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Russia promises to help regions out of debt pit

May 26, 2014, 17:06 UTC+3 Alexandrova Lyudmila
Russian Prime Minister Dmitry Medvedev

Russian Prime Minister Dmitry Medvedev

© © ITAR-TASS/Yekaterina Shtukina

MOSCOW, May 26. /ITAR-TASS/. Russian regions have slipped into debt, with huge social spending being one of the reasons. The government is taking measures to straighten things out, but experts say the situation is not yet critical.

The Russian regions have accrued almost 2 trillion rubles ($58 billion) of debt as they received extensive loans at a high interest rate in commercial banks to increase compensation for public sector workers. According to the Ministry of Finance, this year spending on wages in the regions has grown 16%, while investments dropped 11%. In 2013, the share of bank loans in the regions’ debt grew from 32.6% to 39.8%.

In some cases, the debt exceeds 80% of the region’s entire tax revenue. To make matters worse, the debt is piled up amid the increasing regional budget deficit (2.3 times to 642 billion rubles, or about $18.9 billion, last year).

In early May, Russian President Vladimir Putin instructed the government to present by August 1 its proposals for the entire or partial substitution of the regions’ liabilities with publicly funded loans and prolong the pay-back period for loans allotted before January 1, 2014.

The issue was brought up last week at a meeting with Prime Minister Dmitry Medvedev at the St. Petersburg International Economic Forum.

“The situation is far from making us happy,” said Medvedev. The government is dissatisfied with the regions’ irrational budget planning and financing of social programs under the presidential package of May 2012 decrees suggesting new social support measures, including higher wages for public sector workers.

The regions, Medvedev said, could be more active in strengthening their own tax potential, tackle inefficient budget spending and expenses for maintenance of superfluous property complex.

“The regions’ debt load has become a problem in the last twelve months as increase of compensations in the public sector is often or, I’d rather say, as a rule, not paralleled by optimization of budget institutions network,” presidential aide Andrei Belousov said on Saturday.

The wages were supposed to be pegged to performance results, and a mechanism was suggested for independent evaluation of services provided at budget institutions, he said, but nothing has changed in the organizations that provided low-quality education or medical services.

The regions should primarily increase cost efficiency by their own efforts. Otherwise, state debt financing tricks would not help, Belousov said.

The Ministry of Finance has proposed its own plan approved by the government suggesting a moratorium on new tax discounts and reduction of rates on bank and budget loans. The ministry has agreed with Sberbank, VTB and Russian Agricultural Bank they will lend money to the regions at a rate not higher than the key rate of the Central Bank (currently 7.5%) plus 1.25%, said Minister Anton Siluanov, while the current interest rates sometimes reach 11%.

The 2014 budget will be replenished with 100 billion rubles ($2.9 billion) to the earlier planned 80 billion rubles ($2.4 billion).

The ministry is going to tighten the screws on the indebted regions, in particular have a closer look at tax discounts in the regions and cancel some. To decelerate the growth of spending, Siluanov suggested giving the regions no more extra powers and prohibiting them from financing liabilities beyond their scope, such as the police.

“The debt situation in the regions is not yet critical, but it can become so, if they do not reverse the current trend,” Deputy Head of the Department of Finance at the Higher School of Economics Dmitry Kamenev told ITAR-TASS. “The new work has started. This should be joint work of the federal authorities and the regions, but the regions should have the upper hand”.

The ministry should not act “indiscriminately”, as the situation differs from region to region, as some have a large number of public sector employees.

“It is hard to offer a recipe for all, but they clearly need an analysis of spending not aimed at economic development such as irrational expenses on representation purposes, and so on,” he said.

 

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