Initially published in www.romania-report.ro -- Oct 31, 2005
BUCHAREST, Romania -- The International Monetary Fund has failed to reach a new agreement with Romania due to disagreements over the country's taxation, spending and monetary policies, officials said Monday.
"The IMF program with Romania is now off track," said Emmanuel Van der Mensbrugghe, who is the fund's chief negotiator for Romania. He urged the government to raise taxes to compensate for the introduction of the flat 16-percent income tax, which replaced a 25 percent business income tax and a progressive 18-to-40-percent personal income tax.
"More government revenue is needed to provide for more resources for education, health and infrastructure," he told reporters after several days of negotiations with Romanian officials. He said the country's finances could be under more pressure in 2007, when Romania is scheduled to join the European Union and would have additional expenses.
Van der Mensbrugghe said the fund also disagreed with the proposed budget for 2006, saying the government should spend less on wages and more on items such as infrastructure, goods and services.
Prime Minister Calin Popescu Tariceanu said IMF demands for Romania to reduce the budget deficit were incompatible with the country's needs to develop its infrastructure. "Romania has shown that it has the capacity" to manage its own economic policies, he was quoted as saying in an interview with the private news agency Mediafax on Sunday.
Deputy Prime Minister Bela Marko said the IMF's demands to further cut the budget deficit were too drastic for a country that did not have debt problems.
On Monday, Romanian unions welcomed the end of the IMF agreement, which had called for strict limits on wages for public sector employees. The IMF also urged stronger measures to cut inflation, saying the current rate of about 8.5 percent and the appreciation of the local currency due to incoming foreign capital threaten the country's businesses, which become less competitive.
Exporters have complained in recent months that they have lost money because of a 15 percent appreciation of the leu in the past year and rising utility and labor costs. "To promote sustained economic growth Romania has to bring down inflation to that of its competitors and trading partners in the European Union," which is about 2.5 percent, van der Mensbrugghe said.
Romania does not need to borrow money from the IMF as the country has vast foreign currency reserves, he said, but failing to sign an agreement with the fund could affect the decisions of potential investors or lenders.
The country has set a 0.5 percent budget deficit target for next year and wants to reduce inflation to about 5.5 percent. The IMF warned that, based on its projections, the deficit could reach 1 percent of gross domestic product.
The European Commission said recently that signing an agreement with the IMF was not a requirement for joining the bloc, but warned that Romania needs to keep "a stable macroeconomic framework." "The status of the country's agreements with the IMF may offer valuable information in this respect."
Romanian FinMin Sebastian Vladescu was not sad regarding the failed agreement with IMF. Vladescu said Romanian economy is targeting to meet EU standards – which are not as draconic as those imposed by IMF.
Nevertheless, Vladescu was not happy with the IMF specialists who chose to release today a press statement, instead of tomorrow when Romanian Govt also planned to officially explain the reasons behind its refusal to comply with macroeconomic targets imposed by IMF.
AP and other sources
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