The IMF failed to reach an agreement with EU-hopeful Romania on the country's macroeconomic targets for next year, especially concerning the budget structure.

On October 31st, the chief negotiator of the IMF, Van Der Mensbrugge announced that the standby agreement with Romania is off track, due to the deteriorating economical policies conducted by the Government. The IMF strongly disagrees with the fiscal policy, as the structure of the 2006 draft budget doesn't offer covers to the revenue loss from the flat tax. That is why, the Fund considers that the estimates for 2006 budget deficit of 0.5% of GDP are completely unsustainable.

Moreover, the Mission sees the budget deficit for next year to be at least 1% of GDP, if Romania doesn't improve its fiscal policy. Also, in Romania the governmental revenues as a share of GDP are considerably below the levels in the EU, including the ten new member states. The frequent changes in the fiscal code brought no insignificant revenues, but they increased the uncertainty in the business community.

The postponing of these much needed measures will induce the delay of the necessary decrease in the high social contribution tax. Important resources are a must for improving the education, health and physical capital, as well as for financing Romania's accession to the EU.

As far as NBR is concerned, the IMF admits that National Bank has a difficult mission, as the monetary policy is dealing with conflicting objectives: disinflation and removing incentives for the hot money inflows, due to the liberalization of the capital account. The IMF disagrees with NBR's decision to sharply reduce its interest rates, to real negative yields, which induced unsustainable RON credits expansion.

The real negative yields determined the population to give up saving and encouraged the demand of goods, which is already too high for the possibilities of our weakened production capacity. The surplus demand is supplied by the imports, which induce the widening of the current account imbalance. The IMF suggested that the wage policies need to be adjusted to the demands of a single digit inflation economy, so the IMF founds inappropriate the frequent increases in public salaries, which should reflect more the skill of the employees.

The Fund appreciated the way the BCR and CEC privatization has been conducted by the state. The IMF mission noticed the progress on the energy sector privatization and the mining sector restructuring. However, rehabilitation of the heating sector suffers delays, as the gas prices failed to be lowered to international levels.

Melania Hancila
Research Analyst Treasury Division

Finansbank (Romania) S.A.
Phone : +40 21 301 73 42
Fax : +40 21 318 09 61