From the stop-IMF listserv: Romania's centre-right government and the IMF are at odds over the country's economic policy. So far, despite pointed warnings from the Fund, the government of Calin Popescu Tariceanu is sticking to its guns.

Romania rebuffs IMF; standby agreement off

Nov 4 2005

By Razvan Amariei for Southeast European Times in Bucharest - 04/11/05

Talks between the Romanian government and IMF experts concluded earlier this week with the two sides unable to reach agreement on a number of key issues. As a result, a standby agreement sealed in July 2004 is being terminated. The main sticking points were Romania's budget deficit, its macroeconomic policy, and the use of funds obtained through privatisation.

"With the current policy stance, Romania risks entering the EU with its competitiveness weakened, growing macroeconomic imbalances, deteriorating education and health services, and important gaps in physical infrastructure. The 2006 projected state budget is unrealistic, and the salary policy should be recalibrated," IMF Mission chief Emanule Van der Mensbrugghe said.

Despite the pointed warnings coming from the IMF, the centre-right government of Calin Popescu Tariceanu -- which already created shock waves by introducing a flat tax not long after taking office -- is sticking to its guns. Arguing that the Fund's demands were unreasonable, officials insist Romania has other priorities to address.

"Their conditions were unacceptable," Tariceanu said. "They wanted us to use all the money coming from privatisation for paying the external debts. But our debts are the smallest compared to the 25 members of the EU," he said, arguing that the privatisation funds should be used for motorway construction and other infrastructure improvements. Currently Romania has only about 225km of motorways -- hardly enough to accommodate the country's growing level of traffic.

"Some countries in the EU have budgetary deficits of 3 [per cent], 4 [per cent] or even 6 per cent of GDP," one of the leaders of the centre-right ruling coalition, Emil Boc, told journalists. "Raising the deficit from 0.5 per cent to 0.75 per cent or even 1 per cent would be a positive solution to modernise Romania," he added.

Romania and the IMF are at fundamental odds over the flat tax, which Tariceanu's administration has made a keystone of its economic policy.

"They said we lost 1 billion euros from introducing the 16 per cent flat tax on revenues and profits. But they simply calculated what money the budget would have obtained on the present day data, without considering that the flat tax brought up to light from the black economy 150,000 jobs and revenues of billions of euros," said Finance Minister Sebastian Vladescu.

The main opposition Social Democrats, meanwhile, are seizing on the issue, arguing that Romania is in the hands of a reckless group of ideologues. For party President Mircea Geoana, the end of the agreement is "proof of irresponsibility" demonstrated by the current cabinet.

Many domestic economists, however, are downplaying the significance of the latest developments. Until now, such an agreement was important because it made the country more credible abroad. But because Romania is well perceived by major rating agencies, the agreement with the IMF becomes a secondary issue," the daily Gondul quoted analyst Aurelian Dochia as saying.

The European Commission delegation has also dampened suggestions that the end of the standby agreement could have a direct impact on Romania's entry into the bloc. "There isn't and can't be an official connection between Romania's agreements with the IMF and its accession into EU," it said.

Other commentators say it is more important to look at the IMF's overall role in Romania's recent history. "The government sees this separation as a proof of maturity; since now, we will be able to come home no matter how late, nobody will scold us anymore. But we should be convinced that we are parting from a friend and not from a dogmatic and unbearable teacher," wrote Capital columnist and former Finance Minister Ionut Popescu.