Romania doesn’t need a new agreement with IMF

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According to Romanian Academic Society, privatizing state-owned companies and rendering the welfare system viable should be the most urgent reforms.

Romania does not need and does not have to sign a new agreement with the International Monetary Fund (IMF). “The countries that participate in IMF programmes usually feature external imbalances: large current account deficits, low levels of international reserves, high costs with the servicing of external debt and an overvalued currency exchange rate. The agreements with the Monetary Fund promise precisely to solve these imbalances. However, various studies show that the countries that resorted to the help of the IMF in the past have a higher probability of resorting to the IMF again in the future,” the Romanian Academic Society (SAR) report released yesterday shows. The explanation is that most agreements with the IMF are not carried through to the end and most of the time that happens because internal political forces oppose reforms.

The reticence towards the reforms suggested by the IMF stems from the observation that in most cases although there is an improvement in the external balance the internal production drops during the agreement with the IMF. When it comes to the effects of these agreements, no empirical evidence has been found to support a link between the reform programme imposed by the IMF and the permanent drop in the inflation rate for example. Throughout the years in which Romania had an agreement with the IMF the negotiated economic growth estimates were much too optimistic, SAR points out. The IMF had to negatively adjust its own estimates every year. In its relation with Romania the IMF used the fiscal consolidation formula, meaning lowering the budget deficit by lowering expenditures and raising revenues or by both methods simultaneously, in order to reach economic growth. “However, the IMF analyses conducted during the agreements and at the end of the first agreement signed in 2011 show that although from the IMF’s point of view Romania fulfilled the conditions agreed by both sides, the economic growth did not return.

Hope lies with private sector

“The fears are that Romania will not attract substantial foreign direct investments and the capital outflows will continue in 2013 too, putting pressure o the exchange rate. Moreover, there is the possibility that BNR, under the influence of the global macroeconomic context and of the current political context, could apply more lax monetary policies, permitting a much higher inflation rate than the one targeted. Still, hope lies with the private business sector and with the cooperation between this sector and the government when it comes to lowering the fiscal burden and red tape,” the report reads. The experts involved in the drafting of this report estimate that Romania will nevertheless experience a meager 1.03 per cent GDP growth, that the stock exchange will close the year in the green and the unemployment rate will be lower than the one last year – 6.35 per cent.

The SAR report also points out that a very clear program for the adoption of the single currency on a specified date is necessary, a program assumed by the entire political class, and recommends the return to the four-year electoral cycle with the simultaneous organization of parliamentary and presidential elections in order to eliminate the political class’s tendency of postponing reforms during election years. Apart from the political arguments, from an economic point of view election years that are far too close to each other lower the appetite for reform.