The IMF mission concluded Thursday a 7-day visit in Romania in the annual process of consultation under Article 4, after a small delegation came to Bucharest in January 2017 for a first contact with the new government team.
The conclusions of this visit, communicated to the Government and the Presidency, are unequivocal: Romania should change the trend of the economic policies from the recent years, from policies and measures focused on strongly fostering consumption, to policies supporting investment and the productive structure of the economy.
As the solution to start talks with the IMF is emerging at the Ministry of Finance for a new precautionary agreement in an attempt to maintain the sovereign debt yield within a reasonable range, it is expected for Grindeanu government to start considering not only the party’s indications but also the advice of the institution from Washington.
It is noteworthy that the mission of the European Commission is also present in Romania to run a post-program surveillance. The Balance-of-Payments Assistance Programme, the preventive agreement concluded by Romania with the European Commission, expired on 30 September 2015 after the stand-by agreement with the IMF expired on 26 September 2015.
Program of visit and clues about findings
The IMF delegation led by the IMF Mission Chief for Romania and Bulgaria, Reza Baqir, arrived in Bucharest a week ago, and met with half of the Grindeanu cabinet members, with officials from BNR, the Fiscal Council, INS and leaders of the parliamentary parties.
Clues about the conclusions of the visit are found in the only official statement issued after a meeting with a Romanian official – the Presidential Administration, who presented Thursday some details of the talks:
“The IMF mission chief stressed the need for sound economic policies to strengthen the economic growth that Romania had in the last years, especially in the context of the current fiscal budgetary framework that poses some risks and vulnerabilities.
During the meeting, it has been presented the need to rethink the trend of the economic policy from the recent years, from policies and measures focused on strongly fostering consumption to policies that support investment and the productive structure of the Romanian economy.
In this regard, the IMF said that Romania needs to improve performance in absorbing the EU funds and a significant improvement in the revenue collection by ANAF, but also to ensure predictability and further support the fight against corruption”, announces the Presidency’s press release.
Ministry of Finance is looking for a lifeline
The 2017 budget is based on data that have long been commented within the specialized groups. The current budget targets an economic growth of 5.2%, above the much more prudent forecasts issued by institutions such as the European Commission, the World Bank, the International Monetary Fund or local banks, which place the GDP growth between 3.7% – 4.4%. The consolidated budget revenue level and the increase of expenditure recently reported for January 2017 confirm the concerns expressed.
Officials of Grindeanu government try to keep the situation under control: the prime minister called ANAF for consultations in February to discuss measures for increasing the level of revenue collection and the minister of finance announced that he is prepared to cut spending when he will notice any danger to deviate from the deficit target.
Despite these assurances, within the specialist groups, the opinion shaped is it is impossible for Romania to comply with the deficit limit of 3% of GDP.
An option to ensure the cash-flow is the government loans, but the yield of these loans is on an upward trend. As a precautionary agreement with the international financial institutions is likely to maintain the interest rates within an acceptable range.
Winding evolution of these relations in recent history
Previous consultations under Article 4 were conducted in May 2016 when the IMF officials noted the change of the economic philosophy brought by Ciolos government.
After the visit, the official press release announced:
„Romania has made significant progress in addressing economic imbalances and the prudential policies, the decrease of the vulnerabilities and the fiscal and current account deficits have improved. The governance matters gave been more carefully addressed and Romania has made a progress compared to other states in controlling corruption.”
The financial assistance program agreed by the Government with the IMF expired in September 2015 and the former Ponta government launched signals long before that it no longer wants the same type of collaboration with the IMF.
The agreement ended without registering any success because the Romanian state has missed important commitments – structural reforms assumed through the agreements, which the Romanian state committed by the letters of intent and during evaluations to run in parallel with the financing or guarantees obtained.
An essential role in „cooling of the relations” with the IMF had the former Minister of Finance Teodorovici, who passed in the Parliament, encouraged by Prime Minister Ponta, the new Tax Code that included the well-known fiscal relief measures without informing the IMF delegation that was present at the moment in Romania about this action.
Having learned from media that the Parliament was voting a new tax code and what exact tax relief measures it contained, the delegation stopped the mission before the due term and without releasing any official statement.
Later, Prime Minister Ponta and Minister of Finance Teodorovici gave signals that they would like to continue the relationship with the IMF „within a flexible framework, following Poland’s model”, but the IMF officials have publicly announced that „there are serious doubts that Romania meets the requirements to obtain a Flexible Credit Line type of agreement.”
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