Romania reaches agreement with IMF over 2015 deficit of 1.83% of GDP

By bne IntelliNews December 9, 2014

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Romania and the International Monetary Fund (IMF) reached an agreement over the 2015 budget planning, Prime Minister Victor Ponta announced on December 9.

The cash deficit will be 1.83% of GDP, while the gap will measure 1.2% of GDP under the European System of Accounts (ESA, accrual basis). The cash deficit is formed by the 1.4% of GDP in the Medium Term Objective (MTO) under the Fiscal Compact, plus 0.4% of GDP for co-financing of EU-funded projects, Ponta explained. A supplementary 0.3pp increase in the budget deficit, to 2.1% of GDP, depends on approval from the European Council that will be attended later this month by President Traian Basescu. The 0.3% of GDP would be allocated to supplementary defence spending.

For 2014, Romania is targeting a deficit of 2.2% of GDP under both cash and ESA terms. However, the budget execution of this remains unclear, and PM Ponta hinted recently that the cash gap might be only 1.5% of GDP despite some payments made in advance, for example to school teachers. The budget was in surplus at the end of October, mainly due to subdued capital expenditures and a weak absorption rate of EU funds, hence the low co-financing of EU-funded projects.

The 0.4% of GDP supplementary deficit, agreed by the IMF to be used for the co-financing of EU-funded projects, stands for the money that was not spent during 2014 for such purposes. The money was thus shifted from the 2014 budget to next year’s budget, with a neutral impact on the combined 2014-2015 cash budget. This however puts supplementary pressures on the administrative bodies that manage funds from the EU budget. The absorption of EU funds should accelerate significantly in 2015 at record rates, particularly as the funds made available under 2014-2020 EU financial framework will become available.

Subdued investments this year allowed the government to make payments in advance to school teachers and to pay its arrears to companies. The dues to school teachers were generated by court trials in 2011, when the teachers were given certain financial rights previously cut by the government. The government will pay in 2015 all the money still owed to teachers, meaning that the discrepancy between ESA and cash measurement of the deficit should narrow close to zero starting 2016.

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