The International Monetary Fund (IMF) has lowered the projected levels of public debt for Russia and its regions. The new outlook is 19.9% of GDP by the end of 2024 and 20.4% by the end of 2025. Invest Foresight asked Agvan Mikaelyan, Board Member of FinExpertiza audit and consulting firm, what this forecast means and how good it is that the IMF has also increased the estimate of Russia’s GDP growth at the end of 2024.
– The IMF has lowered the expected levels of Russia’s public debt to 19.9% of GDP by the end of 2024 and 20.4% by the end of 2025. What does this forecast mean?
– On the one hand, the issue is too complex to give a clear and simple answer. On the other hand, 20% of GDP is a very, very small public debt. Even in case of foreign-currency debt borrowed at 5-6% a year, at today’s high borrowing prices, the total burden on GDP is about 2-3%. This is a very low and comfortable level of debt servicing.
It should be noted that the government borrows for a reason; this money serves a certain purpose. If it is spent on development, the purpose is as good as can be; it is excellent in fact. Even if this is not the case, and the funds are needed to address current challenges, it is still very good.
– So, it’s good for a country to have a low debt burden.
– The size of public debt is not the most important indicator. The cost of servicing the debt is far more important. If, say, your debt level is 300-500% of GDP, but the cost of servicing it is zero, is this so bad?
– Can a government operate without borrowing at all?
– Theoretically, yes. But in practice, this suggests that no one is interested in lending to you. Investors give their money to someone they believe in – this is the way the world works. You borrow because you plan to grow. Why else?
It is important to realize that money is invested in ventures that’ll keep it safe and fetch a guaranteed income. This is the economic essence of borrowing. This is the reason people take their money to state banks – they know that they are unlikely to be cheated there. Yes, maybe this trend is short-term, but it exists.
– In its annual report, the IMF increased Russia’s GDP growth expectations in 2024. Is this a positive development? On the other hand, it also cut its prediction for next year’s growth – is this rather grave news?
– I personally believe that any growth is good. As for the forecasts, I would say neither the IMF nor the World Bank have a clear understanding of what is really happening in the Russian economy.
Most of their forecasts from the past two or three years are not just wrong; they are totally misguided. Even with all the adjustments they make as they go along, in the end, the figures they give still turn out to be inaccurate.
Their belief that investing in defense is always bad is not true either.
– Why?
– The truth is that the defense industry has its own multipliers. When you manufacture tanks and shells, you involve a range of other industries, civilian industries such as power generation, metal smelting and transport services.
It is also important to realize that labor costs – the wages paid to the workers involved in the manufacturing process – account for a significant part of our spending. Once you take the money and give it to the people, what do you think they do, given the current level of underconsumption, which is still high?
– They go shopping.
– Exactly. People start spending. Revived spending immediately stimulates demand. Therefore, it turns out that, by producing military equipment, we actually stimulate consumer demand.
What’s the bottom line? Wages have gone up, giving a boost to demand and consumption. Naturally, the rapid increase in incomes and consumption accelerated inflation. True, this is a negative trend, but there’s nothing one can do to avoid it.
Our economy is growing at the limit of its capacity. More importantly, that growth has now encountered other challenges and shortages – namely, a shortage of people and production facilities. The biggest challenge now is to be able to supply all the goods that consumers need, and not low incomes or demand.