MOSCOW, April 20 (Reuters) - Russia needs to normalise its budget and monetary policy faster than previously thought as high inflation suggests Moscow added more fiscal stimulus than needed to support the economy through the pandemic, Deputy Finance Minister Vladimir Kolychev said.
Facing with plunging prices for oil, its major export, and other impacts of COVID-19 on businesses and households, Russia dipped into its sovereign wealth fund and borrowed a record 5.3 trillion roubles ($69.71 billion) in 2020 to plug budget holes.
Addressing falling living standards is a key issue for President Vladimir Putin ahead of 2021 parliamentary elections.
Russia’s economy contracted by only 3% in the year as a whole, however, less than expected and outperforming a global economy that shrank 4.3%, according to the World Bank. Inflation has accelerated, meanwhile, reaching 5.8% in March - its highest since late 2016.
“The inflation pattern suggests that the economy has not only recovered but the scale of the stimulus was probably more than needed. Otherwise, we won’t be having such high inflation,” Kolychev said in an interview with Reuters.
Having slashed the key rate to a record low of 4.25% in mid-2020, the central bank has already begun raising borrowing costs this year to rein in consumer prices. It predicts the economy will return to pre-pandemic levels by the end of 2021. Inflation above the 4% target is expected to prompt the central bank to raise rates again this Friday, according to a Reuters poll.
“(Economic) recovery now is going on much faster than priced in by the macroeconomic forecast from last autumn and by a year-year budget plan,” Kolychev said.
All sectors but two have recovered to pre-pandemic levels, Kolychev said. Russia’s oil and gas output is still constrained by the global OPEC+ output deal, while international transport and tourism continue to be limited by global COVID-19 restrictions, Kolychev said.
In this situation, the finance ministry is not planning to cut spending but is eyeing lower borrowing, Kolychev said.
Hit by new U.S. sanctions, Russia said last week it would cut its 2021 borrowing target by more than initially planned even though rating agencies and analysts have said restrictions on buying its state bonds will not have a significant adverse impact.
Russia will receive an extra 1.5 trillion roubles in oil and gas revenues if oil prices average $60 per barrel, above the $43.3 level factored into this year’s budget, Kolychev said.
That would allow a resumption of the fiscal rule in 2022, relaxed last year during the pandemic, that sees excess oil and gas revenues channelled into the rainy-day wealth fund when energy prices are above the level assumed in the budget.
A better-than-expected economic performance and a recovery in tax collection will generate another 500 billion roubles in extra non-oil and gas revenues this year that could be used for extra spending, Kolychev said.
For comparison, allowances for families with children of up to seven years old, which Putin introduced in 2020 to reduce poverty, cost the budget up to 600 billion roubles a year, Kolychev said.
Putin is expected to shed light on Russia’s social spending plans in his annual state-of-the-nation address on Wednesday. ($1 = 76.0320 roubles)
Writing by Andrey Ostroukh; Editing by Catherine Evans
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