IMF says economy worse affected than expected

These measures are required because the Romanian economy has worsened far more drastically than anticipated at the beginning of this year. This is why the IMF revised its estimate regarding the evolution of Romania’s economy to an 8-8.5 percent decline from the previously expected 4.1 percent drop, the IMF Mission Chief in Romania, Jeffrey Franks, said. The fund also revised the estimate regarding this year’s budget deficit downward, to 7.3 percent, from 4.6 percent.

“The situation is far worse than we expected at the beginning of the year, when we forecast a 4.1 percent economic decline. We now believe that Romania’s gross domestic product will slide 8-8.5 percent. This contraction is not due to the measures taken by the government, which were generally good ones. There are two reasons for this sharp contraction: the external context, which has not been favorable at all, and the drop in demand, in consumption, internally,” Franks indicated. IMF officials said they reached an agreement, at the expert mission level, in order to unblock the second installment of the loan granted to Romania, but the final decision will be made by the management of the financial institution. According to the agreement signed with Romania, the IMF should transfer the second installment, worth some €1.9 billion, on 15 September.

However, on the same day that the IMF was stressing the need to cut public expenditure, Prime Minister Emil Boc announced that the pension point will increase two percent as of 1 October, according to the promises made to retirees, and in compliance with the current legislation. Franks said that about half of the second and third tranches (some €1.75 bln) will be allocated for covering the budget deficit, something that the Romanian authorities has been insisting on. However, the IMF official announced that this amount is insufficient for the financing of the budget deficit, and that the government needs to find other funds to support its expenses. Other money for supporting the budget deficit will be taken from loans granted by the World Bank and the European Commission.

Thus, the adjustment of public sector salary-related expenses in the coming four-five years should be of “at least 0.5 percent of GDP every year” as of 2010, the IMF Mission Chief in Romania added. To support these adjustments, Romania’s government should approve the single salary law, which could be voted next week, according to Franks.

As concerns the evolution of the economy, Franks said that Romania will register economic growth of 0.5-1 percent in 2010, considering the low point of the economic decline will be reached in the coming two-three quarters.