By Alexander Winning
MOSCOW (Reuters) - Russia's return to three-year budget planning that should be combined with a reliable fiscal rule is vital to allow the country to adjust to lower energy prices and to reduce policy uncertainty, the International Monetary Fund said on Thursday.
Russia said it would re-introduce its multi-year fiscal plans from next year. It was forced to scrap the planning following a steep fall in oil prices that helped push the country into a second consecutive year of recession this year.
But it is still unclear when it would bring the budget rule back.
The rule, introduced in 2013, based spending plans on the long-term average oil price and capped the budget deficit at 1 percent of gross domestic product. However, last year Russia saw a deficit of 2.6 percent, making the rule ineffective.
"We think it's critical the fiscal rule be used in order to guide the necessary fiscal adjustment that the country needs to undertake in order to adjust to lower energy prices," said the IMF's mission chief to Russia, Ernesto Ramirez Rigo.
"Removing the uncertainty as to what will guide the medium-term fiscal framework and adjustment would be very important not only for the markets but for investors."
The IMF also said it expected the contraction of the Russian economy this year to be smaller than previously expected due to monetary and fiscal policies that have cushioned the shocks.
The Fund expects Russia's GDP to contract by around 1.5 percent this year, against a previous estimated decline of 1.8 percent. Next year Russian GDP is seen rising 1 percent, while previously the Fund had estimated growth of 0.8 percent.
"The authorities' economic package - a flexible exchange rate regime, banking sector capital and liquidity injection, limited fiscal stimulus, and regulatory forbearance - cushioned, the shocks, helped restore confidence and stabilized the banking system," the Fund said in a statement.
The Fund sees 2016 consumer price inflation broadly in line with Russian central bank's estimates, at about 6.5 percent at 2016-end and falling further next year.
However, the Fund warned, medium-term prospects remain subdued due to low crude prices, aging population, lack of credible structural reforms and the impact from sanctions imposed on Moscow for its role in Ukraine.
The Fund estimates Russia's long-term growth is likely to settle around 1.5 percent, with downside risks coming from lower-than-expected oil prices.
"Also, the absence of credible measures to balance the budget in the medium-term could foster uncertainty and further limit growth," the Fund said in its statement.