IMF: conduct reform, watch out for slippages

The development of the Romanian economy is still far from the stable growth image constantly presented by the authorities. Behind the macroeconomic statistical data lurks an unrestructured economy, which may cause slippages. IMF’s latest report points out the risks Romania is exposed to this year.
Tightening fiscal and credit policies is the only way out the IMF sees in case the Government fails to contain the side effects of the minimum wage growth and stronger wage pressures develop than suggested by the recently-signed collective labour contracts in either the public or in the private sector. IMF fears inflation might get out of control and compromise the results registered so far.
Given the repeated non-observance of the performance criteria for this chapter the decisive implementation of the SOE (state-owned enterprises) wage programme will be the subject of particular attention in the fourth review of the stand-by arrangement.
As far as the IMF is concerned, the issue confronting the authorities this year is how to sustain the “classic” outcomes of policies of stabilisation and reform. Given the uncertainties emanating from the global economic environment and Romania’s unfinished structural reform agenda, there is no room for complacency.
IMF sees Romania at a turning point – either slippages will occur and compromise the efforts it has made so far or the targets will keep being perseveringly pursued.
Upon the latest review, the IMF directors explained it was essential for the authorities to fully implement the policies agreed upon, particularly those policies concerning wages, privatisation pace and structural reforms. IMF stresses that perseverance in reform efforts will be particularly important after the expiration of the current stand-by arrangement in the run up to the 2004 elections, a time where populist slippages are most likely to occur.
Slow progress in structural reforms continues to expose macroeconomic stability to risks, but the authorities’ plan for downsizing large loss-making SOEs is a major change in attitude, the IMF experts feel, as shown in their latest report.
The decision to substantially reduce employment in 22 large loss-making SOEs is therefore an important and promising change. “Adherence to the timetable for the restructuring plan will be crucial for establishing credibility in this area,” the document specifies.  The IMF also recommends the authorities to adopt a “significantly more vigorous approach” to liquidating unviable companies. “In this context, the legislative and institutional framework for bankruptcy procedures, an area where Romania lags behind other accession countries, needs to be strengthened,” the Fund experts say.
The Romanian fiscal policy remains constrained by the need to further reduce payroll taxes, which continue to be among the highest in all EU accession countries and the need to provide resources to meet EU accession-related requirements. razvan.voican@zf.ro