IMF: There is no room for slippages

The business climate in Romania may substantially deteriorate in 2004, and impact on the economic growth, if the market gets the idea that the Government is unable to cope with the electoral pressures, the International Monetary Fund feels.

“The authorities need to clarify their intentions for 2004,” reads IMF’s “Fourth Review under the Stand-by Arrangement” evaluating Romania’s economic situation and debated by the IMF Board in mid October. IMF warned the Romanian authorities to avoid slippages such as the large minimum wage increase in 2003, the weak wage discipline in state-owned enterprises (SOEs), the delays in privatisation and in implementing the necessary energy price adjustments. “The problem confronting the authorities now is how to sustain macroeconomic stabilisation and further structural reforms in the run-up to the elections in late 2004. Given the uncertainties emanating from the global economic environment and Romania’s unfinished structural reform agenda, there is no room for slippages,” the Fund warns. The Fund feels that reining in the domestic demand and arresting any further current account deterioration while resuming the trend towards single-digit inflation are of the utmost importance. “Just as important is to ensure that progress toward imposing strict financial discipline, a crucial element for establishing a functioning market economy, does not falter,” the IMF document shows. The Fund experts also highlight the fact that the current account deficit is already at the upper bound of sustainability and further disinflation is by no means assured. “To avoid unravelling of the achieved stabilisation, the authorities would be well advised to maintain the prudent fiscal policy of the recent years,” the IMF says.

A relaxation of the budget stance in 2004 and insufficiently ambitious plans for SOEs’ restructuring are reason for IMF’s staff to be concerned about the objectives to lower inflation to 9% by the end of 2004 and contain the current account deficit to less than 5% of GDP. The report specifies the increase in the budget deficit from 2.7% of GDP in 2003 to 3% of GDP in 2004 will not affect the two objectives only if strong up-front measures are implemented. These measures include further increases in energy prices – especially in the natural gas price, accelerated restructuring of large loss-making SOEs, including in the mining and transportation sectors and an ambitious wage programme limiting nominal wage bill growth in SOEs below targeted inflation and last but not least, an increase in the minimum wage of at most 9% in January 2004.

The IMF however, has found that the authorities were not ready to commit to such a change so that negotiations are currently in progress.

The IMF is pressuring the Government to complete the privatisation projects in the energy sector and has encouraged authorities to make every effort to complete the privatisation of Petrom by March 2004.
razvan.voican@zf.ro