Romania needs an arrangement with the international financial institutions in order to sell credibly the fiscal reform it intends to implement by modifying its Tax Code so as to avoid losses by having to borrow at higher interest rates, according to Governor of the National Bank of Romania (BNR) Mugur Isarescu.
“From my experience, I believe it is better for us to have some international partners. They lend us some credibility and seriousness, and sometimes a devil’s advocate is also needed, in my opinion. Even if negotiations are at times unpleasant – there are times when you may argue with them – a partnership formula that includes them is good. Besides, I cannot see how we could credibly sell a fiscal reform of such magnitude internationally. That is tough,” Isarescu told a conference where he released the latest inflation report of BNR.
His statement came in reply to a question about the opportunity of Romania staying under an arrangement with the IMF, given that an ongoing arrangement is set to expire this September.
As far as fiscal reform goes, Isarescu argued that if it fails to be credibly advocated, all that is won from fiscal reform is lost on interest rates.
“As you could see, one of the points that make the Treasury fare so well in terms of surpluses is a drop in interest spending,” said Isarescu.
VAT cut by 4pct should be set late May in talks with IMF, EC
When it projected inflation, the National Bank of Romania did not take into account the cut in the standard Value-Added Tax (VAT) from 24 per cent to 20 per cent as from January 1, 2016, as the cut is to be clarified late this May in the Romanian Government’s talks in Bucharest with officials of the International Monetary Fund (IMF) and the European Commission, BNR Governor Mugur Isarescu said Friday.
“What we have in mind, and not just as a hope, but as a certitude, is that following the talks scheduled for late this May with a technical mission of the International Monetary Fund and the European Union clarifications will be brought here in Bucharest, not anywhere else [over the cut in the standard VAT], because what we have here is a vision. In order to cut the VAT, a serious discussion is needed with the European Commission and the IMF. Then, we will know something more concrete. We cannot venture on our own to design a fiscal policy that is not under our jurisdiction. At most, we are a watchdog,” Isarescu told the conference where he released BNR’s latest inflation report.
He also mentioned the Government’s revenue collection programme, particularly the failures in the Government spending.
“Currently, we no longer have a massive surplus of liquidity, that is why we reduced the statutory reserves, because the situation of the Treasury in terms of liquidity is still excellent: a huge amount at RON 17 billion. Serious talks are needed about sustainability, how much of the revenue surplus comes from an obvious effort to improve revenue collection and how much of it is the result of a change in the taxpayers’ attitudes. On the other hand, there are some failures as far as the Government spending is concerned that has to be carefully analysed,” said Isarescu.
He also mentioned the need for infrastructure development for better connection to Europe.
“When you know you have billions to spend on infrastructure so that the country may get connected, accession to the Eurozone appears as an even bigger step. Romania is now integrated with the European Union. The integration with the Eurozone entails integration with currency and policies, physical integration of infrastructure and roads measuring up to European standards. We currently have a master plan to test our administrative and engineering capabilities of building such roads,” added Isarescu.
He warned that a change in the pervasive mentality of the last 20 years that we do not build roads because we do not have money is needed.
“It has been proved that we do have money, but we do not build roads. Are roads made on money only?! They are also made using engineers, serious people and administrative capability. Have you ever seen a motorway built of a pile of banknotes? At the end of the year, allegedly because there was no money, they would still find money for conservation; they would unfold three mats and lo and behold, the road would be conserved! We are talking about a massive conservation of concepts!” said Isarescu.
VAT cut for foodstuffs can reflect 100pct in prices, with transparency and no cartels
The VAT cut for foodstuffs starting June 1, 2015, can be 100 per cent translated into price drops if there aren’t any agreements among traders and if there is transparency in regards with the prices of the products affected by the decision, National Bank of Romania told the presentation conference of the quarterly report on inflation.
“The VAT amendment reflection in the level of prices depends on the economic context and the visibility of the products in question. If you have an excessive offer, whatever traders would do, the VAT cut, through the market levers, takes prices down. If something like this happens, the reflection can go to 100 per cent. Only if the market is hindered, if agreements, cartels are created and the market mechanisms no longer work…. [the prices don’t go down],” Isarescu explained.
He said that the BNR did not take into account a 100 per cent translation into prices. “When the quota increased, it didn’t go to 100 per cent, but to 60 per cent. Let us go with this figure and this is still enough to take inflation in summer even below 0, taking into account the high share of these products in the consumption basket [32 per cent]. With a good agricultural year and a good reflection there is the “danger” of going much lower, to minus 1 per cent,” the BNR Governor underscored.
The Central Bank head also pointed out that at the same time with the announcement of the VAT cut for food products, the inflation expectations on a one-year period “have purely collapsed.” “There are discussions on the shops tactics, but we see the fall to zero or even under the expectations. In two years’ time the figure consolidates to 2 per cent, which isn’t bad, it is within the targeted interval. This means the consolidation of the confidence that inflation will stay at reduced levels,” Isarescu also said.
He showed that during the summer months and the first months of autumn the annual inflation rate will go down to minus 1 per cent, then going to go up in the last quarter and reach 0.2 per cent at the end of the year.
BNR reduced the inflation prognosis for the end of this year by 1.9 percentage points from the estimation of February, to 0.2 per cent, and by 0.5 points for the end of next year, to 1.9 per cent, Agerpres informs.