How to talk to the IMF

The hike of the flat tax rate is the last and worst solution for plugging the budget deficit, and the Romanian government and the IMF officials are all aware of it, just as they perform the quarterly evaluation process for the release of the fifth tranche of the loan of EUR 850 million.

Over the last three days, the press has been claiming that the raise of VAT and taxes was a given, probably because they are under the mistaken impression that the process of evaluating Romania"s economic results in the last quarter is actually a "negotiation".

In fact, yesterday, the two parties had not yet reached a consensus on the size of the budget deficit. The Romanian authorities propose a worst-case figure 4 billion lei lower than the one requested by the IMF.

A good enough reason for the IMF mission to extend its stay here by another two days (as announced yesterday).

At the time, any hike of taxes and/or of the income tax was pure media speculation.

After they agreed on the deviation from the criteria negotiated in the loan agreement, the two parties will begin to assess the available solutions, taking into account the need to protect the business environment, meaning the hiking of the profit tax would be the option of last resort.

The first solution, is the option of taking out a new foreign loan, and yesterday"s news, announced that the International Monetary Fund, would approve the increase of the allowed budget deficit goal, which opens up the door for such a solution, for the moment.

The second solution being considered, would be a reduction in public spending, and it was announced in the news yesterday that both parties agreed on the layoffs in the public sector, but the number of layoffs was not announced.

And at last, increasing state budget receipts is the last option on the list, but this is also dominated by the protection of the business environment: 1) the first alternative considered is raising property taxes, given the fact that this would be the least harmful solution for businesses (rumors were going about that this was the preferred option); 2) the second option was taxing consumption, but yesterday"s news announced that the alternative of raising VAT had been ruled out by the IMF and the government alike (even though the press said it was "imminent") - it was rumored that the governor of the NBR had opposed hiking VAT because this measure would have caused the NBR to miss the inflation target, especially as it had already been revised upwards compared to the initial prognosis; 3) finally, the last option (in every meaning of the word) was to raise the earnings tax, and the news were presenting it as a done deal, but no one could provide a certain figure, everyone was just guessing that the rate could be hiked to 19 to 21% (finance minister Sebastian Vlădescu said that the discussions with the IMF were similar to "fine tuning" - just like on a radio).

When one reviews yesterday"s news, their tone seems to have strayed from the panic that seemed to permeate the media, just one day before. Judging by the rumors, it would seem the Romanian authorities have agreed with the IMF officials on a set of measures selected from all the three categories of methods available.

After the initial fright, the need for a new loan from the IMF, the need for public sector layoffs, the fact that property taxes would increase, as would the taxation of the mostly inexistent corporate profits, doesn"t seem like such a big deal (even though it actually would be).

In the end, Traian Băsescu announced some drastic measures, but nothing as bad as what the press had announced.

That is why I claim, just as I did in yesterday"s paper, that the hysteria of the mass-media was caused by someone who wanted to manipulate public opinion (odds are it was the president himself, even though, after his intervention yesterday, the scenario seems a bit too much), a manipulation that fooled not just TV stations, but also print publications which take pride in the their financial focus, which began depicting apocalyptic scenarios, sprawling them over the frontpage and on many interior pages.

Take it easy with the piano while going down the stairs ...