IMF increases Romania's inflation target by 4.5 percentage points, talks about new loan

The new inflation target for Romania this year is of 7.9 percent, from a previous target of 3.5 percent before the VAT increase, according to the International Monetary Fund, which has recently approved a new loan installment for Romania. The IMF expects the high inflation to fade out during next year. Romania has recently increased the VAT from 19 to 24 percent, driving it among the highest VAT levels in the Europe Union. The measure is meant to increase the budget revenues and decrease the budget deficit. Romania initially wanted to cut pensions by 15 percent, but the Constitutional Court ruled the measure as non-constitutional. The Romanian Central Bank's (BNR) inflation target for this year is of 3.5 percent, plus/minus one percentage point. If the Romanian government sends a clear signal about the need of a new agreement with the IMF, discussions could start in the following months, according to Jeffrey Franks, head of the IMF mission to Romania. If an agreement will be reached, the loan could be a stand-by or precautionary one. If a new loan will be required, there will be a new set of measures and structural reforms Romania would have to comply with, in the area of infrastructure, state companies or the labor market. This is not the first time when the idea of a new agreement with the IMF emerges publicly. Romanian president Traian Basescu himself has talked about a new possible agreement, once the existing one will be over, next spring. The International Monetary Fund board has approved the fifth loan installment for Romania on Friday and the EUR 900 million should reach the Romanian Central Bank (BNR) most likely on Monday, July 5, or Tuesday the latest, according to Mediafax newswire. “The board has unanimously voted for the approval of the fifth loan installment for Romania. It is a strong confidence signal, supporting the reforms in Romania and trust in how things are going. The board has also approved Romania’s request for an arrears waiver,” said Mihai Tanasescu, Romania’s representative with the IMF. The money will this time go to the BNR to cover the balance of payments deficit, which is where the IMF funds usually go. Previous installments have also been used to cover the state budget deficit. Romania has signed an external financing agreement with the IMF, the European union and other international financial institutions, totaling EUR 20 billion. So far, out of the EUR 13 billion from the IMF, Romania has received EUR 9.2 billion. Of this amount, EUR 2.2 billion was used to cover the budget deficit, and the rest went to the Romanian Central Bank. An IMF mission will be in Romania on July 20 to evaluate the country’s economic evolution for the first half of the year and to analyze the newer prognosis for this year and the following years.