Romania follows in Hungary's deficit footsteps

Romania's current economic situation can be compared to that in Hungary, faced with its hardest times in the past 20 years, as both countries registered an economic decline of some 6 percent, according to sources close to the talks between Romanian authorities and the International Monetary Fund (IMF) and European Union.

Romania has a loan agreement with these institutions, the World Bank and the European Bank for Reconstruction and Development for financing worth some €20 billion.

The IMF Representative to Romania, Tony Libek, told Business Standard that the country's macroeconomic framework will be modified this August, when an IMF mission comes to analyze Romania's economy.

"We must emphasize that, the same as in other countries, revising macroeconomic indicators necessarily implies further efforts from authorities to lower public spending," he said. The targets agreed with the IMF were 4.1 percent contraction of the Gross Domestic Product (GDP) and 4.6 percent budget deficit. However, the depending of the economic crisis makes these targets virtually impossible to reach.
During January-May, budget deficit already widened to 2.1 percent of the GDP, while the biggest expenditures are made in the final part of the year.

Both Romania and Hungary are facing severe economic decline and political instability caused by the upcoming elections - presidential in Romania, this fall, and governmental in Hungary, in 2010 or even sooner. Furthermore, both countries asked for financing from international institutions and committed to apply tough measures to revive their economies.

Hungary already revised downwards the targets for its main macroeconomic indicators and took steps to tighten expenditures by eliminating the 13th salary and subsidies for energy and for house acquisitions. It had already increased the value added tax (VAT).

Economic analyst Bogdan Baltazar stressed that Romania needs long-term fiscal consolidation, following Hungary's example, but focused on different problems. "Bonuses in the public system must be severely reduced. Furthermore, many of them need to be annulled," he said. Meanwhile, data released by the National Bank of Romania (BNR) show that one tenth of Romania's short-term foreign debt was paid in May and the balance fell to €18 billion from €20 bln. The €2 bln drop equals that registered in the first four months of this year after a peak of €4.5 bln was only half-covered.

Thus, the money sent by the IMF at the beginning of May came just in time to prevent a massive currency slippage or major losses in the reserve of the National Bank of Romania. Moreover, the deposits of non-residents increased massively, by more than 10 percent, which means €500 mln in one month.

This money has practically returned to Romania together with the trust, after BNR posted constant losses in previous months. Another element that supported the exchange rate were the remittances of Romanians abroad, which fell by only 13 percent in the first five months compared to the corresponding period in 2008.

Remittances totaled €2.9 bln, exceeding even the level of foreign direct investments, as the latter plunged 42 percent compared to January-May 2008, to a mere €2.47 bln.

Business Standard