Alarm mounts over Romania policy paralysis

IMF calls for tighter budget as Basescu survives poll

  • By Sid Verma, Philip Alexander
  • 20 May 2007
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The IMF and leading investors have stepped up calls for Romania to tighten fiscal policy to avoid economic crisis, amid political inertia that has gripped the Balkan nation.

“Romania needs to maintain the confidence of foreign investors with coherent policymaking and an awareness of what its vulnerabilities are,” warned Juan Jose Fernandez-Ansola, the IMF’s senior regional representative. He cited Romania’s current account deficit - which the IMF forecasts at 10.3% in 2007 - as clear evidence of unsustainable macroeconomic imbalances.

His warning comes after several months of political inertia in the run-up to an opposition-inspired referendum, held on Saturday, that proposed impeaching President Traian Basescu for breaching the constitution. The motion was rejected by more than 78% of votes cast.

Finance Minister Varujan Vosganian recently promised an anxious EU that the 2007 budget will remain within the 3% deficit limit stipulated by the Stability and Growth Pact, but Fernandez-Ansola told Emerging Markets that this was a deeply unambitious objective.

“The current level of economic growth allows you to continue spending significantly without having a public sector deficit. Romania could have a balanced budget”. The IMF has called on Romania to target a deficit of 1.0%-1.5% of GDP.

In particular, Fernandez-Ansola is alarmed by the above-inflation increases in public sector wages. “These wages are expected to increase 20% with an inflation rate of 4%. But without reforming the public sector, to increase the wage bill dramatically while the number of people in public sector is also growing is a big problem,” he said.

The sharp rise in salaries is especially worrisome, given that consumer demand is already rampant. Debora Revoltella, CEE chief economist at Unicredit, singled out Romania as one of the few countries in the region where the bank is concerned that consumer credit growth is moving beyond a straightforward catch-up in living standards with the rest of the EU.

“We have calculated implied household savings rates, and these show that Romanians have a lower propensity to save than elsewhere in eastern Europe. That does raise concerns about credit quality, in view of very fast household credit growth,” she told Emerging Markets.

However, Revoltella believed that the monetary policy mix was still adequate, and that tightening should be focused on reducing the government’s reliance on high rates of GDP growth, which Unicredit forecasts at 5.7% in 2007.

Fernandez-Ansola was less forgiving, arguing that the government is severely undermining the central bank ‘s credibility. “Monetary policy is between a rock and a hard place. Inflation and the credibility of the central bank is under threat from loose fiscal policy.”

However, he was not optimistic that the political will existed to tackle these issues in the short term. “In an election year, one can foresee that the next 12 to 18 months are going to be difficult for economic policymaking.”

  • By Sid Verma, Philip Alexander
  • 20 May 2007

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