IMF loan goes towards paying public sector wages

The IMF approved the second tranche of the loan given out to Romania (of 1.85 billion Euros), following its first evaluation of the country as spart of the foreign loan agreement. Half of the money will go to the forex reserves of the NBR, with the remaining amount to be directed towards covering the public budget deficit (expected to reach 7.3% of the GNP this year).

Directing the IMF money towards the public budget is a first, says economist Laurian Lungu, managing partner at Macroanalitica.

"The IMF is also concerned by the social factor", said Mr. Lungu, who added: "A rise of the budget deficit would have affected Romania"s macroeconomic and financial stability".

Marko Mrsnik, analyst with Standard&Poor"s, expects that directing the money from the IMF towards covering the budget deficit could cover the temporary interruptions in cash inflows and would help avoid an abrupt cut in expenditures, subject to the current economic conditions remaining steady in the medium term.

"As the IMF was more flexible than on other occasions in providing financing, and a new target deficit was approved, the funding of the budget by the IMF is not surprising", Mr. Mrsnik said for "Bursa".

The Standard&Poor"s analyst thinks that Romania"s sovereign rating could be reaffirmed at the current level, if the government continues with the implementation of the anti-crisis measures, private sector access to foreign lending improves, and the pressure on the banking systems eases up.

Mr. Mrsnik said: "We are continuously monitoring the situation. The current negative outlook reflects the additional sovereign risk, in case the banking sector issues affect the financial sector or the government does not continue the fiscal and economic consolidation, thus worsening the situation of public finances".

Andrew Colquhoun, Manager of Sovereign and Public Finance as part of "Fitch Ratings", considers that Romania"s rating depends largely on the successful implementation of the entire program agreed upon with the IMF.

• The exchange rate will remain steady

Economic analysts estimate that using half of the second tranche of the IMF loan to plug the budget deficit will most likely not affect the exchange rate negatively.

"It all depends on how this change is perceived by investors", Mr. Lungu said. "If they see it as temporary, the exchange rate should remain unaffected, as the NBR has sufficient reserves for covering budget expenditures".

However, Marko Mrsnik feels that pressure on the exchange rate could alleviate. According to him, the temporary interruptions in financing streams could only be avoided if the conditions of the agreement with the European Union and the IMF will be met.

• The third tranche, after the elections

Mr. Lungu says that the release of the third tranche (1.5 billion Euros), scheduled for December, will depend on what happens in the elections: "The release of the third tranche is subject to the meeting of several deadlines, many of which are tied to the enactment of unpopular measures, which the politicians may not be willing to take."

In spite of the occasional slips, caused by the presidential elections, Mr. Mrsnik considers that the support of the international financial institutions will be maintained, provided the government continues to improve the fiscal system.