When the US secretary of state Madeleine Albright announced Monday the extension of the stand-by loan agreement, it was a premiere in IMF relations with Romania, a foreword to the continuation of a loan accord and to its complete disbursement.
In money terms, the event is of minor interest to Romania, but what an IMF agreement accomplishes is far more important - in time, the country will win back the confidence of rating agencies and investors, gain access to funding from other international institutions, and regain a foothold on the international capital market.
During his US tour, Prime Minister Mugur Isarescu will meet in Washington with officials of the administration, the IMF and the World Bank, and with representatives of the business community and rating agencies. The Prime Minister has taken a pledge to continue reform, which includes unpopular steps, although they would erode the coalition's electoral capital. As Isarescu said, Romania should not fall back to a "bad situation" after the elections. "I don't think there is any room for waiting," the Premier said, referring to instances before 1996 when stable prices concealed subsidies.
The last say will be to the IMF board of directors on May 31, but an unpleasant surprise for Romania is very unlikely, because once on the board's agenda, an accord is virtually certain to pass.
For Romania, striking a stand-by accord with the International Monetary Fund has always been a necessary evil.
An IMF accord requires the country to keep certain indicators, such as inflation and budget deficit, within given margins. These constraints lead to a viable and durable market economy. Romania's biggest problem is that no political power has had the courage to abide by those commitments and thus slice an open wound. No one ever said IMF provisions were not contrary to the country's interest. Political power seemed engaged in an endless election campaign and would not take any unpopular steps.
In 1993, negotiations over a loan failed when the Romanian side turned down IMF requirements to establish genuinely positive interest rates, liberalise the currency market, scale down the budget deficit, eliminate inflation-inducing subsidies and cut arrears.
Only in 1994 the Romanian government signed a $612 million loan accord for a 12-month term. In early 1995, the IMF concluded that Romania had failed to meet the requirements of the accord.
A new loan, worth $382 million, over 16 months, was nevertheless agreed upon in December 1995, but it also failed through.
The 1996 elections and the change of government brought the winners an immense credit of sympathy.
On April 23, 1997, the IMF adopted a new 13-month stand-by loan accord, worth $414 million, to back the government's economic programme.
When Victor Ciorbea took over as Prime Minister, he came forth with one of the most radical programmes of economic reform.
The Ciorbea government liberalised the exchange rate and most of the state-controlled prices, projected an IMF-recommended budget deficit of 4.5% of GDP, and sold a few companies into foreign hands.
But numerous privatisation deadlines were breached. The State Ownership Fund sold only about 15% of its portfolio, and among the major regies, only RomTelecom became a joint-stock company, as a step toward privatisation. Promises to privatise two banks came down to nothing. Reform in the state agricultural sector was put off by discord in the coalition over the return of nationalised land. Parliament passed a law on foreign investments in July, but application norms for it did not come out until December, leaving many investors confused. Under these circumstances, foreign capital inflow remained inadequate - $3.4 billion between 1990 through November 1997, compared to $17 billion in Hungary.
Tension in the coalition has questioned the very future of the Government.
Foreign investors were awaiting word from the IMF on the release of the $86 million in the next instalment. The IMF called off sine die a visit of its negotiating team, who was about to arrive in Bucharest and discuss the loan.
In 1997, Romania suffered a drastic decline in industrial output. In the last quarter of 1997, inflation could have been milder had the NBR refrained from printing more money, and had the Government begun restructuring the mining sector a few months earlier, so that the shock-waves of restructuring, and the severance pay associated with it would propagate into the low-inflation summer months, and not through the autumn period.
When IMF negotiators left Bucharest without signing anything, most analysts took it as a blow to Prime Minister Victor Ciorbea. The Romanian Government had agreed with the IMF on the need to curb budget deficit in 1998 to 3.6% of GDP.
In December 1996, when the Ciorbea government and the IMF agreed on signing a new Memorandum, few could have imagined that relations would degrade so badly in less than a year and a half. The Government enjoyed credibility before the IMF after the chief negotiator, Poul Thomsen, in the spring of 1996 threw a wave of criticism at the Vacaroiu cabinet.
Radu Vasile replaced Victor Ciorbea as Prime Minister in April 1998.
Poul Thomsen's first visit after the change of government ended without a new financing accord; negotiations were postponed. As the IMF official said, whatever would happen to the IMF financing was not up to him, but to the Romanian government and to the way it enforces the ruling programme.
Radu Vasile was thus forced to rule with a programme set up by his predecessor. The IMF was displeased at the slow pace of economic reform, and the phrase often mentioned during the talks was "accelerated reform."
During the IMF visit, Vasile admitted he was "not an IMF fan," but that every attention had to be paid to relations with this institution.
Romania needed a new IMF loan accord to change investors' perception and persuade the foreign market that the country was on the right path with privatisation and restructuring.
The IMF was expecting authorities to take the steps they had promised. But the economy was in a crisis, and the populace, less willing to accept another "reform" whilst all other had had no impact on the standard of living or at least on the prospect of improvement.
What the government had to do in structural reforms has not changed at all since the last years. Among these steps are the closure of enterprises that devour significant funds and still make a loss, while consuming the resources that should go to profitable companies; restructuring in companies the state decides to support; and privatisation regardless of price.
In spite of crawling reforms, the IMF awarded on August 5, 1999 another loan accord, worth $547 million, over 8 months.
And in the spirit of tradition, Prime Minister Radu Vasile was replaced at the request of his own party. He left the Victoria Palace with a lot of noise, which stalled Government activity for a while.
The new Prime Minister, Mugur Isarescu, knows very well, if not better than anyone, where Romania stands with the IMF, since he came from an institution involved in the talks, the National Bank of Romania.
From the very beginning, the cabinet led by Mugur Isarescu set forth ambitious goals, which seemed impossible to some observers - lower inflation, lower budget deficit, and economic growth.
In the same period, the IMF abandoned, at Romania's request, the concept of burden sharing - where foreign debt would partly be financed by the private sector. An accord with the IMF would also release funding from the World Bank and the European Union.
Within the extended stand-by accord, Romania could receive from the IMF around SDR 400 million ($547 million), in three equal instalments, in August and September 2000 and February 2001. The first $73 million instalment of the stand-by accord came in August 1999.
While the budget was passed in the form agreed by the IMF, trade unions have threatened with ample manifestations against the economic measures the Government is preparing in order to meet loan extension requirements posed by the IMF.
Among the targets are consolidation of last year's significant improvement in the foreign position, halving inflation, incentives to exporters - which are already showing - and the foundation for a sustained growth of the living standard.
The programme includes largely unchanged fiscal and monetary policies, ends salary raises in the state sector, and attempts to reduce domestic arrears toward the budget and public utilities. A strict implementation of policies on salaries and arrears will be essential in meeting the inflation goal. In the structural sector, the programme focuses on the privatisation of two major banks and on faster privatisation of companies, in cooperation with the World Bank. Mediafax
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