Give Growth and Macroeconomic Stability in Russia a Chance: Harden Budgets by Eliminating Nonpayments

Abstract

In Russia, implicit subsidies amounting to 10 percent of GDP per year in the form of nonpayments have stifled growth, contributed to the August 1998 macroeconomic crisis through their impact on public debt, and made at best a questionable contribution to equity. Hardening budgets requires that these nonpayments - or mutual arrears and noncash settlements among the government, the energy monopolies, and manufacturing firms - be eliminated with energy bills, taxes and budgetary spending settled on time and in cash.

Pinto, Drebentsov, and Morozov analyze the links between Russia's disappointing growth performance in the second half of the 1990s, its costly and unsuccessful stabilization, the macroeconomic meltdown of 1998, and the spectacular rise of nonpayments. Nonpayments flourished in an environment of fundamental inconsistency between a macroeconomic policy geared at sharp disinflation and a microeconomic policy of bailing enterprises out through soft budget constraints.

Heavy untargeted implicit subsidies flowing through the nonpayments system (amounting to 10 percent of GDP annually) have stifled growth, contributed to the August 1998 meltdown through their impact on public debt, and have made at best a questionable contribution to equity. Dismantling this system must be a top priority, along with promoting enterprise restructuring and growth (by hardening budget constraints) and medium-term macroeconomic stability (by reducing the size of subsidies). Getting the government out of the nonpayments system means settling all appropriately controlled budgetary expenditures on time and in cash, and eschewing spending arrears, thereby setting an example for enterprises and laying the groundwork for eliminating tax offsets at all levels of government, and insisting on cash tax payments.

To stop energy-related subsidies would require not only that the government pay its own energy bills on time and in cash, but also that the energy monopolies be empowered to disconnect nonpaying clients. This will enable the government to insist that the energy monopolies in turn pay their own taxes in full and on time.

This paper - a product of the Economics Unit, World Bank Office, Moscow - was produced as part of the Economic and Sector Work Program, Poverty Reduction and Economic Management Sector Unit, Europe and Central Asia Region.