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ANALYSIS – Ups and downs of Romania’s contracting an IMF loan

Romania is negotiating with the International Monetary Fund (IMF) an external financing which could be the most consistent loan of the past two decades, after two other European Union members - Hungary and Latvia - already inked such accords.

The IMF credit needed to finance the balance of payments of the country affected by the dwindling global liquidity is a solution widely criticized for the tough economic and social reforms required along the way.

However, one of the big unknowns is how the IMF would adjust its economic policies to the countries' needs, plagued by the global economic downturn.

Ups

The widely used notions of "control" and "discipline" voiced in the negotiations with the IMF bear positive meanings too.

After an election year in 2008 the budget deficit reached 5 percent of the gross domestic product (GDP) at yearend. Now the country has to drastically cut spending and find solutions to limit the income drop considering the slight chance of an economic advance this year.

The European Commission's prognosis pinned the budget gap at 7.5 percent of the GDP this year, without including the spending cut measures. The government has targeted a 2 percent budget deficit this year but in a scenario of a 2.5 percent economic increase.

The finance minister recently said that Romania could see a negative economic growth this year, so the budget gap could be wider.

At the end of last week people from the Cabinet told NewsIn that one of the options Romania is negotiating with the IMF includes a budget gap of 3-3.5 percent in the event recession strikes this year.

Romania's mistake

One of the main weaknesses of the economic policies of Romania in the past year was the focus on a pro cyclic fiscal policy, in which in theory is that the country did the opposite than it should have.

Instead of focusing on narrowing the budget deficits during the years of economic advance, the government spent massively. The budget deficit should have been widened only during a crisis when fiscal measures are required to prop up the economy.

IMF obligations

The negotiations started last week with representatives of IMF, the European Central Bank (ECB) and the World Bank (WB) sparked tensed debates in Romania and speculations over the measures forced on authorities once a loan is contracted.

One sure thing is the government pledged to limit public spending and to also come up with solutions to ensure a decent level of budget incomes.

Fencing public spending could mean nothing but cutting public salaries and reforming the public institutions, but also raising taxes. The consumption boom of the past years led to the habit of expecting annual growths of 20-30 percent of salaries, above the labor productivity.

The so-called social costs could mirror into the hiking of unemployment in some economic fields.

However, some of the unanswered questions are those on the new sell-offs and whether these will be continued in strategic fields, such as the power sector.

Measurs taken by other EU members which borrowed money

Hungary hiked the tax on profit from 16 to 19 percent and increased the value added tax (VAT) from 20 to 23 percent, next to the taxes on tobacco, alcohol and fuels. However, it cut by 5 percent taxes for small and medium-sized companies in a bid to control unemployment. The country also reduced taxes on salaries by 2 percentage points, to 27 percent.

By taking such measures, Hungary got 20 billion euros from IMF, the World Bank and the EU, out of which 12 billion euros only from the Fund.

The agreement between IMF and Hungary paved the way to a 2.3 billion euro plan to sustain the banking sector, but the Hungarian government promised to freeze the salaries in the budgetary field and to drop out the 13th wage which is normally received by 700,000 people annually. The budget gap was established near the threshold accepted by IMF, at 2.6 percent of the GDP this year.

In Latvia, the anti-crisis measures cut by 15 percent the salaries in the public sector, hiking the VAT from 18 to 21 percent and also increasing some taxes. The country received 10.4 billion dollars from the IMF.

Romania in comparison to other countries

Romania has a much smaller external debt compared to the other two European countries which asked help from IMF. Hungary's external debt represented almost 100 percent of the GDP last year, while Latvia's debt stood at 140 percent of the GDP in mid-2008.

Romania's medium and long-term external debt amounted to 50.5 billion euros at the end of January, up 0.9 percent compared to December 2008. The state's debt represented only 10.9 billion euros, about 21.6 percent of the total external debt.

The country's short-term debt stands close to 24 billion euros. Romania's GDP was of 503.959 billion lei last year.

According to the current account deficit, Hungary stands on a better position than Romania, with a gap of 6-7 percent of the GDP last year. Latvia had a gap of more than 15 percent of the GDP in 2008 in a time when Romania began to adjust the external deficit and reached almost 12 percent of the GDP.

Romania has an advantage over Hungary in terms of the national currency depreciation, as the leu lost less ground versus the euro in the past months compared to the forint.

Latvia targets a certain exchange rate through its monetary policies, so the central lender had to make massive efforts to maintain the national currency among the thresholds established. The central lender aimed to stabilize the lats at 0.7 lats per euro.

Another important issue is the level of indebtedness in foreign currency which exceeds 20 percent of the GDP and half of the total credit. The whole picture however looks more dramatic in the case of Latvia, where loans are above the GDP and the total credit stands at 120 percent of the GDP. In Hungary, foreign currency loans reached 60 percent.

The trump card in Romania's sleeve is the level of the minimum mandatory reserves which banks are forced to create. Until recently, the high level of these reserves was often lashed by bankers crying out loud money is blocked and cannot be directed into granting more loans. Yet, presently, these reserves are the safety belt for the banking system in Romania.

Romania is the only EU country with such a high level of the minimum mandatory reserves of 40 percent for passives in foreign currency and 18 percent for those in lei. In the Eurozone reserves are pinned at 2 percent. Hungary's reserves were reduced last year from 5 percent to 2 percent.

The solvency rate of Romanian banks is above the level of most credit institutions in the EU, at 12 percent, over the recommended level of 8 percent.

Also, the country should receive European funds of 30 billion euros until 2014 which would be, if exploited, a significant advantage. Official estimates point to EU funds of 1 billion euros the most this year.

Some skies are clearer

According to The Economist, Poland is one of the most secure new members of the European Union, with the public debt weighing less than 50 percent of the GDP.

The article also reveals that the Polish economic growth will be insignificant, if not negative, but a strong decline is not envisioned. The non-governmental foreign currency loan stands for about 30 percent of all the non-governmental credit, versus a double figure in Hungary's case, the article read.

Romania is, from this point of view, similar to Poland. The financial brokerage is just as low in both countries, at about 40 percent of the GDP.

The Czech Republic is also depicted favorably by The Economist, as its banking system is solid and its debt is low.

Its neighbor, Slovakia, is in even better shape, given its recent inclusion in the Eurozone and Slovenia has less to worry about since it entered the zone two years ago.

During the last six months, the IMF approved a 16.4 billion dollars loan for Ukraine, a 15.7 billion dollars credit for Hungary, set aside some 10.4 billion dollars for Latvia, 2.5 billion dollars for Belarus, 2.1 billion dollars for Iceland, 7.6 billion dollars for Pakistan and 516 million dollars for Serbia. All in all, the fund borrowed 55 billion dollars.

Ukraine, not an EU member, was asked to set up a stabilizing fund to allow for loans for banks and companies. Members of the Parliament rejected a clause of the anti-crisis plan that postponed an increase of the minimum salary for 2011 and the government approved a budget built on a public deficit of 3 percent of the GDP. Consequently, the IMF blocked the second installment of the loan, amounting to 1.84 billion dollars.

Bulgaria, which entered the EU at the same time as Romania, has an external debt of more than 100 percent of the GDP and an internal debt of about 20 percent of the GDP. The current account deficit stands at 25 percent of last year's GDP and is significantly higher than Romania's. Conversely, the conservative fiscal policy of recent years allowed it to build up budgetary surpluses.

 

Sursa: http://www.newsin.ro

Tags: percent salaries taxes level public romanias billion euros currency reserves stands about dollars government measures european hungary could which external romania latvia budget deficit economic country credit euro