Latest IMF report: Gloomy economic prospects for Romania

International Monetary Fund (IMF) severely revised the prognosis related to the evolution of private sector lending in Romania in 2009. Based on the data provided by the latest IMF report, published last Thursday, as to the first appraisal of the standby agreement, from 16 per cent advance estimated in June, a nominal drop by 1.7 per cent is currently in place.

The international financial institution indicates more optimistic values for the next two years, namely an advance of non governmental lending by 5.6 per cent in 2010 and a substantially higher growth in 2011, by 13.2 per cent. The report outlines that the funding provided to the private sector advanced by 54.5 per cent in 2006, 60.4 per cent in 2007 and by 33.7 per cent last year.

"The financial constraint has substantially weakened due to the international financial assistance set and to the recovering global markets, but the lending terms remain tough", according to IMF appraisal report. The experts indicate that since the announcement of the program, the exchange rate remained stabile broadly, which has enabled the central bank not to intervene in supporting the currency and to inject significant RON volumes into the banking system.

As a result, the banking financing costs diminished, the rates in the inter-banking market went down below the monetary policy rate level, and the diminishing of the external equity premium has reduced the pressure on the rates of the interests charged for deposits. IMF experts indicate that the Central Bank continues to update its monetary policy stand depending on the inflation and on the foreign exchange context. They draw the attention to the fact that the risks associated to the inflation prospect are towards re-inflating, since a poor agricultural harvest in 2009 could put pressure on food stuff prices (which account for nearly 38 per cent of the basket).

The Fund estimates that the inflation in December shall be 4.3 per cent, under the central point of 4.5 per cent considered when the standby agreement was negotiated, in March. For the end of 2010, IMF expects an advance in consumer prices by 3 per cent and a slight inflating until December 2011 to 3.2 per cent.

In addition, the IMF experts revised upwardly, from 8.9 per cent to 9.6 per cent, the estimation related to the unemployment level in Romania this year. The unemployment rate is expected to advance to 10 per cent in 2010, and then it will decrease to 8.3 per cent in 2011, based on the data from the Fund report regarding the first appraisal of the standby agreement.

Romania's budget deficit will exceed in 2011 the 3 pc limit

The Monetary Fund revised upwardly the prognosis related to the budgetary deficit for 2011, from 2.7 per cent to 4.2 per cent of GDP, which means that Romania shall not meet the 3 per cent limit asked by the European Commission for that year. Based on the report of the first appraisal made by IMF in relation to the agreement with Romania, a 7.3 per cent deficit for this year and 5.9 per cent for next year are expected to be recorded for the budget.

Last year, Romania recorded a budgetary deficit of 4.9 per cent of GDP, which has resulted in excessive deficit procedure being started by the European Commission.

Also, inflation should not exceed by more than 1.5 per cent the average of the inflation rates in the best performing three Member States, and the budgetary deficit cannot be over 3 per cent of GDP. A third criterion is that public debt does not exceed 60 per cent of GDP. The IMF also revised upwardly the estimation regarding the value of foreign direct investments in Romania in 2009, from EUR 3.5 bln. to EUR 5 bln., and they anticipate that their annual balance will continue to advance in 2010 and in 2011.

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