ECONOMY

IMF-Romania accord off

BUCHAREST (Reuters) – The IMF said yesterday its standby deal with Romania was off track because of weak government and central bank policies to bring down inflation, raising the alarm about the country’s reform path. The Balkan state, which hopes to join the European Union in 2007, has held talks with its main economic mentor over the past two weeks, but no agreement was reached on how to tackle growing imbalances in the economy. «Despite extensive negotiations on the second and third reviews no agreement has been reached, and the arrangement is now off track,» the International Monetary Fund said in a statement. Romania does not need to draw money from the IMF but the Fund’s blessing is seen as crucial for the Balkan country to assure foreign investors and the EU its macroeconomic policies are sound. «The bad news is piling up,» said Danske Bank analyst Lars Christensen. «Basically, the government has failed in reforms although it has been very active in the first months.» The country’s two-year standby accord is due to expire next July and the IMF said a renewal of talks was possible if the centrist government changed its policies. The Fund wants Romania to run a budget surplus or a balanced budget next year instead of a projected 0.5 percent of gross domestic product deficit, to rein in a bulging current account gap, but the government says it needs the money to invest in EU-related projects. «The 0.5 percent of GDP deficit, which is absolutely sustainable, allows us to function,» Finance Minister Sebastian Vladescu told reporters. «We believe we will be within it, even if the IMF has its doubts.» The IMF, which forecast the 2006 budget gap would reach around 1 percent of GDP, said a tight fiscal policy was needed in the medium term and revenue losses from the introduction of a flat 16 percent income and profit tax this year must be compensated. Romania has been advised by the IMF to run tight budgets to prevent an already booming economy – which expanded by a robust 8.3 percent in 2004 – from overheating and control a ballooning current account gap. The IMF said the envisaged significant loosening of fiscal policy in the last quarter of this year would add to inflationary pressures and undermine the already difficult task of the central bank (BNR) to combat stubborn inflation. It also criticized the BNR, saying it was struggling with conflicting objectives as it was trying to both rein in the firming leu currency and bring down inflation. The Fund said Romanian disinflation was too slow and undermined the country’s competitiveness abroad, adding the currency was a key tool to fight price growth. It predicted inflation of around 8.5 percent this year and about 6.5 percent next year, but said a lot of uncertainties remain.