EDITORIAL

By Victor Lupu 7th time

Like the Valiant Little Tailor in the Brothers Grimm’s tale, who killed seven (flies) with one blow, the IMF mission led by Jeffrey Franks is back in Romania for talks in the framework of a 7th review mission. It is true that the Little Tailor is bragging about his deeds of gallantry which the other take for granted, and, ingenious as he is, somehow manages to put his hands on half of the kingdom. The IMF mission is not coming here to declare mouth-filling things from the rooftops, yet, quite a few Romanians believe that, following the country’s indebtedness towards the Washington-based financial institutions (the IMF and the WB), as well as towards the European Commission, half of the country has been pawned…


The certainty of the fact is that the IMF mission is coming here at a rather delicate time. On the one hand, the Fund has improved its 2011 forecast for economic growth in Eastern Europe by 0.5 per cent, to 3.6 per cent, and the one for 2012 by 0.2 percentage points. In fact, the Fund seems to have a positive anticipation of the world economic developments, with almost all issued outlooks being slightly more optimistic. On the other hand, as far as Romania is concerned, not before the beginning of this year, IMF mission head Jeffrey Franks was stating in an interview that ‘the absence of economic growth is the big disappointment now that we are getting closer to the end of this stand-by agreement’. It is just as true that reforms could have moved faster. Jeffrey Franks also mentions the absence of economic growth, the fact that the engines of the economy have not started yet. Many read into the statements made by the Fund official an admission to the institution’s failure in Bucharest’s case, in its attempt to come out of crisis. The crisis seems to be mostly affecting Romania and Greece, while the majority of European countries are slowly but surely headed for economic re-launch. After yet another missed year (2010), for 2011 the IMF anticipates a small GDP growth by 1.5 per cent in Romania. Commentators say that, should the trend remain in place, it will not be before 2013-2014 that the GDP will go back to its 2008 level.


Quite a few people are also wondering to whom the EUR 20 bln loan from the IMF, WB and EC has actually served. The money from the World Bank could be used to address budget deficit issues, but it means that it was money pumped into consumption and not investments able to re-launch the economy, money spent on wages and pensions – absolutely necessary, obviously. However, the reforms and restructuring programmes the Emil Boc Government has been boasting about so much in fact consisted of cuts and expenditure reductions here and there, hurting civil servants and pensioners and not of measures that would have truly been able to re-launch an economy blocked by crisis. As for the money from the IMF, it went into the central bank’s Forex reserves. The central bank subsequently released some of the money to commercial banks by reducing the cash reserve ratio. In other words, we have borrowed money to give it to commercial banks – all being subsidiaries of foreign banks, so that they could give better and more cost-effective use to their own funds. At the peak of the crisis, specialists feared that the banks might repatriate their funds and stop using it for local lending. It didn’t happen. Under an agreement signed in Vienna, parent-banks committed themselves not to reduce their exposures to Romania under a given threshold. They didn’t repatriate more funds, but they didn’t use it for lending either. Commercial banks kept their interest rates at prohibiting levels to both companies and individual borrowers, in spite of the central bank cutting the key-interest to 6.25 per cent.


But now – sources say – the IMF would like to renounce the agreement made in Vienna for an unknown reason. It is certain that the topic is on the agenda of the Jeffrey Franks – BNR Governor Mugur Isarescu talks, alongside other ones such as the fulfilment of conditions set under the stand-by agreement, as well as the requirements ahead of a new (precautionary) agreement to be signed by and between the IMF and the Romanian authorities, worth some EUR 3.7 bln.


Not much news is coming from the Executive these days, with the Government displaying steady reluctance when it comes to foreign loans. Prompted by President Traian Basescu, who launched the idea of a precautionary agreement some time ago, the Executive is driving in this direction. But this new loan comes with further conditions. It seems that the IMF will push for the privatisation, reorganisation or winding up of selected state-owned companies, considering that, by selling sustainable companies, the Government will be able to finance its budget deficit at lower costs. ‘The issue of the big state-owned companies will be better monitored under the new agreement and the IMF finds that the privatisation of viable companies will also provide cheaper financing of the budget deficit,’ sources were telling a national newspaper.


In addition, Jeffrey Franks has recently said that a future agreement with Romania would include clear targets regarding state companies’ arrears, because, once the problem is resolved, additional resources will be released to help the economy start growing again. The total value of the arrears of the first ten state-owned companies with losses in November last year amounted to RON 7 bln, overdue debts towards the budget included.


We will definitely find out more details about the talks to be held by the IMF and WB officials with the Bucharest authorities in the end of the seventh review mission. However enthusiastic Romanian authorities may be showing, the quasi-general opinion is that Romania has run into a too big debt. Payments for the existing loan are already being made and Bucharest’s repayment capacity is assessed with prudence. Jeffrey Frank’s enthusiasm in the interview given early this year was most likely also due to this particular issue. As for the reforms masterminded by the Emil Boc Government, we should not labour under misapprehension.

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