An overview of Romania's relations with its international lenders.
Bucharest hosted a new round of talks between the IMF, the EC and WB with the Romanian authorities between May 19 and 26. The international mission came after two failed attempts to officially finalize the official evaluation of a precautionary loan agreement in effect at this point, and after another visit by experts last year and several meetings between Romanian government representatives with the IMF held in Washington. Romania has fared better in the last few years in macroeconomic terms, but still had problems in terms of the pace of structural reforms and the financing of measures for reducing the VAT, stipulated by the newly adopted Fiscal Code. This includes the decision to shave five points off the employer contribution to social insurance, a measure passed by the government in the last quarter of last year. IMF representatives agreed in principle to reducing the tax burden exacted on labor, although the main beneficiaries should be the most vulnerable categories.
Other problematic aspects in the negotiations were the timeline for liberalizing the natural gas market for household consumers and the fate of the energy complexes Oltenia and Hunedoara. The main concern for Romania’s international lenders seems to be the sustainability of measures to cut taxes imposed by the new Fiscal Code, and the way in which this could affect budget deficit targets. The new fiscal code also slashed VAT for foodstuffs from 24 to 9%. The new law also provides for the VAT to drop from 24 to 20% in 2016, going as low as 18% by 1 January 2018. Also in 2018, employer contributions to social insurance will also be dropped from 15.8% to 13.5%, and employee contributions from 10.5 to 7.5%. Another reduction will come in the form of a drop in fuel excise worth between 16 and 20%, while excises from some products will be dropped altogether. The flat tax rate is set to drop from 16 to 14% on 1 January 2019. Journalist Daniel Apostol told us about the IMF talks:
“Of course, the most widely discussed issue in the public sphere right now is taxation, whether or not we can afford a more relaxed taxation, a pleasant expression meaning a less burdensome taxation. This is the government’s promise to us all, and what we all wish for. It is no hypocrisy to say that we want easier-to-pay and smaller taxes. At the same time, there is the issue of how low we can drive taxes so as to still have a state to speak of. How low can we afford to have taxes? I am confident that we can afford a more relaxed taxation, and that confidence is grounded on the fact that lower taxes would be like an oxygen mask: a boost, the air needed to function in good health. Lower taxation allows companies to allocate money in other ways than pushing it into the state’s pockets, to allocate it where it is needed by us all, to jobs, to lower prices, and by consequence, to an economic life less burdened by taxes, which should be beneficial to everyone.”
Professor Dan Armeanu with the state Academy for Economic Studies in Bucharest told us:
“IMF experts have always worked on a philosophy that any tax cut should be accompanied by a compensatory measure. That may have a certain kind of logic, but as far as I am concerned, Romania is in a situation in which a tax cut can be compensated within six to eight months from the economic effect, for the most part. In addition, I believe that the fight against tax evasion on the part of the government has started to yield effects, and if it continues at the same pace and revenues grow as they did in the first quarter, I believe this program of tax relaxation could become sustainable. The most important measure, for instance, for next year, is the cut in the VAT from 24 to 20%. Here there are a lot of arguments, starting from the fact that the present rate is huge, one of the highest in the EU. There is no point in maintaining such a high rate, as long as you only collect half. You can make cuts and collect more, with a good effect on the state budget.”
National Bank Governor Mugur Isarescu said that the most important role played by the IMF in relation to Romania is in terms of economic policy coherence:
“The ratio of monetary policy and fiscal policy instruments is more important than any other monetary policy measure. If I were to give a verdict after so many years of collaboration with the IMF, it would be as follows: the mixture of policies had a certain consistency, although communication has sometimes been problematic. We have a problem of late feudalism, if I were to put it that way, and go from place to place, from one institution to another, and see no consistency. The worst delays are in structural reforms. There is no point in using fiscal or monetary leverage from a certain point on, it is like taking a drug in excess, in the idea that you compensate by taking another. If the dosage is not proper, you will get intoxicated no matter what, or even worse.”
The next IMF delegation is expected in Romania in the second half of this month, as the country prepares to end this loan program by September.