IMF Urges Romania To Oppose VAT Cut For Food, Earlier Pension Hikes

"The mission urges the authorities to strongly oppose these and other initiatives that would put at risk the fiscal targets for 2008 and undermine macroeconomic stability,” the IMF said in its concluding statement after the Fund’s mission to Bucharest in April.

IMF experts said a cut in the VAT rate for food items to 5% from 19%, a move the Romanian Senate has already approved, could lead to a full-year fiscal cost of the proposal to up to o.5% of the gross domestic product (GDP), depending on implementation details.

Also, the proposal to bring forward the already approved pension increase from January 2009 to an earlier date, could lead to full-year fiscal costs amounting to about 1.5% of GDP.

Reflecting fragmented politics and a series of key elections approaching, fiscal policy making seems to have shifted to a particularly short-term mode, the IMF said.

Against this backdrop, the fund proposes that authorities in Bucharest should consider upgrading fiscal expertise and capacity at the executive and legislative levels, modifying rules and procedures to change the present short-term policy orientation and setting up an independent fiscal agency.

Upgrading fiscal expertise would include adding resources that strengthen budget formulation, transparency, analysis, audit, accounting, and shifting to performance-based budgeting.

The scope for multiple budget rectifications should be reduced, the IMF said, and the modalities of emergency ordinances should be reconsidered. Also, and all revenue and spending items included in the approved budget should be supported by already approved legislation.

The Fund added that, in the short term, the establishment of an independent expert panel to provide macroeconomic and revenue forecasts should be considered to help insulate the budget process from politically motivated biases.

Over time, consideration could be given to expanding the role of such an agency to also provide assessments of specific budgetary proposals, the concluding statement added.