Romania ends agreement with International Monetary Fund

Romania”s agreement with the International Monetary Fund has ended and the managing board of the international financial institution will be notified in November, the Fund”s Negotiator for Romania, Emmanuel van der Mensbrugghe stated yesterday.

Romania”s agreement with the International Monetary Fund is now off-track despite extensive negotiations on the second and third reviews, because the parties failed to reach an agreement on the budgetary deficit for 2006 and on the necessary steps to reduce the macroeconomic imbalances.

A release of the mission of the Fund that has conducted talks with the Romanian authorities over the last two weeks, says that with the current policy stance, Romania risks entering the European Union with a weakened competitiveness and growing macroeconomic imbalances. The release reads: “The IMF mission shares the view of the European Commission that a clear medium-term focus is urgently needed to bring policies in line with the requirements of a modern, low-inflation European economy. 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 the physical infrastructure. It is clear from our discussions that the Romanian authorities recognise these problems. However, strong and urgent policy actions are needed.

“Macroeconomic imbalances have continued to widen in 2005. Economic growth and productivity have started to falter despite rapid consumption-driven domestic demand. The current account has weakened with imports fast outpacing export growth; external debt has risen; and, despite a sizable exchange rate appreciation, inflation remains high, resulting in a sharp loss of competitiveness.”

The IMF experts criticise the fact that the introduction of the flat tax, which generated a decline in the state budget revenues of 1.5% of GDP or about one billion euros, was not offset by anything other than measures that caused uncertainty in the business environment. Other aspects highlighted by the Fund”s officials are the unjustified increase in the wages in the public sector.

“Wage policies need to be recalibrated to the needs of a low inflation European economy. With inflation now in single digits, frequent increases in public wages (as many as four in the last 12 months), which have raised wages by up to 50% since late 2004, are no longer appropriate. While public sector wages are low, the rapid pace of wage increases has contributed, together with the income tax cuts to inflationary pressures. We recommend that future public sector wage increases better reflect skill needs. Otherwise, a ballooning wage bill will undermine the aim of establishing an efficient and modern civil service and the ability to absorb EC funds,” the IMF release adds.

The shares of Rompetrol Rafinare (Petromidia) yesterday fell by over 5%, with the significant decline occurring at the end of the session. The investors that had been watching these shares in the last trading minutes could see the quote suddenly sinking from 0.114 RON/share to a minimum of 0.111 RON.

The loss incurred by Petromidia was harsher than the overall decline of the Bucharest Stock Exchange, which continued to go down after last week”s record highs, with the drop being 2% this time.

The RON lost ground against the euro for the third day in a row, after no more large interests to sell foreign currency occurred on the market, while purchases maintained at significant levels. NBR calculated a 3.6503 RON/EUR exchange rate, the highest since April. Dealers say they are expecting new increases, so that we could see the euro at 3.7 RON soon.