ALEXEY VEDEV: WE MAY FACE A “VISCOUS” CRISIS”
Alexey Vedev, Head of Financial Studies Department, the Gaidar Institute, shared his forecast for development of Russian economy under coronavirus pandemic with “Kommersant” newspaper.
“The main result of QII is the drop of economy by 10-12%. These are my estimates and they may not coincide with other sources. The service sector was most affected, while the industrial production suffered less. The government has timely and professionally prepared a plan for economic recovery. However, I think it would be better to split this plan into two parts: the first is to eliminate the consequences of the crisis, and the second is to enter the trajectory of sustainable growth. These are different tasks, and, accordingly, it is necessary to separate anti-crisis measures from measures that stimulate development.
Regarding the first task: the society has suffered losses due to the coronavirus pandemic, and we will have to come to terms with it. Neither people nor enterprises have to be blamed for this. A lockdown was announced. Losses should be covered from public money, either by direct financing or by tax deductions (both for businesses and households). Losses just need to be compensated, and the more the better. At this point, the opinions of economists differ only on the scale of the losses and amount of money that the state can afford to allocate from the National Welfare Fund or through borrowing in the domestic or foreign markets. Estimates of such compensation range from RUB 3 to 8 trillion.
The government is allocating RUB 5 trillion for the entire plan of economic recovery, however, this is a "direct accounting", i.e., losses and funds spent. Apparently, this is only an initial figure and most likely more money will be needed.
According to my forecasts, this year we will have a drop in GDP of 6-7%. Next year and in 2022, we may expect a slight increase. We will be able to reach the level of 2019 in the middle of 2023. We will face a "viscous" crisis, and it will be difficult to quickly get out of it.
Back at the end of 2019, there was a tough dispute about stimulus measures, when the Ministry of Economic Development blamed the Ministry of Finance possessing its surplus budget and the Central Bank conducting its policy of high interest rates for low growth rates. The pandemic has eased these positions. The budget is already assumed to be in deficit, that is, the Ministry of Finance will give the economy more than take. The Bank of Russia looks like starting to accept zero neutral interest rates, while earlier these rates amounted to 1.5-2% (neutral or natural rates ensuring full utilization of production capacities while maintaining the inflation rate at "O"). Another important thing is the reduction of social taxes (taxes on labor). This measure has been already discussed in 2016, however, forgotten later. To-date, the overarching issue is whether this stimulus measure will be permanent or cancelled in two-three years.
The government is still inclined to support certain industries that have a prospect to become development drivers in accordance with the governmental intention. However, is it possible to ensure high growth only at the expense of the IT industry? Well, it is hardly possible. If money goes only there, then they will end up with enterprises that are far from "digits", who will call themselves IT companies. Moreover, we have already experienced it more than once. There were ideas to rely on aerospace technologies, on nanotechnology. We wasted money and achieved no result.
I believe that it would be more correct and systematic to stimulate all industries frontally, rather than selectively. Investment incentives have to be introduced for everyone at once. Social taxes have to be reduced to 15% also for everyone, as it is now done for IT companies. This tax in Russia is one of the highest in the world. If it is corrected to a reasonable level, it would stimulate investment and wages would increase and consumer demand grow as the major platform of the economy".
Regarding the first task: the society has suffered losses due to the coronavirus pandemic, and we will have to come to terms with it. Neither people nor enterprises have to be blamed for this. A lockdown was announced. Losses should be covered from public money, either by direct financing or by tax deductions (both for businesses and households). Losses just need to be compensated, and the more the better. At this point, the opinions of economists differ only on the scale of the losses and amount of money that the state can afford to allocate from the National Welfare Fund or through borrowing in the domestic or foreign markets. Estimates of such compensation range from RUB 3 to 8 trillion.
The government is allocating RUB 5 trillion for the entire plan of economic recovery, however, this is a "direct accounting", i.e., losses and funds spent. Apparently, this is only an initial figure and most likely more money will be needed.
According to my forecasts, this year we will have a drop in GDP of 6-7%. Next year and in 2022, we may expect a slight increase. We will be able to reach the level of 2019 in the middle of 2023. We will face a "viscous" crisis, and it will be difficult to quickly get out of it.
Back at the end of 2019, there was a tough dispute about stimulus measures, when the Ministry of Economic Development blamed the Ministry of Finance possessing its surplus budget and the Central Bank conducting its policy of high interest rates for low growth rates. The pandemic has eased these positions. The budget is already assumed to be in deficit, that is, the Ministry of Finance will give the economy more than take. The Bank of Russia looks like starting to accept zero neutral interest rates, while earlier these rates amounted to 1.5-2% (neutral or natural rates ensuring full utilization of production capacities while maintaining the inflation rate at "O"). Another important thing is the reduction of social taxes (taxes on labor). This measure has been already discussed in 2016, however, forgotten later. To-date, the overarching issue is whether this stimulus measure will be permanent or cancelled in two-three years.
The government is still inclined to support certain industries that have a prospect to become development drivers in accordance with the governmental intention. However, is it possible to ensure high growth only at the expense of the IT industry? Well, it is hardly possible. If money goes only there, then they will end up with enterprises that are far from "digits", who will call themselves IT companies. Moreover, we have already experienced it more than once. There were ideas to rely on aerospace technologies, on nanotechnology. We wasted money and achieved no result.
I believe that it would be more correct and systematic to stimulate all industries frontally, rather than selectively. Investment incentives have to be introduced for everyone at once. Social taxes have to be reduced to 15% also for everyone, as it is now done for IT companies. This tax in Russia is one of the highest in the world. If it is corrected to a reasonable level, it would stimulate investment and wages would increase and consumer demand grow as the major platform of the economy".