Wednesday, June 27, 2012

FT: Romania: IMF remedy starts to pay off

While eurozone policy makers thrash out the growth vs austerity debate, the evidence from Romania seems to be that the traditional medicine works.

The IMF has given Romania a qualified thumbs up on it’s economic reforms and recovery. However, the Fund may have praised Romania’s progress, but it still warned of substantial downside risks and that reform still has a long way to go.

The new government, installed after its predecessor collapsed towards the end of its term in April, needs to juggle international commitments with the political pressures of an election expected before the end of the year: a tricky balancing act.

The IMF completed the fifth review of its current stand-by arrangement for Romania on June 22, deciding that Romania had adhered closely enough to the deal’s terms to merit the release of a further €519.4m of emergency funding. Romania now has €2.67bn available for disbursement, though the government has said that it does not intend to use the cash, considering it a precautionary fund. The arrangement was approved in March last year, replacing a €12.94bn deal that had run from May 2009, when the IMF intervened to counter Romania’s fiscal crisis.

The Romanian economy hit the buffers in the wake of the global financial crisis, following several years of strong growth in the last decade. Successive governments had adopted pro-cyclical loose fiscal policy during the boom years, leading to a serious crunch once the crisis hit.

Under the aegis of the IMF, Romania has adopted austerity measures including job losses and a 25 per cent in wages in the public sector, as well as an increase in VAT. These have proved deeply unpopular, and helped fuel street protests earlier this year that eventually led to the fall of the government in April. It was replaced by a socialist-liberal coalition led by new Prime Minister Victor Ponta.

Despite the difficult political situation, the IMF noted that “Romania’s economic performance under the programme remains strong,” adding that “GDP growth is projected to pick up in the second half of the year, inflation remains in check, and the fiscal and external positions continue to improve.”

But the praise was followed by a warning that external risks are “looming large”. Romania is exposed to the crisis in the eurozone, its major trading and investment partner. While its financial system has been reinforced in recent years, it remains vulnerable to contagion, as well as to rising non-performing loans at home.

The IMF also urged “strict spending discipline” and renewed commitment to structural reform, including to the tax administration, health system and the transportation and energy sectors, as well as privatisation. Following Romania’s EU accession in 2007, reform stalled. EU fund absorption remains worryingly low – yet another sign of the populous and resource-rich country failing to capitalise on opportunity.

As this year’s protests and a number of delayed or botched privatisations indicate, austerity and economic liberalisation remain politically and economically sensitive. Having played fast and loose in the good years, Romania has faced some harsh realities.

For the time being, Ponta retains the benefit of the doubt, both from international institutions such as the IMF and voters at home, having won a resounding victory in local elections earlier this month. The temptation to dispense vote-winning baubles before the general election expected in November should be moderated by the parlous condition of the opposition, as well as Ponta’s commitment to international agreements.

After the vote, whoever is in government will face the usual Romanian situation: tremendous potential, but big challenges.

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