Expanding Cash Base Is Fueling Price Rises
By Igor Semenenko
Staff Writer
MOSCOW - A surge in money printing by the Central Bank late last year is starting to be felt, pushing up inflation and worrying the government. Consumer prices are up nearly 10 percent since the start of the year and the money base - the sum of cash in circulation and obligatory reserves of commercial banks held by the Central Bank - is up 5.9 percent to 550 billion rubles ($18.9 billion), according to official figures. The new figures mean that since the start of 2000 the money base has more than doubled, so consumer prices, which grew 20.2 percent last year, are beginning to catch up at an accelerating pace. Even though most of the money printing occurred in the second half of 2000, its effects were not felt until the start of the year, with the process appearing to be gathering steam. Money velocity, which measures the number of transactions serviced by 1 ruble of cash on an annual basis, is up to 6.55 from 6.0 at the end of last year. It hit a high of 7.4 shortly after the 1998 financial crisis, when people were trying to get rid of their rubles as quickly as possible, fearing a further deterioration in the purchasing power of the national currency. Money velocity traditionally shoots up when individuals and corporations fear that inflation will erode their real wealth. So coupled with a growth in inflation figures, the recent increase in velocity is a worrying sign, economists say. Aton forecasts annual inflation to reach 25 percent in 2001, well above the government's target of 14 percent to 16 percent. With the process gathering speed, a number of top officials addressed the inflation issue in public last week. President Vladimir Putin promised to lift restrictions in the area of foreign exchange legislation at a meeting with top business figures. With exporting companies obliged to sell 75 percent of their hard-currency incomes to the Central Bank, the bank has been printing money to buy up dollars coming into the market. Deputy Finance Minister Bella Zlat kis mapped out plans to place a total of 130 billion rubles of debt instruments over the next 18 months to drain some excess liquidity from the marketplace. In pre-crisis 1997, budget expenditures excluding debt servicing stood at 15.2 percent of GDP. In 1999, they dropped to 11.4 percent, later rising to about 12 percent. Until recently, economic growth was fueled by four main factors: growth of net exports; healthy private consumption; increase in fiscal spending and growing investment activity. With an increase in imports, a loss of the population's purchasing power due to inflation, and self-imposed limitations on budget spending, the government may be left with only investment activity to spur growth. More investment, however, does not compensate for the decline in the other growth factors, meaning GDP will suffer. And given that the Putin administration plans to achieve sustainable economic growth over the next 10 years, it is facing a huge workload. "If this [growth] is to be achieved, then the huge liquidity build-up will have to be diverted into real investment," Troika Dialog wrote in a research note issued last week.
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