1. This statement provides information on recent developments since the issuance of the staff report. The new information does not change the thrust of the staff appraisal and reinforces the staff’s concerns about the current policy mix which places a heavy burden on monetary policy to achieve the authorities’ macroeconomic objectives.
2. As indicated in the statement by Messrs. Kremers and Croitoru, the authorities confirmed during discussions with staff on the occasion of the Spring Meetings their intention not to resume discussions for the completion of reviews under the SBA prior to its expiration in July 2006.
3. On account of mounting expenditure pressures, on April 19 the government approved a revised 2006 budget, increasing the deficit from 0.5 to 0.9 percent of GDP. It is the staff’s understanding that the approved budget includes additional allocations equivalent to 1 percent of GDP for infrastructure, teachers’ wages, social benefits, flood repairs, and other expenditure. This additional expenditure will be partially financed by higher-than-originally-budgeted revenue (estimated by the authorities at 0.6 percent of GDP) associated mainly with strong indirect tax collections due to the continued consumption boom, but also initially-conservative revenue projections. The government also approved (already-budgeted) hikes in excises effective July 1, 2006 in line with Romania’s commitments to the EU; and additional excises on tobacco and alcohol, effective immediately. The increase in the budget deficit confirms the staff’s view (¶20 of the staff report) that the underlying budget deficit for 2006 is about 1 percent of GDP.
4. The Senate recently approved legislation (opposed by the government) that could increase the general government deficit relative to that in the revised budget. In early April, the Senate approved a cut in the VAT rate on food to 9 percent (from the current 19 percent), with an estimated revenue loss of ¾ percent of GDP. If approved by the House, this will lead to a weakening of government revenue and a higher budget deficit. The government has indicated that it will not support such legislation and the authorities have informed staff that, in the event that it passes, offsetting revenue-raising measures will be adopted.
5. The envisaged fiscal loosening will accentuate external imbalances. Recent data releases confirm that macroeconomic imbalances are widening: the consumption boom continues, and strong import growth outpaces export growth, thus pointing to a widening current account deficit. The narrowing of the current account deficit projected in the staff report (incorporating a change in the policy mix as recommended by Fund staff) was driven by an improvement in the savings-investment balance of the government, thus allowing for a substantial increase in private sector investment. Staff now projects a widening in the current account deficit to about 9 percent of GDP in part on account of the envisaged fiscal loosening. This policy will increase the burden on monetary policy.
6. The monetary authorities have affirmed their readiness to tighten policy further depending on the evolution of inflationary pressures. Following the increase in the policy interest rate in February, the authorities have stepped up open-market operations and have brought the effective sterilization rate in line with the policy rate—this stance has been maintained through April. The envisaged fiscal loosening and the inflationary consequences of higher excise rates on tobacco and alcohol have however created a more challenging environment for the National Bank.