DORU LIONĂCHESCU: "Without the IMF, the government will pawn off our future, for political gain"

The talks between the Romanian authorities and the representatives of the IMF mission have ended in a deadlock as early as the first meetings, as the tensions that arose during the negotiations were elucidated by the budget delegate minister, Darius Vâlcov, who said, on Friday, that the IMF has asked the government to cut next year's budget deficit to 0.9% of the GDP. The Romanian party considers that this request is unacceptable, as stated by minister Vâlcov and prime-minister Victor Ponta.

The representatives of the two parties have held talks throughout the weekend, but by the time the newspaper went to print, no public statement had been made, as government sources claim that the mission of the IMF as well as the Romanian authorities hold their own opinions on next year's deficit.

Following the statements made on Friday by Darius Vâlcov, there have been rumors that the talks between the two parties may be suspended, and the agreement with the IMF may come to an end, if the participants in the negotiations don't agree on a deficit of 1.4%.

Economic analyst Dragoş Cabat considers that the first potential outcome of the breaking of the agreement with the IMF could be that there would be no one to keep in check the relapses in economic discipline that are bound to occur sooner or later, and that a lack of confidence in Romania's economy would develop among investors.

According to Doru Lionăchescu, the president of Capital Partners, the short term effects of a possible termination of the agreement with the IMF will not be catastrophic, the only cause for concern being that "the only constraint we had to make structural reforms would disappear and nothing more would get done".

He told us: "We need these structural reforms in infrastructure, as well as in education, healthcare etc. Without the IMF, the Government will cut investments and will give out social handouts, pawning away our future for political gain".

Doru Lionăchescu wonders "where did the figure of 0.9% for next year's deficit come from?" and makes the following assumption: "Considering that over a reasonable timeframe, the public debt must not increase anymore, we could speculate that this year, public debt has increased more than the authorities have expected, and in order to get to zero debt, we need to reduce our deficit. This is an assumption based on which we could understand why the IMF has asked for a deficit of 0.9%, but there may be other demands as well. If the IMF has indeed asked for that, somewhere there is a difference between the real situation and what we are being told".

Dragoş Cabat thinks that if the Fund has demanded a deficit of 0.9%, "it is because it has seen that we have a budget surplus (ed. note: the budget execution ended with a surplus on October 31st, for the second month in a row, with a surplus increase from 0.06% of the GDP to 0.29% at the end of October), because never until now did the IMF get involved in these kinds of things and it has never overdone it in the negotiations with our authorities".

He stressed that " it is extremely strange that the representatives of the IMF have demanded for a 0.9% (ed. note: budget deficit), but it is explicable, seeing the ten month surplus".

Darius Vâlcov explained that on Thursday, "the IMF brought this new element into the technical talks, by which they (ed. note: the representatives of the Fund) have proposed a deficit of 0.9% for 2015 (...). The government will not accept that, I do not have a mandate to discuss a deficit of less than 1.4%". According to the minister, the argument in favor of the request would be that there must be no difference anymore between the ESA deficit (where the deficit is calculated not based on the actual payments made during a year, but based on payment commitments and the legal delays for the payment of the liabilities) and the cash deficit (which comprises the incurred expenditures), like it has happened in the previous years.

The prime-minister said that he does not believe that the agreement between Romania and the IMF will be "broken", and he explained that this is a period of negotiations that can be very difficult. The PM stressed that the talk to the representatives of the European Commission is very important now, because "that is where the major issues are". Victor Ponta reiterated that Romania has an agreement with the IMF, which is set to expire next year, and thinks that it will probably not be extended, because "there is no reason to do so". The essential part in the negotiations of a member state is played by the European Commission, for the Fiscal Treaty, the prime-minister further said, who stressed the following on TV: "What is essential is our relationship, just like it is for any other member country, with the European Commission, where the big issues are. You should know that France has no agreement with the IMF, but it does have a disagreement with the Commission concerning its own deficit, which is about three times higher than Romania's - I think it is about 4.7%, Italy's is above 3%, we are Europe's teacher's pet. Well, I wouldn't want to be teacher's pet, by accepting some terms that would prevent us from growing at an accelerated pace".

The IMF experts are taking it out on the Government like teachers do "with the student sitting in the back of the class", the prime-minister said on Saturday, in a TV show, and he added that they have probably become more rigid in their negotiations after hearing Traian Băsescu criticize them, one day prior to their demand to cut the deficit to 0.9%, that they are being "too kind" to the Government.

President Traian Băsescu last week harshly criticized, the IMF and the European Commission, whom they are accusing of standing idly by to watch the "fiscal adventures" that happened in Romania over the last eight months, prior to the presidential elections.

He said that there are major issues in the creation of the budget and that he wouldn't want to see these issues get resolved through the breaking of the agreement with the IMF, which would amount to a return to the "much maligned end of the "90s".

A termination of the agreement with the IMF would represent a large "black mark" for the IMF, the European Commission and the World Bank as well, because it would be the first time when "a country ends up weaker in terms of fiscal consolidation than it was in the beginning", the president said.

President Băsescu reminded the prime-minister on Thursday that he did not agree with Victor Ponta when it comes to the cutting of the Social Security Contributions and that he "warned" him there would be problems in the drafting of the budget.

Ionuţ Dumitru, the president of the Fiscal Council recently told us: "Romania must reach a certain deficit level, as lots of budget adjustments are needed, to cover at least 15 billion lei, needed to carry out the overall long term objective (approximately 5 billion lei), to cover the deficit caused by the cut of the CAS (social security contributions) (five more billion lei), as well as the increase of the defense budget, the pension hike and the implementation of other measures announced for this autumn, which together would require at least 5 billion lei".

Meeting the overall long term objective involves reached a structural deficit of 1%, in 2015, which means a budget deficit of 1.4%. Ionuţ Dumitru told us: "In order to meet the medium term budget objectives that we have made a commitment to with the international entities, we must reach the structural deficit target of 1%, which would be achieved if the economy reached its potential GDP. That would be the case if we had no demand surplus or deficit. We currently have a demand deficit, as the GDP is below potential. In order to have a structural deficit of 1% next year, we have to reach an actual budget deficit of 1.4% of the GDP. The budget deficit target for this year is 2.2%. After the first seven months, that deficit has only reached 0.2%, as the difference was rather high compared to the target".

According to the economist, the amounts needed to cover the deficit can be raised by cutting expenditures, by increasing revenues or by doing both.

Romania's budget deficit is expected to increase to 2.8% of the GDP, if the Government does not take any fiscal policy measures, the European Commission states, in its report concerning the economies of EU member states.

The EC report also shows that in structural terms, the deficit is forecasted to increase from 1.75% of the GDP in 2014, to 2.5% of the GDP in 2015-2016, and that the public debt is set to increase from 37.9% of the GDP in 2013 to 41.1% in 2015.