IMF raised the inflation target for Romania after authorities increased the VAT

The IMF managing Council approved the rectification of the inflation rate for 2010 set by the stand-by agreement with Romania, namely from 3.5% to 7.9%, after Romanian authorities raised the VAT from 19 to 24%, IMF chief of mission to Romania Jeffrey Franks told Romanian news agency Mediafax.

According to Franks, the decision was taken during the meeting on Friday. The target was raised by 4-4.5%, so the fluctuation will reach 7.9%. Franks said the IMF expected the VAT increase impact to have a single impact on prices, which is to gradually disappear during the course of next year, leaving no persistent inflation pressures.

The Romanian Central Bank (BNR) maintained the monetary policy interest rate to 6.25% on Wednesday following the Government’s announcement of the austerity measure to raise the VAT from 19% to 24%. BNR said it would interfere to limit the effects of the second impact. BNR’s inflation target for 2010 is 3.5%, plus/minus 1%.

The IMF will not change Romania’s GDP evolution forecast significantly for this year, Jeffrey Franks said. Currently, the Fund foresees a 0.5% drop. The Fund’s experts are going to analyse the latest data on Romania’s economy and alter, if necessary, the forecast during the next evaluation mission to take place end of July.

Franks said an economic increase is still in the next year’s cards and that the Fund’s experts were expecting a quarterly increase by the end of this year. He believes it would have been for the better if Romania had had room for fiscal stimuli at the beginning of the crisis. But by the time the economic crisis reached Romania, the state already had a big budget deficit.

Franks noted that the IMF board were impressed by the speed at which the Romanian Government found an alternative after the Constitutional Court ruled out the cut in pensions was unconstitutional. Asked whether a cut in pensions would have been more adequate, Franks gave a negative answer, saying that the Fund proposed an increase in taxes during the last visit.

The IMF is waiting for a clear sign from the Romanian Government to start discussions on a new agreement, which could start within the coming months. Should both parties reach a consensus, this will be a precautionary or stand-by.

The IMF rep said there will definitely be another set of structural reforms that Romania would need to fulfil. The reforms would target the infrastructure, state companies and the labour market. Certain additional reforms addressing an improvement of inventions in the public sector and the functioning of the labour market are also to be considered.

In order to support long term growth, Romania needs a better infrastructure, more efficient state companies from the operational perspective, like rails transport and electricity, but also a more efficient of the goods and labour market. Franks said President Basescu expressed his interest in a new agreement with the IMF once the current agreement concluded, next year in spring.

The IMF board will release the fifth instalment of the stand-by agreement with Romania, worth of 913 million Euros. The money will most likely go to the Central Bank.