While the Romanian economy is contracting, the pressure on the government for a financial agreement with the International Monetary Fund (IMF) is increasing. The discontent between the authorities on one hand and the private sector on the other is becoming more intense. President Traian Basescu stated recently that “the last thing Romania will do is borrow from the IMF,” saying that the Romanian economy can no longer be within the fund's reach.
A strong reaction from economic specialists was soon to follow.
“With all due respect to the president, the last solution is also the first solution. It isn't normal to reject the idea of an agreement with the IMF so vehemently. Why this grudge? It is true that the IMF would impose certain conditions, but these would only limit the chance that public money would be wrongly spent. It is just an unjustified fear of such an agreement and it is clear to me that they have other plans,” Matei Paun, managing partner with BAC Investment, told Business Review.
Bleak economic outlook
The latest government estimates for this year show economic growth of only 2.5 percent, compared to 7.8 percent last year, and a budget deficit of some 2 percent of the GDP.
A recent Citibank Report says that Romania's 12-month rolling budget deficit rose to RON 19.8 billion in November 2008 from RON 18 billion in October. In fact, the preliminary official data show that the budget deficit last year rose markedly to 5.2 percent of GDP from around 2.4 percent in 2007.
And the perspective is bleak. “In November 2008, the European Bank for Reconstruction and Development said it was forecasting a three percent growth for Romania this year. However, it has since said that it was revising down its expectations for average growth across the whole region where it invests and it now sees growth of under two percent this year,” Anthony Williams, head of media relations at the EBRD, told Business Review.
He added that: “In the coming period, the EBRD will focus on private sector companies, energy and infrastructure in order to support the production side of the economy and assist Romania in maximizing the benefits of EU membership.”
According to government sources, Romania needs financing of at least EUR 4 billion, but the figure could change depending on the budget priorities, a budget which has not yet been approved by Parliament.
Regular financing sources closed, IMF says
Juan Jose Fernandez-Ansola, the IMF's representative for Romania and Bulgaria, told Business Review that “regular foreign sources of financing are mostly closed to Romania at the moment.” He thinks that the country could meet a deficit of around two percent of GDP from domestic sources. “This is of course a very rough estimate because it depends on developments on financial markets. As foreign markets return to normal – and that may take some time – the financial constraints on Romania would obviously ease,” said the IMF representative.
Fernandez-Ansola recently said that Romania could get access to an IMF loan if the government sets a credible budget, with economic reforms, a lower budgetary deficit, if inflation drops and the Romanian currency comes under less pressure.
But what would the effects of such a deal with the IMF be? According to Mihai Tanasescu, Romania's representative with the IMF, a possible IMF and/or European Commission loan would aim at covering the balance deficit and increasing international reserves, which would then strengthen macroeconomic indicators. This would indirectly have a positive impact on financing and borrowing possibilities for the real economy.
Furthermore, he added that it would help attract new foreign investments
and create jobs and faster economic growth.
What are romania's financial solutions
The president sees another way out of the crisis. “The current account deficit can be covered from EU funds or through a partnership with the European Union, the World Bank or the EIB,” said Basescu. He added that access to EU structural funds is one of the most important ways of decreasing the impact of the crisis in Romania. From EUR 1.85 billion transferred from the EU to the Ministry of Finance, only EUR 200 million has been spent so far. Yet economists draw attention to the high costs that Romania will have to pay if it fails to come up with solution.
“Considering the competence of the current government, I do not see any other financial solution. The more they reject the agreement with the IMF, the higher the costs will be. If such an accord had been negotiated last autumn, we would probably have benefited from more moderate costs and less severe conditions,” said Paun. Analysts say that the new government will have to deal more with fiscal discipline, reverse populist policies in order to revive the reform process and buttress macroeconomic stability. Simply said, this would translate into Romania needing a deal with the IMF.
“Since the widely-expected slowdown in economic growth is likely to undermine revenue, the bulk of the adjustment will need to come from the expenditure side, which, in our view, reiterates the need for an IMF arrangement,” said Engin Dalgic, regional economist for Turkey and South-Eastern Europe at Citibank.
By Dana Ciuraru