Romania: IMF remedy starts to pay off
2012-06-26 16:04:09
While eurozone policy makers thrash out the growth vs austerity debate, the evidence from Romania seems to be that the traditional medicine works. The IMF has given Romania a qualified thumbs up on it’s economic reforms and recovery.
However, the Fund may have praised Romania’s progress, but it still warned of substantial downside risks and that reform still has a long way to go. The new government, installed after its predecessor collapsed towards the end of its term in April, needs to juggle international commitments with the political pressures of an election expected before the end of the year: a tricky balancing act.
The IMF completed the fifth review of its current stand-by arrangement for Romania on June 22, deciding that Romania had adhered closely enough to the deal’s terms to merit the release of a further €519.4m of emergency funding. Romania now has €2.67bn available for disbursement, though the government has said that it does not intend to use the cash, considering it a precautionary fund. The arrangement was approved in March last year, replacing a €12.94bn deal that had run from May 2009, when the IMF intervened to counter Romania’s fiscal crisis.
The Romanian economy hit the buffers in the wake of the global financial crisis, following several years of strong growth in the last decade. Successive governments had adopted pro-cyclical loose fiscal policy during the boom years, leading to a serious crunch once the crisis hit. Under the aegis of the IMF, Romania has adopted austerity measures including job losses and a 25 per cent in wages in the public sector, as well as an increase in VAT. These have proved deeply unpopular, and helped fuel street protests earlier this year that eventually led to the fall of the government in April. It was replaced by a socialist-liberal coalition led by new Prime Minister Victor Ponta.
Despite the difficult political situation, the IMF noted that “Romania’s economic performance under the programme remains strong,” adding that “GDP growth is projected to pick up in the second half of the year, inflation remains in check, and the fiscal and external positions continue to improve.”