus amounted to 3.4% amid the dramatic slowdown of economic growth, while the expenditures were executed for the mere 42.5% of the tough plan targets.
In H2 2018, the key interest rate was raised to 7.75%. It seems obvious that no tax novations could speed up the rate of inflation with such a low domestic demand in place. As a result, the inflation rate is steadily moving below the target level of 4%.
The tough monetary and budgetary policy justified the reduction of investment activities. If in 2018 investments increased by 4.3%, though lots of experts believe that the Rosstats’ data are overstated, in the first six months of 2019 there was symbolic growth of 0.6%. A key prerequisite for the Russian economy’s turning to sustainable growth is a switchover to the investment model of development wh ere a key factor is growth in the share of savings. However, at present quite the opposite situation is observed mainly by virtue of reduction of budget investment expenditures.
The Ministry of Economic Development expects a 5% growth in investments next year and maintenance of the investment growth rates in the range of 5.3%–6.5% in the mid-term prospect (till 2024). Those are highly ambitious plans which implementation is feasible only in case of the radical easing of the budgetary and monetary policies. But one can hardly expect the revival of private investment activities in the near future; the situation is complicated both by low domestic demand and possible worsening of external conditions.
It is noteworthy that the pattern of investments has changed for the worse. During the crisis, investments in machines and equipment fell dramatically (by 30%, but then rose by the mere 17%), while investments in buildings and facilities were more stable. Importantly, the investments in machines and equipment depend critically on the exchange rate of the rouble and are the least prone to import substitution.
Rules for investments
So, utilization of the NWF’s funds is an important and much required condition for underpinning economic growth. Note that this condition is to be in place even for ensuring insignificant growth, to say nothing of the prospect of entering the world’s top five largest economies. The NWF’s funds should be used primarily on development of infrastructure projects and then on the expansion of investments in manufacturing of machines and equipment – such investments depend more on the rate of inflation as they suggest purchasing of investment goods abroad.
But it is important to define the strict criteria of “self-support of infrastructure projects” and use the estimates of the direct return of funds to the investor. Also, it is important to take into account indirect estimates of the efficiency of projects, such as overall additional budget revenues, creation of additional jobs and eventually the multiplier effect for economic growth.
It is obvious that at present the balance between the stability and growth has largely shifted in favor of stability. The tough monetary policy and exceedingly tight budgetary policy have justified fading of growth amid favorable external conditions. Further conservation of the NWF will not provide stability because it facilitates sliding of the Russian economy into recession in which frameworks it is expected to use the accumulated funds.
The opponents of spending of the NFW’s funds claim that this level is not sufficient enough to guarantee budget commitments and say there is a risk of an inflationary pressure on the back of growth in expenditures. Actually, lots of experts agree that the threshold of 7% of GDP should be applied only to liquid assets because a portion of the NWF’s funds has already been invested into investment projects. As regards the inflationary pressure, in our opinion the risk is insignificant. The Russian economy sooner faces the risk of deflation or the prolonged staying of the inflation rate index below the target level of 4%, rather than appreciation of the price index.
Unreasonable toughness
The relevance of the debates on the fate of the NWF’s funds is justified both by Russian economic results which are not good enough in H1 2019 and the revision by the government and lots of experts of the forecasts for the current and subsequent years. The frontal reduction of the key macroeconomic parameters is triggered by the slowdown of domestic demand and worsening of external conditions.
According to the latest version of the forecast of the Ministry of Economic Development, consumer lending growth rates are expected to decline fr om 24% to 4% year on year as early as next year. If the contribution of consumer lending to final demand growth amounts as per the estimate of the Ministry of Economic Development to Rb 1.7 trillion in 2019, in 2020 it will be equal to the mere Rb 0.4 trillion. As a result, the dramatic slowdown of consumer demand growth to 0.6% is expected. Amid the expectations of the slowdown of external demand (by virtue of the depreciation of prices of oil and slowdown of the global economy) the GDP growth rates of 1.7% in 2020 appear quite unrealistic.
The further slowdown of domestic demand, which is recognized at last by the Ministry of Economic Development, has been caused by the prevalence of the tough monetary policy with simultaneous tightening of the budgetary policy; experts have been talking about the risks associated with such a policy for two years.
At the same time, the budget plan suggests maintenance of the federal budget surplus in the mid-term prospect. Based on the results of H1 2019, the surplus amounted to 3.4% amid the dramatic slowdown of economic growth, while the expenditures were executed for the mere 42.5% of the tough plan targets.
In H2 2018, the key interest rate was raised to 7.75%. It seems obvious that no tax novations could speed up the rate of inflation with such a low domestic demand in place. As a result, the inflation rate is steadily moving below the target level of 4%.
The tough monetary and budgetary policy justified the reduction of investment activities. If in 2018 investments increased by 4.3%, though lots of experts believe that the Rosstats’ data are overstated, in the first six months of 2019 there was symbolic growth of 0.6%. A key prerequisite for the Russian economy’s turning to sustainable growth is a switchover to the investment model of development wh ere a key factor is growth in the share of savings. However, at present quite the opposite situation is observed mainly by virtue of reduction of budget investment expenditures.
The Ministry of Economic Development expects a 5% growth in investments next year and maintenance of the investment growth rates in the range of 5.3%–6.5% in the mid-term prospect (till 2024). Those are highly ambitious plans which implementation is feasible only in case of the radical easing of the budgetary and monetary policies. But one can hardly expect the revival of private investment activities in the near future; the situation is complicated both by low domestic demand and possible worsening of external conditions.
It is noteworthy that the pattern of investments has changed for the worse. During the crisis, investments in machines and equipment fell dramatically (by 30%, but then rose by the mere 17%), while investments in buildings and facilities were more stable. Importantly, the investments in machines and equipment depend critically on the exchange rate of the rouble and are the least prone to import substitution.
Rules for investments
So, utilization of the NWF’s funds is an important and much required condition for underpinning economic growth. Note that this condition is to be in place even for ensuring insignificant growth, to say nothing of the prospect of entering the world’s top five largest economies. The NWF’s funds should be used primarily on development of infrastructure projects and then on the expansion of investments in manufacturing of machines and equipment – such investments depend more on the rate of inflation as they suggest purchasing of investment goods abroad.
But it is important to define the strict criteria of “self-support of infrastructure projects” and use the estimates of the direct return of funds to the investor. Also, it is important to take into account indirect estimates of the efficiency of projects, such as overall additional budget revenues, creation of additional jobs and eventually the multiplier effect for economic growth.
It is obvious that at present the balance between the stability and growth has largely shifted in favor of stability. The tough monetary policy and exceedingly tight budgetary policy have justified fading of growth amid favorable external conditions. Further conservation of the NWF will not provide stability because it facilitates sliding of the Russian economy into recession in which frameworks it is expected to use the accumulated funds.