If everything goes according to plan, Romania should receive its seventh disbursement from the International Monetary Fund (IMF), worth almost EUR 900 million, in January, a month later than previously agreed. However this depends entirely on the government’s commitment to make headway on reforms and meet the conditions negotiated during the sixth review of the EUR 13 billion bailout agreement that ended last week, on November 1.
A mission from the International Monetary Fund (IMF) visited Bucharest between October 20 and November 1 to assess the country’s progress under the EUR 13 billion stand-by agreement signed last year. While a schedule for the next disbursement was settled, discussions proved tense and didn’t leave much room for maneuver on the Romanian side.
The government found itself once again caught between unpopular austerity measures, which are expected to cause further social protests in the coming months, and the need to comply with IMF requirements. The main topics put on the agenda by IMF representatives included the controversial Government Emergency Ordinance 50/2010 (OUG 50/2010) on consumer loans, the 2011 budget and a clear timetable for the approval and enactment of the unitary public sector wage law and pension reform. All of these issues should be addressed by the government in order to secure the next loan disbursement in January, but public debate over the laws has been heated.
President Traian Basescu criticized lawmakers on public television last week: “They knew well enough that we have to pass the pension bill, the unitary public sector wage bill and the state budget bill. If we don’t, Romania will have to end its agreement with the IMF and then we will be left wondering how to pay salaries and pensions.”
Veni, vidi, valued
With what has become proverbial optimism, IMF representatives announced that 2011 should see Romania register a 1.5-2 percent GDP increase. “Economic activity is now stabilizing and we expect growth of 1.5-2 percent in 2011 (compared to around minus 2 percent in 2010),” said Jeffrey Franks, IMF mission chief for Romania.
“We expect inflation to peak at slightly above 8 percent at end-2010 before returning to within the National Bank of Romania’s target range in the course of 2011. We project a current account deficit of 5-6 percent of GDP for 2010,” forecast Franks at the end of the visit.
By reducing existing fiscal imbalances, “the tough but necessary fiscal measures taken earlier this year” should ensure that the 2010 budget deficit target of 6.8 percent is reached. “We have agreed with the government on the main components of a 2011 budget which should produce a deficit of 4.4 percent of GDP (in cash terms),” added Franks.
The IMF’s mission chief for Romania admitted that the authorities are facing spending pressures, “particularly in health and social assistance programs” and the issue should be addressed along with the ceiling on general government arrears and improvements in tax collection.
Considering the government’s intentions to increase the minimum wage while reducing the flat tax and social security contributions, the IMF called for stability, as constant changes to the national fiscal are not productive. “Our advice is to maintain the current changes for a year or two in order to support fiscal predictability,” urged the IMF.
Give credit where credit is due
One of the main issues on the discussion agenda, also considered an obstacle to obtaining the next loan tranche, is the infamous OUG 50/2010. Adopted by the government in June, the ordinance transposes the EU 2008/EC/48 directive regarding consumer loans into local legislation. Meant to improve transparency and to protect consumers from abusive banking practices, the ordinance is popular with the public. Bankers feel differently, calling it excessively consumer-friendly and abusive, as it applies to existing loan contracts too.
Since June, representatives of the EC and the IMF have repeatedly called upon the government to change the ordinance so that it doesn’t endanger financial stability.
“We have agreed that improvements in consumer protection are needed in the banking sector, but that actions in this area must respect EU directives and not endanger the stability of banks,” said Franks, while admitting that he is aware of certain abusive banking practices taking place in Romania.
Banks also complain that allowing the National Authority for Consumer Protection (ANPC) to suspend their lending activities under the new ordinance exceeds the institution’s authority. In a statement made on November 1, the EC said that the government “agreed to work with Parliament to ensure that OUG 50/2010 improves transparency and protects consumer rights, while it also safeguards the stability of the financial system.” According to the same document the government must also ensure that the National Bank of Romania (BNR) remains the only agency authorized to regulate banks’ lending activity.
Romania risks more than an infringement procedure from the EC. Franks confirmed that changing the OUG 50/2010 is a condition for disbursing the January loan tranche. “We need to reach a satisfactory form for the ordinance, otherwise we can’t continue,” he said.
Last week, after announcing that it had revised the annual inflation rate for this year from 7.8 percent to 8.2 percent, the BNR said it would intercede in the ordinance issue in order to make sure that the document complies with the European directive in the field.
“We will publically intervene (…) in this debate which has turned away from a normal framework,” governor Mugur Isarescu said at a news conference last week, adding that there is no need for excess.
The governor said that had the central bank been consulted on the
matter earlier, “many of the superfluous issues would have been avoided”.
So far the Romanian authorities, including the president, have defended the ordinance, arguing that the complaint about it being applied retroactively doesn’t stand up. Some representatives of the ruling Democrat Liberal Party (PDL) have even expressed fears that changing the ordinance in favor of the banks would be political suicide.
However, the fate of the ordinance has yet to be decided as it is currently blocked in Parliament. Constantin Cerbulescu, president of the ANPC, is also expected to discuss its content with European authorities this week in Brussels.
Please, IMF, we want some more
In all likelihood January is also when Romania will begin negotiations for a new financial agreement with the IMF, EU and the World Bank (WB), announced the president last week, following preliminary discussions in Bucharest. The government’s plan was made public prior to the visit.
“I am an unreserved supporter of a new agreement with the IMF and the European Union, but it should be a precautionary agreement, not a loan agreement,” Basescu stated in October.
If a suitable accord is reached, the new agreement should come into force right after the current one ends, in April, the president explained, adding that he is confident that Romania will meet all the terms agreed upon with the IMF by that time.
No actual amount has been specified so far, but this time the Romanian authorities hope for a “precautionary” agreement that will set up an available credit line, should the international economic environment deteriorate.
The idea is also supported by the governor of the central bank, who believes that it will send a positive message to the international business community.
Romania and the IMF signed a EUR 13 billion loan agreement last year, as part of a larger package that includes funds from the EU, the World Bank and other foreign lenders.
So far, Romania has received around EUR 11.27 billion from the IMF and another EUR 3.65 billion from the EU.