IMF stays firm: The next installment in March - only if the budget is credible

If political crisis continues and the completion of the second evaluation by the International Monetary Fund (IMF) gets pushed back to January, the Fund might deliver the third and fourth installments together. Anyway, the next IMF evaluation was scheduled for late January - early February 2010, and the fourth tranches was due for March, the IMF representative for Romania and Bulgaria, Tonny Lybek yesterday told a press conference organized by the European Commission's representation office and the European Institute of Romania, on the means to overcome the economic crisis.

According to the IMF official, delaying the third installment because the political crisis is not solved yet has additional costs. The IMF money comes at a 3.5 pc interest, while the bonds issued on the local market had an interest of 5.25 pc, Lybek explained. If the Government takes loans in RON, it will pay an even higher interest, so there are additional costs, he went on explaining. For Romania, the biggest challenge is to curb fiscal deficit under 3 pc, said Lybek, who estimates the Romanian economy will grow between 0 and 1 pc next year.

"We must see the specific details and decide whether the budget plan is feasible. It is not enough to formulate a budget plan relying on a gap of 5.9% of Gross Domestic Product. Expenses structure must also be in line with our macroeconomic forecasts", Lybek said. He added that passing the 2010 budget was a "priority" for Romania to receive the third tranche from the IMF and stressed the importance of its credibility. "It must be approved by the Parliament as well".

Asked whether the IMF would release the third tranche of the loan, if Romania had a budget for 2010 but no stable government, Lybek said "the IMF is not getting involved in politics."

On the other hand, BNR chief-economist Valentin Lazea described next year's budget deficit target of just 5.9 pc of the GDP as "a modest goal," adding that the deficit must be brought under 3 pc of the GDP by the year 2012. The health of Romania's financial sector "critically depends" on the reforms in the two sectors, which has been strongly demanded by both IMF and WB.

BNR: Romania would have been in crisis even without the global downturn

Romania would have entered a crisis on its own, unrelated to the world economic downturn, because of imbalances in both the public and private sector, Lucian Croitoru, counselor of the BNR governor told the same press conference yesterday. "The present crisis was generated by politicians, by monetary authorities and by market regulators," Croitoru added. "The politicians wanted credits to be very cheap, the monetary authorities made the money cheap, and regulators could not keep pace with the innovations of the market. (…) This is what happens when we witness a poor management of capitalism," he added. Mugur Isarescu's counselor said adjusting the public sector is the key to overcoming crisis, and the increase of taxation might be impossible to avoid.

Nicolae Idu, head of the European Commission Representation to Romania, is more optimistic and considers the current political uncertainty had no influence upon the encouraging economic evolutions so far, such as the GDP stabilizing prospects in the second half of the year and the payment balance improvement. According to the EC official, Romania also achieved important progress in terms of structural and fiscal administration reforms, especially by adopting the draft law on unifying the public salary systems, drafting the law on fiscal responsibility and the pension systems' reform. The current political situation however hampers the continuation of fiscal consolidation, which is a necessary process, Idu warned.

MFP simulates the effects of a 1 pc VAT increase

Gratiela Iordache, secretary of state in the Public Finance Ministry said the Romanian state made an effort to maintain the VAT and single tax level unchanged in 2009, but tax increases would have been "a big mistake," as they would have proved to be "pro-cyclical policies." However, Iordache admitted to HotNews.ro that the Finance Ministry ran simulations on raising the VAT by one percent point, but these simulations are rather "an exercise" and the Ministry does not plan to step up the tax regime. According to Iordache, holding the single tax steady occurred against the background of high deficit levels and VAT increases in neighboring countries. Iordache stressed that, despite political turbulence, Romania still provides stability and guarantees for economic development in the future, as well as opportunities in agriculture, tourism, environment, and renewable energy sources.

One of the major challenges for the Romanian state was the increase of unemployment, the official explained. In a different move, Iordache said MFP has lowered its forecast of the GDP contraction this year, from 8 pc to 7-7.5 pc.

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