Post by Bozur on Feb 17, 2005 14:10:05 GMT -5
Romania’s surging C/A deficit makes it less likely to resist IMF call to ease tax cuts
By Antonia Oprita - Reuters
BUCHAREST - Romania’s current account balance of payments deficit is estimated to have risen to the equivalent of 8.2 percent of gross domestic product last year from 6.5 percent the year before, a source close to talks with the IMF told Reuters yesterday.
The estimate gives more leverage to the International Monetary Fund’s demands that Romania lower its budget deficit to help fight inflationary pressures.
“Last year’s current account deficit, computed according to a new IMF method, was around 8.2 percent,” the source said. “According to the old method, it would have been higher anyway; it would have been 6.9-7 percent.”
Romania’s new centrist government is locked in negotiations with the IMF, which is worried that recent sweeping tax cuts could fuel inflation and widen an already ballooning current account deficit.
The source said that under the new computing method, the profits of foreign companies were considered hard currency outflows although much of the money remained in the country.
A visiting IMF team is in talks with the government which is seeking to push the budget deficit below last year’s 1.2 percent of GDP as part of efforts to win the fund’s approval for its plans.
Romania introduced a flat 16 percent tax on profit and income this year to replace a 25 percent corporate tax and an 18-40 percent income scale in the hope of attracting more foreign investment before joining the European Union in 2007.
“No conclusion has yet been reached regarding the budget deficit,” the source said, adding that a decision was expected by Feb. 8, when the IMF experts end their visit.
The government wants to persuade the IMF that it can cut the quasi-fiscal deficit — state companies’ debts and losses — estimated at 2.4 percent of GDP, rather than reduce spending and raise excise duties to tighten the budget gap.
IMF gets more leverage
Analysts said the new current account gap figure might give more strength to the IMF’s demands for strict fiscal discipline and added that the talks may not reach a conclusion next Tuesday.
“The IMF is likely to be more severe on the issue of cutting the budget deficit,” said ABN Amro senior analyst Radu Craciun. “We have to see if a compromise can be reached by the end of the IMF mission, but I’m skeptical.”
They said discussions seemed even tougher since the IMF, which would have preferred that Romania postpone opening up leu deposits to foreigners, might get the cold shoulder given that delaying the move could risk Romania’s EU entry target.
“I don’t think it will be postponed, or if it is, it will be just by two to three months,” said financial analyst Florian Libocor.
Officials have said the talks with the IMF included the possibility of a delay in giving access to foreigners to leu deposits, planned for April, to give the central bank more scope to fight inflationary pressures, but that the EU’s approval was needed.
Romania plans to cut inflation to 7 percent this year from 9.3 percent in 2004 and 14.1 percent in 2003.
“The recent fall in interest rates for one-month deposits suggests that the central bank wants to go ahead and implement the next step in the capital account liberalization,” Libocor said.
The rate fell to 12 percent yesterday from 13.08 percent on Thursday.
www.ekathimerini.com/4dcgi/news/content.asp?aid=52638