IMF to decide whether Romania gets €2 bln tranche

Following this assessment, IMF will decide whether or not to grant a second tranche of the loan, worth some €2 billion, to Romania. The first €5 billion of the total €12.9 bln borrowed from the IMF were given to the National Bank of Romania (BNR) in May. The sticking point of the talks is the budget deficit. According to the stand-by agreement, this is set to amount to 4.6 percent of gross domestic product (GDP) by the end of the year. While the Finance Ministry stressed that it kept the gap between revenues and expenses within the agreed target, Romania’s Representative to the IMF, Mihai Tănăsescu, estimated that the country exceeded its deficit target in the second quarter of 2009 and things are likely to be similar in the third quarter.

The IMF currently foresees a 7 percent economic decline, compared to a 4 percent drop in April, with a budget deficit of as much as 8 percent of GDP, instead of the initial 4.6 percent target. At stake for the government is convincing IMF representatives to agree to a wider budget deficit, so it can cover for expenses budgeted by the end of the year. If the fund rules out this option, the government will have to further cut spending. This has already happened in other countries in the region that borrowed money from the IMF, such as Hungary, Ukraine, and Latvia, and in countries that are still trying to avoid a loan package, such as Bulgaria and Lithuania. According to aVienna Institute for International Economic Studies (WIIW) analyst, Gabor Hunya, the IMF could be willing to accept a wider budget deficit in terms of percentage, if the economy drops further than estimated, but not in terms of actual figures. Thus, the budget deficit should not exceed €5.7 billion, or 4.6 percent of GDP estimated at €123.5 billion. If the GDP is lower, the Fund could accept a deficit worth €5.7 bln, although the percentage would be higher.

“The deficit is too high in terms of what was concluded in the stand-by agreement. If this is due to economic slowdown, it is excusable. But if this happens because parts of the agreement were not respected, the IMF will take a harsher stand,” Hunya told Business Standard. He said it is unlikely that the fund will push the government to cut salaries and pensions, but expects that the second loan tranche will be conditioned on the elimination of bonuses for public servants.

“It is in Romania’s best interest not to get addicted to IMF’s cheap money. For Romania, the best long-term option is to go back to international markets for financing,” he said. The IMF agreement has an “enormous impact” on the exchange rate level and the Credit Default Swap (CDS), namely that extra interest is paid for the country risk, upon borrowing funds on international markets, according to BAC Investments bank Managing Partner, Matei Păun. “If the IMF agreement were to disappear tomorrow, we would have very serious problems, which we cannot afford,” he added.