Romania fails to revive IMF stand-by arrangement

By bne IntelliNews February 9, 2015

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Romania’s stand-by arrangement (SBA) with the International Monetary Fund remains in limbo after Romanian officials failed to reach agreement with an IMF mission on gas price liberalisation and other key issues, Prime Minister Victor Ponta said on February 9.

The Romanian government also objected to the IMF's suggestion to liquidate mining and power generation group CE Hunedoara, and for a tough restructuring programme for another mining and power group, CE Oltenia.

Despite the apparent deadlock, the Romanian authorities still hope for an amicable agreement on the country’s third SBA, which was signed in September 2013. The agreement will not go off track, Ponta stressed on February 9. However, no letter of intent on the SBA will be drafted before April, when negotiations will continue, he added.

This means Romania will be unable to draw down any monies under the SBA until April at the earliest. However, Bucharest has no urgent need of funding, and treats both the SBA and the balance of payments programme agreed in parallel with the European Commission as precautionary.

The SBA will remain suspended, as it has been since June last year, the head of the parliament’s budget, finance and banking committee, Viorel Stefan, explained after lawmakers’ representatives met the IMF mission, together with teams from the European Commission and World Bank. Experts from the two sides will continue their discussions, Stefan added.

Bucharest has repeatedly failed to revive its third SBA since June 2014, when the government and international financial institutions failed to reach an agreement on “some issues”, according to an official IMF statement.

The disagreement is believed to have concerned the government’s decision to cut the social security contributions rate by 5pp, which was made without the Fund’s approval. The government went forward with the rate cut as of October 2014.

However, in December, IMF experts endorsed the Romanian government’s 2015 budget plan, which appeared to open the door for a smooth continuation of the agreement.

Under its first SBA, Romania borrowed some €12bn from the Fund and €5bn from the European Commission. Most of the money has already been paid back, and since then Romania has not drawn down any money under its second and third two-year agreements with the Fund.

Ponta said recently that Romania no longer needs an agreement of this type, and announced that the government will probably opt for a more flexible agreement after the current one expires.

Moreover, Ponta has repeatedly spoken out against allowing the IMF to dictate policy in Romania, and his government openly disregarded IMF recommendations when making the social security contribution rate cut in October. Ponta made another tough statement on February 9, when he stressed that cutting the VAT rate - a move contemplated by the government for 2016 - will not be the Fund’s decision.

Despite the current deadlock, Romania is now in much better shape than when it entered its first SBA. While the country was dependent on international financial institutions in 2009, when its first SBA was signed, the economic situation has radically changed since then.

Terminating the current arrangement would generate slightly higher co-financing costs for the government under EU-funded projects, since the more favourable terms would be ended by the EU. This might be of some importance for the budget balance this year, when Romania plans to absorb a record amount of EU funds. However, public financing in the internal and external market is likely to remain as abundant as it is now.

On February 5, the European Commission released an improved Winter Forecast for Romania, which gives a positive picture of the country’s macroeconomic fundamentals. However, weak public administration and unreformed state-owned companies - commented on by the IMF  in its current negotiations with the government - are preventing Romania from achieving higher growth rates.

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