IMF terminates agreement with Romania
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IMF terminates agreement with Romania

Criticisms could jeapordize EU accession

IMF officials in Romania announced yesterday the termination of the precautionary stand-by arrangement citing disagreements with the government on fiscal and broader economic policies.

The Fund's team was attempting to resume the precautionary agreement signed with Romania last July but frozen after the first quarterly review last September. Finance minister Sebastian Vladescu, rather surprised by the Fund's gesture [both sides were expected to make a joint statement today], announced that officials will return next January for regular Article IV consultations.

IMF desk chief Emmanuel van der Mensbrugghe, in assessing Romania's fiscal policy, said that the cut in income and profit tax rates this year resulted in losses of revenues worth 1.5% of GDP [more than EUR 1bn] which were not offset and created fiscal instability. Regarding next year's budget draft, Mensbrugghe viewed it as inappropriate, eventually yielding a deficit well above the planned 0.5% of GDP.

The IMF representative was also critical of Romania's monetary conduct, assessing that the interest rates [sterilisation rate included] were brought too low by the central bank which created incentives for local currency lending. Added to supplementary disposable income created by lower income taxes, this is creating inflationary pressures that are already beginning to surface.

Fund representatives said that current policies would result in Romania entering the EU with low competitiveness, widening macroeconomic imbalances, deteriorating healthcare and education services and significant setback in terms of infrastructure. This is a troublesome development for Brussels officials, whose economic assessment included in the recent Monitoring Report was already critical with regard to lack of progress in many other sectors.

While the termination of the agreement between Romania and IMF creates certain concerns, it does not have the same crucial importance as the accession reforms, according to Fitch analyst Nick Eisinger. He explained that Romania is currently not dependent on IMF financing. However, he stressed the need for sounder fiscal policies able to offset the need for supplementary funds for tackling the pension system and infrastructure investments. The impact of the agreement's termination on the accession process is seen as limited even if Brussels officials would have liked to see it continued, Eisinger concluded. In regard to the country's sovereign, he sees no impact.

EIU analyst Joan Hoey however predicts a more dramatic impact of the Fund's criticism on accession. Hoey cites the extreme criticism expressed by the IMF representatives yesterday and also mentions that the EU's Monitoring Report was already critical in terms of macroeconomic developments.

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