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Stimulus too strong as inflation becomes 'embarrassing'
Published: 27 April, 2009, 21:46
TAGS: Markets, Budget, Economy, Finance
Russia’s economic stimulus is the biggest in the world, according to the International Monetary Fund. But experts say the Government’s generosity is boosting the country’s double digit inflation.
Russia’s battle with the crisis will cost over 4% of GDP this year. The IMF says that is at least a double what other G20 nations are spending on bailouts and welfare measures.
Evgeny Gavrilenkov, Chief economist at Troika Dialog says that’s too generous and is aggravating inflation.
“We need to moderate our spending. Russian approach should be different. We’ve already overestimated and overheated the economy, it’s embarrassing for the country to have double digit inflation and pretend to be a full member of G20.”
Quick to announce its massive stimulus package, the government is slower to implement it. Experts say, that may help curb inflation, but could send the economy into freefall. The government changed its forecast for this year, saying GDP will shrink 6%, but Evgeny Nadorshin, Chief economist at Trust Bank believes the measures already announced could take some time to become effective.
“The Economic Ministry has become so pessimistic. Maybe they know more than we do. Maybe the anti crisis measures are not going to be implemented in full this year. If they postpone spending to the end of the year, it’s clear it won’t have any effect in 2009.”
And the outlook remains poor: The Ministry forecasts industrial output will slump 9%. Unemployment will exceed 10 %, and for those in work, real wages are falling.
Russia is the only major economy that is experiencing stagflation – the combination of a stagnating economy and rising inflation – expected to hit 13% again this year.
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Some say the problem is deflation, so inflation is better as far as it is not excesive. If the stimulus is successful and Russia avoids a deep Recesion, then it was worth the effort and the Ruble will start rising again. And once growth starts again interest rates will rise too.