IMF urges Romania to improve fiscal policies

BUCHAREST – The International Monetary Fund urged Romania yesterday to plan fiscal policies better in the longer term in order to offset political and economic risks to sustainable growth. Following a regular mission to the new European Union member, the Fund said it remained concerned about Romania’s external imbalances, demand pressures stemming from fiscal policy and a potential overheating of the economy. «A medium-term fiscal perspective is very much missing,» IMF mission chief Albert Jaeger told a news conference. «There are political uncertainties, there is a fragile political environment… A medium-term-oriented policy framework… may help discipline politics,» he said. The Fund urged Bucharest to tighten fiscal plans, saying current budget targets raised the risks for the buoyant economy and asked it to cut next year’s planned deficit to less than 2 percent of gross domestic product (GDP). «If the fiscal target for 2007 is reached, it will be a very large fiscal pressure which will add to overheating pressures,» Jaeger said. Romania targets a shortfall of 2.8 percent of GDP this year, but Brussels has said its own calculations put it above the bloc’s 3 percent cap. Analysts warn that spending plans may be erratic as Bucharest’s centrist minority government struggles to survive and opposition parties push to boost flagging ratings. Jaeger also said that in the context of an uncertain outlook for inflation, the central bank’s current «wait-and-see» approach to monetary policy was «appropriate.» «It is unclear how to extrapolate fiscal pressures going forward,» he said, pointing to wage demands and spending pressures as key risks. The bank has cut interest rates by 175 basis points this year but has kept them at 7 percent since June. Red-hot risks Romania has registered fast growth in recent years, expanding by 7.7 percent in 2006, on the back of robust foreign investment and voracious domestic consumption as companies race to modernize and Romanians improve their living standards. The IMF expects the Romanian economy to grow evenly, expanding by 6 percent this year and next, slightly below government forecasts. But it sees the current account deficit, Romania’s main economic headache, expanding to 14 percent of gross domestic product this year, from 10 percent in 2006. On the leu, Jaeger said the currency was likely to continue appreciating nominally over the medium to long term, despite a recent slump to 2007 lows versus the euro. «We would expect that in an economy like Romania… to see the same nominal appreciation that we have seen in other transition economies… as long as inflation remains contained,» he said. The leu hit its lowest level this year at 3.4303 to the euro in September as foreign funds worried about the sustainability of economic growth.

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