"Despite severe impacts but strong initial fiscal position and large reserves, Russia’s fiscal policy response has been larger than that of many G-20 countries, and greater than the internationally recommended 2 percent of GDP," said Klaus Roland, Country Director for Russia. "A greater portion of the anti-crisis package should now be directed towards vulnerable households."
The main findings of the Report suggest that:
* The global outlook remains extremely uncertain, with declines in world global output and trade, and very limited capital flows to developing countries this year and world oil prices in the US$40-50 range during 2009-10.
* As a result, Russia’s real GDP is likely to contract in 2009 by 4.5 percent, compared with the positive 5.6 percent growth in 2008. The fiscal surplus from last year will turn to a sizeable deficit.
* Unemployment could reach 12 percent by year end. And the crisis threatens to undo some of the large poverty reduction gains of recent years.
Challenges Ahead
Reflecting the early crisis impacts, policy has so far focused on supporting the financial sector and enterprises, with rather limited support to households. But with significant social impacts now unfolding, the focus of fiscal policy should shift towards cushioning the impact on the poor and vulnerable.
Preliminary estimates cited in the Report suggest that:
* A modest, temporary increase in the three social protection programs (costing about 1 percent of GDP) focused on child allowance, unemployment benefits, and low-end pensions – targeting some of the most vulnerable groups at risk of poverty – could provide significant relief to the poor.
* In addition, addressing the most critical infrastructure bottlenecks and providing support for small and medium-size businesses – with additional modest support even during the crisis – would help the economy in the recovery stage, with beneficial impacts on medium-term growth and diversification.
* In the long term, accelerating structural reforms geared towards broad-based growth remains crucial for restoring growth in employment and incomes for the middle class, and reducing overall poverty.
* But improving the effectiveness of social and regional policies becomes important in reaching the chronic poor and reducing the vulnerability to poverty.
“Despite the difficult economic and social conditions, Russia’s prudent fiscal policy and large fiscal reserves make it better prepared to deal with the impact of the crisis than in the past,” commented Zeljko Bogetic, World Bank Lead Economist for Russia. “But focusing policy response on supporting households is a win-win solution that achieves both objectives – cushioning the social impact and supporting domestic consumption.”
Russian Economic Reports are periodic assessments of Russia’s recent economic developments and policies, providing evidence-based analyses of key policy issues. Report No. 18 features three parts: (i) a review of the international environment, macroeconomic developments and outlook for Russia, (ii) an analysis of Russia’s fiscal policy response, and (iii) a summary of a larger study of poverty, inequality and vulnerability in the pre-crisis period.
