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March 21, 2023

Jeffrey Franks: IMF expects worsening fiscal situation in Romania in 2010

Media information on the hiking of flat tax and VAT is incorrect. BNR opposes VAT hike, sources say.

When asked whether the VAT will be hiked, head of the IMF mission Jeffrey Franks stated on Wednesday that he will not comment on fiscal policy measures before an agreement with the Romanian authorities is reached. ‘I will not talk about specific fiscal policy measures before we reach an agreement with the Romanian authorities,’ Franks said ahead of his meeting with Finance Minister Sebastian Vladescu.

In recent days the press published several scenarios concerning the hiking of the VAT and flat tax, however the negotiators pointed out that no agreement has been reached for the time being. Government sources stated yesterday that BNR opposes any VAT hike, arguing that collecting the VAT is deficient anyway and that such a measure would prevent economic recovery and would hike prices. At the same time, the IMF does not believe a progressive income tax has benefits.

In an interview for The Money Channel, the head of the IMF mission pointed out that the IMF estimates a worsening fiscal situation in Romania this year. Jeffrey Franks pointed out that the IMF is analyzing several options for growing the budget revenues but warned that we should not act hastily when it comes to tax hikes. He also stated the information published in the press (concerning the hiking of the VAT and flat tax) is incorrect.

However the IMF official did not want to comment on the budget deficit estimate of approximately 7 per cent of GDP this year, an estimate recently rumoured against the backdrop in which Finance Minister Sebastian Vladescu stated that talks continue to be based on the prospect of a deficit of 5.9 per cent of GDP.

Speculations in the media

The rumours surrounding the flat tax and the Value Added Tax (VAT) have been reproduced and magnified by local media, their effects on taxpayers pushed to catastrophic proportions and reactions bordering on panic.

The press wrote the International Monetary Fund (IMF) looked at the latest figures and concluded Romania would not post an economic growth this year anyway, which makes sure the theory of the negative impact created by a major VAT increase, a measure the National Bank of Romania (BNR), through the voice of Governor Mugur Isarescu, vehemently opposes.

Further more the rumour goes, the Fund was deeply disappointed at the authorities’ inability to draw European funding. While the Finance Ministry tried to get the most out of the taxes and dues in place, IMF experts had enough of such improvisations, which only leave the combined raise in VAT and flat tax as the only alternative at the negotiating table.

EC warns: Without supplementary measures, the budget deficit to rise at 8 pc of GDP

Unless the Government takes supplementary measures, the deficit of the consolidated general budget for 2010 may rise to 8 per cent of GDP (according to EU-ESA), the European Commission claims in the document presenting the spring forecasts for member states. “We expect the mission currently in Romania would reach an agreement with the Government on supplementary compensatory measures to reduce deficit,” is stated in the document. The Commission takes into account the failure to collect the revenues estimated for the first quarter, particularly from VAT, social contributions and profit tax, as well as the risk of surpassing budget expenditure. Moreover, it points out the Government may collect only half of the amount Rompetrol owes to the state (EUR 571 M). According to Brussels’ figures, Romania’s last year deficit amounted to 8.3 per cent of GDP, significantly above the 7.8 per cent target that would correspond to the 7.2 per cent objective agreed upon with the IMF, by the “cash” method. For the time being, the Commission accepts the IMF’s latest estimate of a 0.8 per cent growth rate for this year. “A source of risk is the fiscal consolidation, lower than expected”.

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