The IMF and leading investors have stepped up calls for
Romania to tighten fiscal policy to avoid economic crisis, amid
political inertia that has gripped the Balkan nation.
Romania needs to maintain the confidence of foreign
investors with coherent policymaking and an awareness of what
its vulnerabilities are, warned Juan Jose
Fernandez-Ansola, the IMFs senior regional
representative. He cited Romanias current account deficit
- which the IMF forecasts at 10.3% in 2007 - as clear evidence
of unsustainable macroeconomic imbalances.
His warning comes after several months of political inertia
in the run-up to an opposition-inspired referendum, held on
Saturday, that proposed impeaching President Traian Basescu for
breaching the constitution. The motion was rejected by more
than 78% of votes cast.
Finance Minister Varujan Vosganian recently promised an
anxious EU that the 2007 budget will remain within the 3%
deficit limit stipulated by the Stability and Growth Pact, but
Fernandez-Ansola told Emerging Markets that this was a
deeply unambitious objective.
The current level of economic growth allows you to
continue spending significantly without having a public sector
deficit. Romania could have a balanced budget. The IMF
has called on Romania to target a deficit of 1.0%-1.5% of
In particular, Fernandez-Ansola is alarmed by the
above-inflation increases in public sector wages. These
wages are expected to increase 20% with an inflation rate of
4%. But without reforming the public sector, to increase the
wage bill dramatically while the number of people in public
sector is also growing is a big problem, he said.
The sharp rise in salaries is especially worrisome, given
that consumer demand is already rampant. Debora Revoltella, CEE
chief economist at Unicredit, singled out Romania as one of the
few countries in the region where the bank is concerned that
consumer credit growth is moving beyond a straightforward
catch-up in living standards with the rest of the EU.
We have calculated implied household savings rates,
and these show that Romanians have a lower propensity to save
than elsewhere in eastern Europe. That does raise concerns
about credit quality, in view of very fast household credit
growth, she told Emerging Markets.
However, Revoltella believed that the monetary policy mix
was still adequate, and that tightening should be focused on
reducing the governments reliance on high rates of GDP
growth, which Unicredit forecasts at 5.7% in 2007.
Fernandez-Ansola was less forgiving, arguing that the
government is severely undermining the central bank s
credibility. Monetary policy is between a rock and a hard
place. Inflation and the credibility of the central bank is
under threat from loose fiscal policy.
However, he was not optimistic that the political will
existed to tackle these issues in the short term. In an
election year, one can foresee that the next 12 to 18 months
are going to be difficult for economic policymaking.