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Franks, IMF: Economic contraction of 3 pc this year, too pessimistic

The IMF official pointed out that a suspension of talks, like it happened in Hungary, does not represent a danger in Romania’s case.

The IMF is in the process of revising its economic growth forecast, however an economic contraction of 3 per cent this year is far too pessimistic, Jeffrey Franks, head of the IMF mission to Romania, stated yesterday on day one of the new round of negotiations on releasing the fifth tranche of the loan that the Boc Government contracted from the IMF, the WB and the EU. The IMF official’s statement, quoted by Mediafax, comes after most of the local banks and the EBRD announced last week that they expect the Romanian economy to contract by 3 per cent. “The EBRD forecast is pessimistic. I am not that pessimistic,” Franks said.


After his meeting with the Governor of the National Bank of Romania Mugur Isarescu, the IMF official also stated that the main challenge for the international financial institution will be to reverse the Romanian economy’s trend in order for it to come out of recession. In what concerns the structural reforms that the Romanian state conducted in recent months, Franks pointed out that there are sectors in which “things are moving along very well,” but there are also sectors in which the reform process has to be speeded up. “We have to carry on with the pensions’ reform, a reform that was delayed in recent months, but also with the blanket salary law.


Overall however there has been significant progress in recent months,” the IMF official added. Referring to the budget deficit target set for this year (6.8 per cent of GDP), Franks pointed out that it is premature to talk about a possible change. He explained that the IMF will discuss this issue with the Finance Ministry and that an IMF team is already present within that Ministry’s headquarters in order to analyze the data. Jeffrey Franks, head of the IMF mission to Romania, also stated that a suspension of talks, like it happened in Hungary, does not represent a danger in Romania’s case.


“I don’t see a danger in that,” Franks said when asked whether Romania is in danger of suspending its agreement with the IMF just like it happened in Hungary. Two weeks ago the IMF and EU representatives suspended their talks with the Hungarian Government, talks that were meant to evaluate the external loan agreement, after the Hungarian authorities rejected the idea of adopting new austerity measures, instead choosing to place a supplementary tax on banks and to set an upper ceiling for public sector salaries, including the salaries of central bank officials. The arrival of an IMF mission in Romania on Monday, barely a week after its officials left neighbouring Hungary in a huff, is not without a certain irony, Financial Times noted in an article published Monday. “But preferring the role of pugilist to that of poodle, Viktor Orban, Hungary’s new prime minister, told the IMF last week that it could keep its policy prescriptions”, FT reads.


An IMF mission will be in Bucharest from July 26 to August 4 in order to complete the fifth evaluation of the stand-by agreement that Romania signed in May 2009. A European Commission mission will be in Bucharest at the same time.


Capital Economics: Zero growth in 2011 would be a positive development


The continuation of the agreement with the IMF calls for sacrifices that will manifest themselves through an economic drop of 2.5 per cent this year, with a zero GDP growth in 2011 being considered a positive development, the economists of Capital Economics London anticipate. Although the Government managed to devise an austerity plan equivalent to 2.3 per cent of GDP, the analysts note that they still have some doubts in what concerns the attainment of the budget deficit target of 6.8 per cent of GDP, a target agreed with the IMF in May, mainly because of the delay in applying many of the measures included in that plan. Thus, Capital Economics estimates that Romania’s budget deficit will stand at 7 per cent of GDP this year and will fall to only 6.5 per cent of GDP next year. “In other words, new fiscal measures will be necessary in order to attain the 4.4 per cent of GDP target agreed with the IMF for 2011,” the analysis shows.


At the same time, Romania “doesn’t have time for complacency,” despite receiving the fifth installment from the IMF in July (EUR 913.2 M). The continuation of the agreement reached with external creditors is perceived positively by the markets. In this context, “which has significant chances for something bad to happen,” they anticipate an unfavorable period for financial markets and estimate that the RON will fall from RON 4.25/EUR today to RON 4.4/EUR by the end of the year. Moreover, the austerity measures will “also have significant macroeconomic effects,” the inflation rate being aimed at in the immediate future. However, Capital Economics has a more optimistic outlook in what concerns that indicator, estimating an inflation rate hike of only 2.5 percentage points as a consequence of the VAT hike.

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