At the conclusion of the first evaluation of the new agreement with Romania, the IMF reps had bad news too: the lowering of the CAS is not included in the next budget, and any relaxation of labour taxation has to be accompanied by extending the taxation base and by compensatory fiscal measures, meaning new taxes.
Staff-level agreement has been reached. The programme remains broadly on track. All end-September 2013 performance criteria were met and progress was made toward meeting most of the structural benchmarks, Andrea Schaechter, the head of the IMF delegation, told a press conference yesterday when presenting the conclusions of the first evaluation of the new agreement with Romania. She pointed out that the international lenders’ teams have reached a technical agreement with the Romanian authorities as a result of the mission, however the evaluation has to be approved by the IMF leadership and the Executive Committee.
“For 2014 we project a real growth of the constant GDP, which means that this will remain at 2.2 per cent, but we expect to see a shift of the determinant growth factors, from net exports as it was in 2013, towards internal demand, in particular the growth should be determined by bigger investments, because the government was lately successful in absorbing EU funds and this will have an effect on the future growth,” Schaechter stated. The head of the IMF representation in Romania pointed out that the GDP growth projection was revised upwards by 0.2 percentage points to 2.2 per cent, because of a bumper crop and of very good exports. “The inflation rate dropped faster than expected, this reflecting in fact for the most part the smaller food prices. The inflation rate forecast now for this year is of 2 per cent,” the Fund’s representative stated.
In its turn, the European Commission (EC) is anticipating that Romania’s economy will grow by 2.1 per cent next year and by 2.4 per cent in 2015, with a more significant contribution from internal demand, the EC at the same time forecasting for next year that the inflation rate will drop to 2.5 per cent and the budget deficit will stand at 2 per cent of GDP, according to the EC’s autumn economic forecast presented on Tuesday.
In what concerns the unemployment rate, the EC estimates that the unemployment rate will remain over 7 per cent in the next two years. In its economic forecast last spring the EC estimated an economic growth of 2.2 per cent in 2014, with an inflation rate of 2.1 per cent, an unemployment rate of 6.8 per cent and a budget deficit of 2.4 per cent. At the same time, the Commission notes in its autumn forecast that the investments will “speed up” next year, backed by a better absorption of EU funds, the large infrastructure projects set to pick up speed. Private consumption should grow by 1.6 per cent in 2014 and 2.2 per cent in 2015, the EC forecasts. In the public sector consumption would grow by 1.8 per cent in 2014 and by 1.3 per cent in 2015. According to the same EC forecast, Romania’s public debt will grow from 38.5 per cent of GDP this year to 39.1 per cent next year and to 39.5 per cent in 2015.
Key measure: linking excise taxes to inflation
The deficit target next year will be 2.2 pc cash, 0.2 pc higher than anticipated by the IMF in July. “The main reason for next year’s slightly higher deficit is the strong commitment to attract European funds, which implies that we must create more space for necessary co-financing expenses; the deficit target accommodates this need,” Andrea Schaechter said. She explained that in order for the government to reach the target deficit, it must take measures in several areas such as European fund expenses and increasing other expenses, align public sector wages to levels foreseen under specific court orders, put into practice the second phase of increasing minimum guaranteed income, and increasing pensions and wages in 2014. “The key measure announced by the government would be linking excise taxes to inflation, increasing excise taxes for fuel, and expanding the property tax base to include special structures or constructions. The government has undertaken to improve tax collection and diminish tax evasion,” Schaechter added. According to the IMF official, the future structural reform agenda will continue to focus on improving the transparency and efficiency of the energy and transportation sectors and ensure that the services provided are better and less of a burden for the general public. In addition, health reforms will continue and will be aimed at improving quality of services, increasing system efficiency, and ensuring financial viability.
CAS cutback not included in 2014 budget
The 2014 budget projection does not foresee a reduction of social insurance contributions (CAS) because wages, pensions, and public investments were considered of higher priority and any relaxation in taxation must be accompanied by expanding the base and taking compensatory fiscal measures, Schaechter, further said. “Let us not forget our main objective. The government has undertaken to maintain the deficit around 2.2 pc of GDP. Revenues were poorer and additional expenses are scheduled next year for wages, pensions, and other investments, so clearly we must prioritize in order to cover these costs. This reduction aimed at supporting the labor market was one component, but it is too soon. I don’t think it was the right time to assess those effects, but it is certainly still on the agenda,” Andrea Schaechter said. She admitted Romania’s fiscal burden on labour is high and authorities must reassess the system, but this must be performed “with great caution” in order to avoid a hole in the budget. Prime Minister Victor Ponta announced late Monday that CAS levels will be reduced by 5 pc in the second quarter of next year, if the government finds all necessary resources to fully compensate for the effects of such a measure before July 1. He pointed out that cutting back CAS is a political commitment assumed on behalf of the government and the governing coalition and he presented this reduction as a safe measure. Daniel Chitoiu, Finance Minister, mentioned the financial impact of cutting back CAS was assessed at RON 2 billion for a five-month-interval in the second quarter of next year. The CAS cutback, he added, is designed to be applied to employers, as announced previously. However, Chitoiu said the social insurance contribution system for copyrights and registered sole traders will not be modified in 2014 and this does not violate the conditions listed by the IMF official, according to whom expanding the taxation base is essential in ensuring the institution accepts a potential reduction of CAS.
In turn, PNL chairman Crin Antonescu stated yesterday, before the BPN (National Permanent Bureau) meeting, the IMF experts who arrived to Bucharest “are wrong” in saying CAS cannot be cut back by 3 pc as of the start of next year; it is, however, preferable to apply a 5 pc cut beginning in the second quarter of 2014. Former Prime Minister Calin Popescu Tariceanu, also present at the BPN meeting, made ironic remarks on the measures agreed upon by government and IMF representatives, without offering additional explanations, “Excellent. I could never have dreamed of such a thing,”
Furthermore, IMF experts came up with several options during the negotiations with Romanian authorities, among which was increasing the flat tax. However, the topic was not negotiated because it was known beforehand that the government does not approve the measure, the head of the assessment mission also stated.
VAT reduction for meat to wait
The decision to reduce the VAT for other food products, like meat, can be made only after the government evaluates the impact which the reduction of the 9 pc VAT for bread, operated in September this year, had upon the economy.
“The Central Bank evaluated the impact on inflation and found out that the reduction had consequences in the inflation, being one of the reasons for which inflation was so low in September and October. But it is too early to make an evaluation now,” Schaechter explained.
Opposition: The measures taken by the USL government will further block the economy
PDL strongly rejects the “aberrant” measures proposed by the Ponta government, which will further block the economy, the first vice-president of PDL, Catalin Predoiu warned Tuesday in a press conference, quoted by Mediafax. According to Predoiu, this was not about the government negotiating with the IMF, but instead “it was a desperate attempt of the Ponta government to save this accord.” He added that the CAS decrease promised for July 1st “is an illusion, propaganda,” while “Crin Antonescu’s attempt to save the situation in the media is plainly ridiculous.” Predoiu mentioned that Romania needs the CAS reduction today and criticised the enforcement of new excise duties for fuels, which will result in a chain of price hikes, will block investments and will bring less money to the budget. In his turn, economic analyst Ilie Serbanescu believes that the measures announced by the government about increasing the excise duties for fuel and instating taxes on special constructions will bring domestic consumption to its knees and will affect the economic growth, because the Romanian economy still relies heavily on consumption.
Tolosa: No position to make recommendations on Rosia Montana project
IMF is in no position to make the Romanian Government recommendations on Rosia Montana project, since this project has implications that go beyond the IMF expertise area, the IMF Resident Representative in Romania Guillermo Tolosa told the same news conference. He added that the economic advantages of such project are obvious and its impact on the budget revenues is also clear and such things represent but a part of the overall image of the project.
The Romanian Parliament in a plenary sitting on Oct. 22, by a vast majority passed a Government’s draft resolution calling for the extension of the deadline for filing the report of the special joint commission in the Chamber of Deputies and the Senate on a bill laying down the measures relating the exploitation of the Rosia Montana gold and silver ores and boosting and easing the development of the mining activities in Romania.
Romgaz listing– a hit; CFR Marfa failed privatisation – a ‘step back’
The head of the IMF mission to Romania praised the success of listing a package of 15 pc of Romgaz shares on the capital market, but she considers that the failure to privatise the majority stake in CFR Marfa is “one step back,” mentioning that the government remains committed to continuing the privatisation process and will support the restructuring of the company meanwhile. “This transaction (the Romgaz offer) has a value of reference for the sector of state companies in Romania and for the Romanian capital markets. It is an outstanding achievement of these past months,” Schaechter said. “What the government committed itself to doing from now on is to search a strategic investor (for CFR Marfa). The 2015 deadline is maximal, it is clear that if this can be done earlier, then it will be done and will be well perceived. It is important that this privatisation is conducted the right way and, meanwhile, it is important that the management team of the company takes measures of restructuring, meant to increase the efficiency and avoid the accumulation of new arrears, of bad financial results that will be transferred to the state budget,” she said.
Schaechter mentioned that the government promised to support the management team of CFR Marfa, while searching for a strategic investor meanwhile. The objective of the Executive is to increase the efficiency of the transportation sector, where it is very important to attract private investments, she added. Answering a question about the possibility to turn the company insolvent, the head of the IMF mission said that only restructuring has been envisaged for now, but if this fails the government will have to analyse other options too. She explained the government’s failure to privatise CFR Marfa by saying that Romania has not done a major privatisation in many years, so this is a new and difficult process.
Finance minister Daniel Chitoiu said Monday that the government must conceive a new privatisation strategy for CFR Marfa, which will be subjected to approval by the Supreme Defence Council (CSAT), and that the drafting of the new strategy is “the attribution of the government,” not of the presidency.