The IMF mission to Romania left Bucharest yesterday leaving the government with a set of measures that are as austere as they are surprising: an increase from 1% to 10% of the tax on interests and stock market gains and an increase in excise duties (both of which are to become effective as of April 1), and a reduction in public spending by more than half a billion euros.
What purpose do these measures serve? The reduction of the budget deficit to as close to 0.4% of GDP as possible, as requested by the IMF, down from the current 2.1% seen in the current spending and revenue structure. Since it was agreed that increasing VAT was too risky a solution, other streams of income were sought, and the most important of these was the increasing of excise duties on mineral oils, tobacco and alcohol three months earlier than initially scheduled: starting April 1 instead of July 1 2005.
The authorities' negotiating margin was visibly narrowed by the slippage of the current account deficit for 2004, estimated at 7.8% of GDP compared with an acceptable threshold of 6%. In these circumstances, the government committed to take steps to curb the foreign deficit by at least one percentage point to 6.5-6.8% of GDP. The main leverage in this is the same budget deficit that is fenced in from all sides.
The other basic macroeconomic goals agreed upon with the IMF are for a 5.5% level of economic growth and the keeping within a 7% rate of inflation.
Given the large number of measures to be taken and the serious lack of certainties, the Fund's expert team plans to come back to Bucharest early in March to see for themselves whether the government has shown the will to abide by the agreements.
Until such time comes, a first revision of the budget for 2005 needs to be carried out to prove that concrete steps to cut spending are going to be taken. This entails some 580 million euros in cuts to subsidies, foreign loans and other material and service expenses for public institutions.
The supplementary letter of intent by which the authorities request adjustment of the economic programme as part of the arrangement with the IMF will not be finalised until March.
On conclusion of this round of talks with the IMF, Prime Minister Calin Popescu Tariceanu said that "grave and serious slippages" from the steps agreed upon with the IMF had occurred during the term of the former cabinet, especially in 2004. These slippages included salary raises beyond established limits, which had led to excessive and unsustainable increase in consumption and to a current account deficit estimated at 7.8% of GDP for last year.
The budgetary spending chapter is also coming under pressure, says Tariceanu, due to the fact that the minimum wage, established at 3.1 million ROL by government decision, was increased to 3.3 million ROL in the collective employment contracts signed throughout the country.
To keep within the spending limits for this year, the government will not be able to approve salary rises of more than 4% in the spending and revenue budgets of the companies monitored by the International Monetary Fund and will also introduce the principle of fiscal discipline for all taxpayers through a set of measures to punish tax evasion.
razvan.voican@zf.ro
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