Washington, 7 October 1998 (RFE/RL) -- The executive directors of the International Monetary Fund (IMF) have warned Romania that its underlying mix of fiscal (budget) and monetary policies is "unsustainable."
The directors say the current global financial turmoil has limited the government's options for dealing with the situation, but that it is critical to get the state budget under control. They said Bucharest must start closing or privatizing large unprofitable state enterprises that are draining the budget, as well as improve tax collections.
The 24 executive directors, who represent all 182-member nations in making the day-to-day decisions of the fund, conducted their annual review with Romania on September 15. The IMF report on the review was released yesterday.
The directors said that Bucharest's hopes for increased revenues this year from higher privatization proceeds and better tax collections have proved wrong. They said that despite reducing budget appropriations by a further two percent of gross domestic product (GDP) this summer, it is now a matter of urgency to further tighten the budget to relieve the strain on the country's monetary policy.
The directors praised the Romanian Central Bank's liberalization of the foreign exchange market, its adoption of market-based instruments, and its focus on controlling inflation.
But because of the country's fiscal problems, and the fact that Romania's structural reforms have not moved ahead in the past year, they said it is essential to tackle the budget's growing deficit.
The problem, said the directors, is that the restructuring, closing or privatizing of loss-making state enterprises is "well behind schedule," putting enormous strains on the budget as it pays for their losses, while reducing the availability of credit to the non-government sector.
Making matters worse, said the directors, is that policies for the enforcement of financial discipline have not been effective and the failure of state firms to pay their bills, especially those for taxes and utilities, is facing Romania with a mounting problem of enterprise arrears.
The directors said they are encouraged by the new government's apparent recognition that reforms must be put back on track, but said the deep-seated nature of the country's problems means Bucharest will have to act boldly if it hopes to avert financial disaster.
The IMF directors said they are particularly concerned about Romania's failure to come to grips with the problems of its ailing state banks, saying a plan for restructuring the banking sector is urgently needed.
The directors said tax revenues must be significantly increased immediately, noting that there is still "considerable scope" for improving collections. They said, however, that this may not be enough without increasing tax rates. Still, the directors again urged the government not to introduce a temporary import surcharge, saying it would be counter-productive.
What the government needs to do, they said, is to end the policy of ad hoc expenditure cuts -- which tend to hurt the most vital programs first, but leave a number of costly outlays, such as planned increased military spending, in place.
The directors reiterated that for Romania to go ahead with the stand-by loan it is asking for this autumn, it must achieve adequate fiscal consolidation and some basic structural reforms first.
The fund has agreed to send a delegation to Romania later this month to resume discussions on a stand-by loan arrangement. Romania's last stand-by was canceled last year after Bucharest failed to meet the agreed economic reform targets.