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August 18, 2022

Beware! Dangerous measures!

During a visit abroad a few months ago, President Traian Basescu mentioned that the loan from the International Monetary Fund (IMF) may be used to pay salaries and pensions. The ensuing reactions in the media were both swift and critic. The economic forecast at the time just changed from economic growth to a decline of over 2 per cent. Projections worsened gradually to reach a current downturn of 8.5 per cent GDP. And this is how the government will use the IMF money to pay salaries and pensions. There may also be room for some investments.

It’s a wonder that the IMF delegation agreed with the second tranche of its loan to go into the state budget and not become part of central bank reserves. A first, for Romania at least, after the extremely tough benchmarks in the 1990s of the agreements with this international financial institution over amounts a great deal smaller than those at stake now.

Nonetheless, the current world economic situation is quite volatile and given the previous examples of the steep economic decline experienced by Latvia and Hungary, IMF sees Romania as yet another, and even higher, potential danger for regional economic stability, given the size of the market and the local potential. Regardless of IMF’s motivations, the Boc government plays a dangerous game. Romania has to live in debt since it produces less than it consumes. The deficit burst out since the crisis makes incomes fall while spending is higher than in the year-earlier period, fuelled by salary and pension increases in the second half of 2008. Incomes were down 5 per cent at the end of the first half of this year while spending was up 5.6 per cent. Despite repeated promises of staff-related spending cuts, such expenses are 12 per cent higher than in the corresponding period a year ago. The state’s hunger for money was one of the features this year. Since January, the Finance Ministry has borrowed more than 40 times from banks by means of RON bonds, on interests between 9 per cent and 11 per cent, either to pay for older loans that reached deadline, or for fresh ones.

Given the circumstances, at first glance, a more advantageous loan borrowed from the IMF appears as a good option. Even Romania’s representative at the IMF, Mihai Tanasescu, said that ‘the step taken by authorities is successful, a good solution, as it brings in inexpensive liquidity and leaves money available for crediting. This is a first for Romania, an exceptional measure that has also been taken recently by Hungary and Latvia.

On the other hand, using the loan on current spending should come with a warning tag attached: ‘Beware! Dangerous measures!’ Obviously, the IMF demands budgetary spending cuts, which calls for harsh measures by the Executive even in the personnel department. Still, as the decisions have so far been pushed back again and again, we rather doubt the government’s ability to take the measures required. On the brink of the presidential election campaign, the ruling coalition made up of ‘enemies’ Democratic Liberal Party (PDL) and Social Democratic Party (PSD) can hardly make proof of the much needed cohesion today. Each of the two parties will rather use each opportunity available to win more electoral points. The recent wrangling over government taking responsibility for law packages on education, pensions and blanket salaries is a telling example in this respect.

However, Romanian living in debt and spending more than they produce is the most serious problem by far. Both the president and the ruling government have always pointed the finger at the past government, bringing similar accusations: the economic growth was obtained by boosting consumption, which in turn led to a rise in imports and not domestic growth output. While this is true, it should also be said that the Tariceanu government is not the only one to blame, but all the three big parties in the Romanian political landscape: the National Liberal Party (PNL), PSD and PDL.

Democrat-Liberals had been in power for two years along Liberals and we don’t recall a single instance wherein they said reform measures need to be taken in the sense of cuts in budgetary spending. The break-up in 2007 happened from reasons all together different than that, with the growing animosity between President Traian Basescu and then-PM Calin Popescu Tariceanu being one of the reasons. While staying in power as a parliamentary minority party, PNL allowed itself to be blackmailed and fulfil to a large extent the demands of opposition Social-Democrats, which led to such populist and uncushioned measures such as rises in pensions and salaries, higher employment in the state sector etc. Finally, during the legislative election campaign of 2008, PDL and PSD outran each other in making fanciful promises, of which raising teacher salaries by 50 per cent right away made history.

All the three parties are therefore responsible for the ascending and reckless spending spiral. To put the blame just on one of them is simplistic and groundless too. In years past, Romania at least could somehow afford such extravagance, given successive record economic growth. Amid the global economic crisis this year however, state spending cuts are imperative. Will they be implemented? Meanwhile, to borrow in order to cover current spending yields some major risks. What will happen when the IMF money is spent? Will salaries and pensions be cut or not paid all together? Even supposing we overcome the crisis and Romania’s economy goes back to an upward trend, we will face interest and loan payments which will definitely affect the ability of the Executive, no matter its political hue, to allocate money for investments.

The Boc government is ducking the danger of entering financial collapse. Yet, without stern and efficient measures, the ‘sentence’ is only put off. Still, after months of wavering during which all but nothing has been accomplished, the Boc government may adopt some economic measures to be put into practice too, able to reduce the risk of collapse. As they say, hope dies last…

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