Wednesday, January 29, 2014

Feud between president, PM threatens Romania's IMF aid deal

January 28, 2014
By Radu Marinas and Luiza Ilie

BUCHAREST (Reuters) - Romania's president and his arch rival the prime minister must reach a compromise by next week over a proposed fuel tax backed by the International Monetary Fund, to keep a 4 billion euro aid deal on track for the European Union's second poorest country.

The spat between Traian Basescu and Prime Minister Victor Ponta could harm five years of deficit-cutting and market-oriented reforms that Bucharest has implemented under aid packages since 2009.

The fuel tax would charge motorists an additional 7 euro cents ($0.10) per litre of fuel. Basescu refused to ratify the IMF's first review of Romania's aid deal last month, arguing the tax would stifle a fragile economic recovery. Both sides agreed to delay introducing the charge until April 1.

An IMF mission is in Romania until February 5 for talks on how Bucharest plans to plug a revenue gap triggered by the delay, and politicians and analysts believe an agreement will eventually be struck.

Failure to do so would raise serious questions over Romania's commitment to its aid deal - the third since a real estate and credit bubble burst in 2008. The country does not plan nor need to draw on the IMF funds, but the agreement is a credibility anchor for foreign investors.

"If Romanian politicians don't agree a truce, they risk alienating the IMF at a time when markets are very volatile," Dan Bucsa, an economist at UniCredit Bank in London. "Lacking the credibility guarantee offered by the IMF agreement, Romanian assets would come under more pressure."

Political squabbling has repeatedly hampered the country's development in the 24 years since the fall of communism, and the economy trails other emerging EU countries such as Poland and the Czech Republic.

Ponta's government "does hope the Fund will understand this deadlock is not because of us but because of the president who insists on scrapping the tax", said a senior ruling Social Democrat official who is close to Ponta's office.

"Delaying the tax enforcement again until June would be one of the options. This will probably be considered," said the official, who spoke to Reuters on condition of anonymity.

UNPREDICTABLE

The president does not have policymaking powers, but under Romanian legislation he mandates the government to negotiate international agreements, which gives him a large say.

Ionut Dumitru, chief economist at Raiffeisen Bank in Bucharest, said the government could reach an agreement with the IMF during its visit, as there was "enough room for manoeuvre inside this year's budget to plug the gap".

The government and the IMF negotiated a review of the aid deal in November, agreeing a 2014 budget plan that offered modest increases in state wages and pensions but also raised some taxes and enforced the new levy on fuels.

Politics may prevail in the end. Romania holds elections for the European parliament in May with Ponta's leftist-liberal alliance set to win most votes, and a presidential poll in November with Basescu not eligible to run after two consecutive terms in office.

At least one member of the opposition says it is possible the fuel tax may never be introduced.

"It is very hard to believe that the tax on fuels will be enforced in an election environment. So I would not rule out capitulations," said Adriana Saftoiu, Basescu's former adviser and now a member of the opposition Democrat Liberal Party.

Investors have often criticised unpredictable fiscal changes and tax hikes in the Black Sea country in the past.

"Benjamin Franklin, one of the U.S. Founding Fathers, said, 'In this world nothing can be said to be certain, except death and taxes'," the top U.S. American diplomat in Bucharest, Duane Butcher, told a financial conference last week.

"Companies operating in Romania have learned that nothing is certain about taxes here either."

Basescu, a former sea captain known for his outspoken and combative nature, called the tax a "useless burden". The three-month postponement would generate a modest loss to the budget of 600 million lei ($185 million) which could easily be covered by minor spending cuts, he said.

"I don't want to give the impression there's a dispute between myself and the IMF," Basescu told German investors last week at a meeting attended by IMF mission chief Andrea Schaechter, before reiterating his refusal to endorse the tax.

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