Government Asks IMF To Increase Budget Deficit To 7-8%

• Jeffrey Franks, Head of IMF Mission to Romania: "We are willing to be flexible in negotiations, given that Romania"s economic status has worsened"

• Gheorghe Pogea, Finance Minister: "The GDP could decrease by 8%"

The budget deficit target of 4.6% of the GDP agreed with the International Monetary Fund (IMF), the European Commission (EC) and the World Bank (WB) months ago will most likely be changed following a decline in Romania"s economic status. Following discussions at the Finance Ministry yesterday, Jeffrey Franks, Head of the IMF Mission to Romania, said the Fund was willing to be more flexible in negotiating this topic.

"We"re at the beginning of our discussions and we"re evaluating the macroeconomic programme. In today"s discussion we took into consideration the fact that the economic situation is worse, as is its impact on the budget. We are willing to be flexible in negotiations, given that Romania"s economic status has worsened,\" Franks said. However, he said he could not speak of new targets for the Romanian Government and that it was premature to give any exact figures.

• If economy recedes 7-8%, budget deficit will gain 7-8%

Considering the officials" latest remarks on the subject, they will probably try to negotiate a budget deficit target of 7-8% of the GDP during the ongoing discussions with the IMF. Economy Minister Adriean Videanu recently said he was expecting a budget deficit of approximately 7% of the GDP amid an approximately 6% economic decline. In turn, Finance Minister Gheorghe Pogea two weeks ago estimated a 6.5 - 7.1% economic decline for the entire year. However, he revised his forecast to minus 8% yesterday.

"We will modify the macro-economic projection. You will see that the economic projection will worsen in most of the EU countries in the near future. Romania will be in the same situation, as far as the economic downturn in the second half of the year is concerned. Consequently, the deficit targets will change, too. An economic contraction of 8% is possible.

• Analysts are more optimistic

However, economic analysts believe that an 8% contraction of the Romanian economy is unlikely. "An 8% decrease in the GDP this year is a bit pessimistic for me. Such scenario is possible, but unlikely," said Ionut Dumitru, Chief Economist of Raiffeisen Bank Romania.

In turn, Lucian Anghel, Chief Economist of Banca Comerciala Romana (BCR) said: "if the budget deficit is kept tight, any scenario can be valid. With a lower budget deficit, the decline of the GDP will be deeper, too."

• Government needs to cut public spending

Before accepting an increase of the deficit target, the IMF will ask the Government to take steps to increase budget revenues or cut public spending. However, Finance Ministry officials believe that the possibility of increasing revenues is highly improbable, as any increase in taxation would further stimulate economic contraction.

Given the circumstances, the only measure that the Government can take to comply with the conditions of the agreement with the IMF is to cut public spending, which will be one of the primary matters of interest in the evaluation that the IMF will perform on the Government"s performance.