Sharp economic downturn calls for a recalibration of policies
Romania’s economic activity has deteriorated sharply since the approval of the stand-by arrangement in May, said John Lipsky (photo) first deputy managing director of IMF. He stressed that the deeper than expected economic downturn called for a recalibration of policies so as to strike an appropriate balance between the short-term response and to the crisis and the medium-term policy objectives.
“The revised program focuses on measures that would secure permanent reductions in current spending, while preserving capital and social safety net spending. However, the reductions contemplated will require additional reforms to strengthen controls over areas that pose the largest fiscal risk—including expenditure commitments, pension reform, contingent liabilities, and public entities outside the central government—are crucial”, said John Lipsky.
Initially IMF had estimated a 4.1% decline of GDP in 2009. In August, IMF representatives have revised forecasts upward, to 8% to 8.5% of GDP this year saying Romania has slid into a severe recession.
The projection of a sharper economic contraction has led to a modification of budget gap target to 7.3% from 4.6% of GDP for end-2009.
First deputy managing director added “improved stability in financial markets and declining inflation may provide some room for further easing, but a cautious approach is warranted given the still high inflation rates and remaining vulnerabilities to external pressures”.
Inflation targeting regime and flexible exchange rate policy have helped cushion the impact of the crisis while providing an appropriate anchor for monetary policy.
However, Lipsky warned that “financial policies should remain appropriate to tackle the challenges posed by the crisis, and continued vigilance will be needed to respond to any signs of stress in the banking system, particularly the deterioration in asset quality to be expected as a result of the continued weak economy”.
Loans 90 days or more past due increased share in total banking system lending to 1.03% in June this year, versus 0.3% a year earlier, according to the monthly bulletin published by the National Bank of Romania.
“The revised program focuses on measures that would secure permanent reductions in current spending, while preserving capital and social safety net spending. However, the reductions contemplated will require additional reforms to strengthen controls over areas that pose the largest fiscal risk—including expenditure commitments, pension reform, contingent liabilities, and public entities outside the central government—are crucial”, said John Lipsky.
Initially IMF had estimated a 4.1% decline of GDP in 2009. In August, IMF representatives have revised forecasts upward, to 8% to 8.5% of GDP this year saying Romania has slid into a severe recession.
The projection of a sharper economic contraction has led to a modification of budget gap target to 7.3% from 4.6% of GDP for end-2009.
First deputy managing director added “improved stability in financial markets and declining inflation may provide some room for further easing, but a cautious approach is warranted given the still high inflation rates and remaining vulnerabilities to external pressures”.
Inflation targeting regime and flexible exchange rate policy have helped cushion the impact of the crisis while providing an appropriate anchor for monetary policy.
However, Lipsky warned that “financial policies should remain appropriate to tackle the challenges posed by the crisis, and continued vigilance will be needed to respond to any signs of stress in the banking system, particularly the deterioration in asset quality to be expected as a result of the continued weak economy”.
Loans 90 days or more past due increased share in total banking system lending to 1.03% in June this year, versus 0.3% a year earlier, according to the monthly bulletin published by the National Bank of Romania.