"The budget deficit doesn''t matter any more," said the resigning prime minister, Calin Popescu Tariceanu, after witnessing the havoc wreaked by the floods in Bacau county.
After six months of haggling with the IMF, the macroeconomic targets negotiated for this year - budget deficit 0.7% of GDP, inflation at 7.5%, economic growth of 5.5% - now no longer matter after the calamities that have struck 31 counties across Romania.
"In the new circumstances, it is necessary to redirect government spending. What was previously earmarked for more complex investments, such as the building of highways, must now be redirected to the rebuilding of the damaged infrastructure. It is therefore quite normal that the budget deficit will go up. We should no longer be clinging to a set figure, like 0.7-0.8% or 1% of GDP," explained Liviu Voinea, the director of research with the Applied Economics Group.
"Increasing the budget deficit will probably be top on the list of priorities since the government now feels somewhat freer in terms of the agreement with the IMF," said Radu Craciun, ABN Amro Romania''s chief analyst. He believes the most important discussion will be about what happens next year: "For the government to enjoy flexibility from the IMF it will have to take the necessary steps to ensure budget revenues go up as of January 2006," he said.
The current government, which is supposed to end its mandate this coming Monday, is yet to announce any adjustments to the budget to allow for an extra allocation of funds.
Talks with the World Bank, however, have already been conducted with a view to allocating 33 million dollars from existing projects to complement state budget resources for the immediate reconstruction of infrastructure and the homes damaged by the floods.
President Traian Basescu yesterday asked the European Commission for financial support in terms of redirecting 20 million euros of PHARE funds granted to Romania to the immediate reconstruction of dams, roads, bridges and small bridges affected by the recent floods.
"As this is an emergency it would be absurd to stick to the macroeconomic targets, while the real world is covered in water. Another adjustment to the budget can be made without any problems," said Voinea.
The shock caused to the entire economy by the flood damages is still hard to estimate, particularly because the flash floods are not yet over and new waves of heavy rain are expected for next week.
There is no doubt, however, that the Campia Moldovei area will suffer significant losses in terms of agriculture. According to some estimates, crop losses will cause wheat prices to soar by 22%. With crop losses expected across the entire country, economic growth is also expected to suffer. Agriculture grew by 22% last year, contributing to overall economic growth of 8.3%.
Transporters are still assessing the damage caused by delays in freight shipment.
Many factories in the area were also flooded, though some of them were insured.
The transport of petroleum from southern Moldova to refineries was also affected.
On a positive note, the artificial reservoirs that have overflowed as a result of the floods have boosted production for Hidroelectrica, increasing their share in the national energy system from 21% to 42%, affording significant gains to the company. razvan.voican@zf.ro
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