Does the suspension of the agreement with the IMF "clear the coast" for electoral bribes?

The International Monetary Fund (FMI) has postponed until November the evaluation of the agreement concluded with Romania, prime-minister Victor Ponta announced yesterday.

The head of the Government says that the decision of the IMF has been determined by the fact that the institution wants to first see the draft budget for next year, so it can review the sustainability of cutting the social security contributions (CAS) in 2015 and 2016.

"For 2014 it is obvious that we can afford to have a cut of the CAS, due to better budget inflows, but these measures have to be sustainable in the long run, in 2015, 2016. In this particular case we have not yet identified the measures that would make the cut of the Social Security Contributions sustainable", said Victor Ponta, who added that next week the government will submit to the Parliament the proposal to cut Social Security Contributions by five percentage points, starting with October, and the budget deficit would not be affected.

The prime-minister also said that there would be no need to renew the agreement with the IMF, which expires next year.

The announcement is not likely to significantly affect the way investors perceive our country, but there is a risk it could open the way for the passing of populist measures, given that in November, are scheduled presidential elections, the economists and representatives of the business sector contacted by BURSA warned.

"So far, the agreement with the IMF has represented an anchor of stability for Romania", according to Mihai Bogza, the president of the Council of Foreign Investors, who said that it remains to be seen what the consequences of this suspension will be.

"We are just hoping that the authorities will not use this situation to "clear the coast" for populist measures that would affect the macroeconomic stability in the coming period".

Former minister of Finance Gheorghe Ialomiţianu does not believe that the financial markets will sanction the postponement of the IMF assessment, either.

"Romania is in a better situation than it was in in the years 2010 - 2011. We are on a good path when it comes to fiscal consolidation, and the economy is growing based on exports", he told us.

However, the PDL deputy has also been reporting that the tax collection rate is very weak, especially since the Government has introduced the additional excise of seven eurocents per liter of fuel and the tax on special constructions.

Gheorghe Ialomiţianu went on to say: "Fiscal revenues are very weak and they must be improved, because if social security contributions are cut, but other taxes increase, then we won't have actually achieved anything".

Romania is going through a favorable moment, which means that the markets will not react visibly to the announcement of the suspension of the agreement with the IMF, economic analyst Aurelian Dochia says.

"For the moment, this decision will have no consequences, because we are not dependent on foreign money", he says.

The economist says, however, that in the long run, there is the risk of the investor perception changing for the worse, which would make the anchor provided by the IMF necessary.

As for the populist accents of the government's insistence to cut the Social Security Contributions, even if the tax earnings limits required by the IMF weren't met, Aurelian Dochia told us that the desire to demonstrate independence from the international financial institutions has been seen in a large number of countries, from Hungary to Great Britain.

• Radu Crăciun, BCR: "The temptation to cut taxes without any measures that would offset the decline in earnings to the state budget raise some questions"

Radu Crăciun, the chief-economist of BCR, doesn't expect a significant impact on the markets, caused by the postponement of the evaluation of our agreement with the IMF.

"We are at a stage where investors don't see an agreement with the IMF as a requirement anymore. The economic policies of the government will matter more now", he said.

Radu Crăciun warns that recent history showed us that when he hasn't been involved in an agreement with the Fund, the government has opted for excessive economic decisions, with suboptimal results.

The economist went on to say: "Let's hope that the authorities have learned from the mistakes of the past and will not repeat them. Still, the temptation to cut taxes without measures that would cover the decline of the general budget revenues raises some questions concerning to the economic measures that could be taken in the near future".

Vlad Muscalu, senior economist at ING has a similar stance on the effect of this announcement on the financial markets. The consequences would be mitigated by the reduction of Romania's structural deficit, as well as by the investors' increased risk appetite, caused by the lax monetary policies of the major central banks.

Cristian Pârvan, the secretary general of the Association of Romanian Businesspeople (AOAR), thinks that the unyieldingness of the IMF and of the European Commission in the negotiations that the Romanian authorities had with them for the reduction of the social security contributions. "The measure depends on the improvement of the tax collection rate, which did not perform as wanted. Still, the degree of taxation of labor is very high in Romania and it needs to be reduced", he told us.

Cristian Pârvan considers that the decision of the Government not to renew the deal with the IMF, after its expiration, at the end of next year, does not represent a problem, given that Romania has several agreements with the European Commission, which require budget discipline.

As for any potential issues concerning foreign financing, the secretary general of the AOAR claims that the Government could, and even more, should, turn to the domestic borrowing, more specifically from the population.

Ştefan Nanu, the head of the Treasury Department of the Ministry of Public Finance said that the Ministry of Public Finance is in talks with the Bucharest Stock and with the Financial Oversight Authority (ASF) to cut its taxes, in order to issue government bonds intended for the population.

Enache Jiru, the secretary of state in the Ministry of Public Finance who is in charge of the aforementioned department, had said that the Ministry of Public Finance intends to issue bonds with a face value of 1,000 lei, ten times lower than that of the government bonds currently being issued, which would be directed at retail investors.

Economist Florin Cîţu doesn't see any risks arising from the worsening of the way investors perceive Romania, but rather from the creation of domestic imbalances, caused by pro-cyclical monetary and fiscal policies, just like in 2006 - 2007.

"The good thing about the breaking of the agreement with the IMF, which is very unlikely, is that we will be able to see clearly who is causing these imbalances, as the authorities would no longer be able to blame the", he told us.

The economic analyst also said that Romania needs harsh reforms, in order to stimulate economic growth and improve the standard of living, reforms which the authorities have avoided to do under the agreements with the IMF.