Romania can expect the long-awaited third and fourth installments of its stand-by loan from the IMF after the Fund gave Romania’s economy a favorable review last month. The two tranches come to around €2.3 billion. The IMF refused to transfer the money last year because Romania was mired in political crisis. The Fund was reluctant to conduct its review until Romania had a government with full negotiating powers.
Finance Minister Sebastian Vladescu has indicated that half of the money will go toward shoring up the state budget as a one-time measure, while the other portion will go to the central bank. Future installments will go to the central bank in full.
Analysis and Forecast: Decreasing Risk
The IMF’s positive review grants Romania access to some much-needed capital. The decision to use half of the money to shore up the budget highlights the fact that the administration is running desperately short on cash.
Before and during the review, one state official after another sounded his determination to implement the IMF-mandated steps, emphasizing the importance of responsible fiscal policies and other IMF-friendly platitudes. This time, the government had better mean it: The administration needs to enact some truly painful steps such as laying off approximately 100,000 state employees, executing the much-delayed pension reform plans and implementing a uniform wage system for public workers.
The government also has to be prepared for mounting social pressure. State employees held a warning strike in February. Although an agreement was reached, the unions remain ready to walk off the job again. In addition, contrary to previous promises, the legislature abolished the discount tax rate of 3% applied to “micro enterprises” – companies that have fewer than nine employees and annual revenue of less than €100,000. These companies will now have to pay the standard 16% corporate tax. Industry representatives fear that potentially half of Romania’s micro-entrepreneurs could go bankrupt as a consequence.
The government’s other revenue-raising idea, a tax on fast food, continues to meet with strong opposition from business circles. The duty is supposed to go into effect starting March 1 and aims to bring in revenues in excess of RON 1 billion. The Health Ministry, which proposed the tax, has already watered it down thanks to pressure from the corporate sector. It is now almost certain the fast-food tax will not be levied in March as planned.