IMF fears overheating of Romanian economy

By Justyna Pawlak – ReutersBUCHAREST – Romania’s fast-growing economy is close to overheating and could see a rebound in inflation unless fiscal and monetary policies work to stem demand, the International Monetary Fund warned. Speaking ahead of an annual consultation due to take place in Bucharest on February 21 and March 7, the IMF representative to the new European Union member said high demand was likely to cause a significant widening of external imbalances this year. «The economy is doing very well but it is a question of managing a car that’s accelerating. A question of when it becomes unmanageable,» Juan Jose Fernandez-Ansola told a news conference. «The economy is already very close to overheating,» he said, adding that Romania’s fiscal policy needs to share the burden of fighting inflation. He said the government’s plan to raise the budget deficit to 2.8 percent of GDP from 1.7 percent last year was «a very significant fiscal expansion.» Fernandez-Ansola said the annual inflation figure was likely to exceed the central bank’s target of 3-5 percent for December. Inflation in Romania fell to 4 percent in January, its lowest level since the fall of communism, but many analysts expect that heavy consumption, wage demands and robust economic growth may reignite price pressures later this year. Asked about the central bank’s unexpected decision to cut interest rates by 75 basis points to 8 percent last week, Fernandez-Ansola said policymakers may be forced to raise interest rates again if inflation overshoots estimates. «The risk the bank is running is that if there are underlying pressures in the economy and inflation picks up, then interest rates will have to pick up.» «It’s a risk that instead of running smoothly, the bank will have to cut and then raise again,» he said. The world lender has long said inflation and a bloated current account deficit were the key worries for Romania, which is going through a consumption boom as businesses and people are adjusting to EU standards. Fernandez-Ansola said the IMF sees the Romanian economy growing 6.5 percent this year versus an estimate of more than 7.5 percent in 2006. He also forecast that the country’s current account deficit would widen to 12 percent of gross domestic product in 2007 from 10 percent last year.