III The Current Account, Growth, and Competitiveness
Author: Mr. Luis Valdivieso
Language:
English
Keywords:
OP; reformer; deficit; SBA III; exchange market pressure; intermediate reformer; IMF staff estimate; developments in the Baltics; oil-producing country; Russia in the case; export trade financing; Current account deficits; Exchange rates; Current account; Baltics
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Abstract

In 1997, for the first time in six years of transition, lull the Baltics, Russia, and other countries of the former Soviet Union recorded deficits in their external current accounts: eight of them with deficits exceeding 8 percent of GDP (Appendix, Table 8). The factors underlying the evolution of these deficits have differed markedly across countries. Among the advanced and intermediate reformers, the rising investment needs associated with the resumption of output growth have been met, or supported, by progressively greater recourse to external savings in the face of rising but still low domestic private savings and. in most cases, persistent public sector dissavings (Figure 3). Between 1992 and 1997, the Baltics and Russia have seen their current account surpluses turn into deficits. The turnaround has been particularly steep in Estonia, which, after experiencing annual average surpluses of 2 percent of GDP in 1992–93, recorded a deficit of about 13 percent in 1997. giving rise to concerns about overheating. Latvia and Lithuania had also experienced an early turnaround in their external current account positions, but more recently their deficits have tended to stabilize. The erosion of the external surplus in Russia has been more gradual than in the Baltics, reflecting in part the strong, initially favorable impact of trade liberalization on exports, and in part the maintenance of sizable—albeit declining—trade flows with its trading partners supported by export trade financing. Among the remaining intermediate reformers, Kazakhstan, notwithstanding its large foreign investment program in hydrocarbons, has managed to keep its external deficit at an annual average of less than 5 percent of GDP in the past three years. This contrasts sharply with the Kyrgyz Republic and Moldova, where deficits have remained above 8 percent of GDP for the last two years.

In 1997, for the first time in six years of transition, lull the Baltics, Russia, and other countries of the former Soviet Union recorded deficits in their external current accounts: eight of them with deficits exceeding 8 percent of GDP (Appendix, Table 8). The factors underlying the evolution of these deficits have differed markedly across countries. Among the advanced and intermediate reformers, the rising investment needs associated with the resumption of output growth have been met, or supported, by progressively greater recourse to external savings in the face of rising but still low domestic private savings and. in most cases, persistent public sector dissavings (Figure 3). Between 1992 and 1997, the Baltics and Russia have seen their current account surpluses turn into deficits. The turnaround has been particularly steep in Estonia, which, after experiencing annual average surpluses of 2 percent of GDP in 1992–93, recorded a deficit of about 13 percent in 1997. giving rise to concerns about overheating. Latvia and Lithuania had also experienced an early turnaround in their external current account positions, but more recently their deficits have tended to stabilize. The erosion of the external surplus in Russia has been more gradual than in the Baltics, reflecting in part the strong, initially favorable impact of trade liberalization on exports, and in part the maintenance of sizable—albeit declining—trade flows with its trading partners supported by export trade financing. Among the remaining intermediate reformers, Kazakhstan, notwithstanding its large foreign investment program in hydrocarbons, has managed to keep its external deficit at an annual average of less than 5 percent of GDP in the past three years. This contrasts sharply with the Kyrgyz Republic and Moldova, where deficits have remained above 8 percent of GDP for the last two years.

Table 8.

Current Account Balance 1

(Including grants, unless otherwise indicated)

article image
Sources: National authorities and IMF staff estimates.

In simple unweighted averages.

Average excluding Russia.

Average excluding Turkmenistan.

Excluding official transfers.

Figure 3
Figure 3

Real GDP Growth and Current Account Balance

Sources: National authorities; and IMF staff estimates.

Large imbalances also persist in the countries affected by conflict, although there is a general downward trend. Georgia’s external imbalances have declined quite rapidly, despite very high real GDP growth. Progress has been less encouraging in Armenia, reflecting in part slippages in domestic financial policies in late 1996 and early 1997. Developments in Azerbaijan have gone against the general trend in this group mainly because of the boom in investment in the oil and gas sector. Among the slow reformers, Ukraine has maintained its current account deficit at 3 percent of GDP. whereas both Belarus and Uzbekistan have continued recording annual average deficits above 5 percent in 1996–97, supported partly through a reduction in the net foreign asset positions and partly through bilateral trade financing, including a buildup in external arrears, particularly from Russia in the case of Belarus. Turkmenistan experienced a serious reversal in the external balance as a consequence of the suspension of gas exports.

External developments in the Baltics, Russia, and other countries of the former Soviet Union are part of a general trend toward relative stability in nominal exchange rates, although there have been significant differences across countries (Appendix, Table 9). Following a general depreciation of the nominal exchange rate in 1992, the advanced reformers experienced a small appreciation in the period 1993–95, in contrast with a continued depreciation in the other countries. In 1997, both the advanced and intermediate reformers managed to contain the average nominal depreciation of the exchange rate to 10 percent or less, whereas slow reformers and countries affected by conflict depreciated their currencies by over 25 percent. Despite the divergence in the changes in nominal exchange rates, inflation was such that the general trend toward sizable appreciations of the real exchange rate had certainly changed. With the exception of countries affected by conflict whose real exchange rates depreciated by over 20 percent in 1997, all other country groups recorded a change in their real exchange rates, which was contained within a 2 percent range. Advanced reformers recorded an appreciation of their real exchange rate of close to 2 percent, while intermediate and slow reformers had real depreciations of about I percent, The trend toward a more appreciated real exchange rate has continued unabated for the oil-producing countries of the region—Russia. Kazakhstan. Turkmenistan, and Azerbaijan—and to a lesser extent for Moldova, Ukraine, and Georgia.

Table 9.

Real and Nominal Exchange Rates 1

(January 1993=100)

article image
Sources: National authorities: and IMF staff estimates

In simple unweighted averages.

An increase indicates an appreciation.

The real exchange rate is calculated by correcting the nominal exchange rate for the differential between the domestic CPI inflation and that prevailing in the United States.

The large, cumulative appreciation of the real exchange rate that has been recorded throughout the region since 1992 has coincided with a general decline in the ratio of exports of goods and services in all country groups, except the intermediate reformers where this ratio remained relatively more stable. As real exchange rates stabilized in 1997, advanced and intermediate reformers have experienced an upward trend in the ratio of exports to GDP (Appendix. Table 10 and Figure 4 on page 8). While the initial decline in regional exports may be attributed to the continuing adverse effects of the general collapse in trade ties after the dissolution of the Soviet Union, the recent recovery is being sustained by the low wages that continue to prevail in the region (Figure 5 on page 9), compared with those in neighboring or in export-competing countries. Despite significant increases over time, by the end of 1997, average monthly wages exceeded $100 in only 6 out of 15 of these countries, including the Baltics, Russia, Kazakhstan, and Belarus, Tajikistan and Armenia still have the lowest monthly wages, at $10 and $23, respectively. While there is no reliable information on labor productivity, indications are that in the Baltics wages have grown consistently less than the increase in productivity in the manufacturing sector.15

Figure 4
Figure 4

Exports in Percent of GDP and Real Exchange Rate Indices

(January 1993 = 100)

Sources: National authorities; and IMF staff estimates.
Figure 5
Figure 5

Average Monthly Wages1

(in US. dollars, period average)

Sources: National authorities; and IMF staff estimates.1 Refers to the state sector only, except for Russia and the Baltic countries.2Dollar wages are based on official exchange rates.
Table 10.

Exports of Goods and Services 1

(In percent of GDP)

article image
Sources: National authorities; and IMF staff estimates.

In simple unweighted averages.

The 1993 data for Armenia are for goods only, as data on services are not available.

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Cover Macroeconomic Developments in the Baltics, Russia, and Other Countries of the Former Soviet Union, 1992-97
Macroeconomic Developments in the Baltics, Russia, and Other Countries of the Former Soviet Union, 1992-97
Author: Mr. Luis Valdivieso
ISBN:
9781557757807
ISSN:
0251-6365
Publication Date:
06 Jan 1999
Publisher:
International Monetary Fund
DOI:
https://doi.org/10.5089/9781557757807.084
Pages:
35

Real GDP Growth and Current Account Balance

Exports in Percent of GDP and Real Exchange Rate Indices

(January 1993 = 100)

Average Monthly Wages1

(in US. dollars, period average)