Bogdan Dragoi, secretary state for finance, Romania

Bogdan Dragoi, secretary state for finance, Romania

Hit hard during the financial crisis, the Romanian government was the first in the EU to successfully complete an International Monetary Fund loan programme, without even needing to draw the whole loan. Secretary of state for finance Bogdan Dragoi explains his government’s strategy to Philip Alexander.

When the government of prime minister Emil Boc took power after elections in Romania in November 2008, ministers discovered that pre-election expenditure overruns had left them with the country’s largest budget deficit since the end of the Soviet era, at 4.8% of gross domestic product (GDP). Worse still, the government would need to fund this deficit in the context of a global liquidity squeeze following the collapse of Lehman Brothers, which caused the country's economy to fall by 7.1% in 2009.

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“In 2009, we had a budget deficit of 7.4%, even with the measures that we took. Without those measures, we calculated that the deficit would have reached 10% in 2009 and 12% by 2011,” says Bogdan Dragoi, the secretary of state in the Romanian finance ministry.

Emergency funding

In a scenario of such uncertainty, the new government began negotiations with the EU and the International Monetary Fund (IMF) for an emergency funding package, not least to restore the sovereign’s credibility in the market. Mr Dragoi says the two supranationals were very flexible in those negotiations.

“They essentially said this is where you need to get to, but how you get there is up to you,” he says.

The adjustment is well under way, but at great political cost. Mr Boc has had to pursue fiscal austerity while rebuilding a fractious coalition several times. Consequently, the current finance minister Gheorghe Ialomiteanu is the third incumbent since the November 2008 elections. The US-educated Mr Dragoi – a business analyst in the telecoms sector before he went into politics in 2006 – has worked with all three finance ministers, providing the policy-making continuity for the €12.9bn IMF programme that was signed in May 2009.

In March 2011, Romania became the first of the EU countries that required IMF emergency assistance during the crisis to complete its stand-by arrangement, with the final tranche of funds remaining undrawn. The government then signed a precautionary stand-by agreement for €3.5bn, with the stated intention not to draw down any of the funds.

“The IMF money is there only for unforeseen external events, not internal. If something very bad happens on global financial markets that means there is a lack of access to liquidity for Romania, it is there as a last resort safety net,” says Mr Dragoi.

Fiscal rehabilitation

In June 2011, Romania confirmed its fiscal rehabilitation with a five-year Eurobond issue for €1.5bn. This was twice oversubscribed and priced inside Romania’s existing yield curve, at a spread of 255 basis points over euro mid-swaps, despite the growing market fears over Greece.

A further issue is planned for September, market conditions permitting. To stabilise the budget and win back investor confidence, the government has pursued a programme of spending cuts and structural reforms that are not for the faint-hearted.

“The biggest problems we inherited were on structural expenditures, with public sector wages and pensions almost doubled. So the decision was not to touch the revenue side, but to focus only on expenditures,” says Mr Dragoi.

The public wage bill was to be cut from 9.4% of GDP to 7% by 2015. It has already fallen to 7.4%. Meanwhile, the government worked with the World Bank to devise a sustainable pension system that would be in balance by 2030. And since much of the current expenditure increase occurred in local governments, a new law was passed to control local administration finances. Finally, a fiscal responsibility law created multi-annual budgets intended to show allocations across the lifetime of each capital expenditure project, to reduce cost overruns.

New focus

A supreme court decision prevented the planned 15% reduction in pensions and the government substituted a rise in VAT to meet its fiscal deficit target. Mr Dragoi says he still regrets having to deviate from the planned strategy, but it was worthwhile to bring the deficit back to a forecast 4.4% of GDP in 2011. Under the new IMF precautionary agreement, the focus switches from structural macroeconomic reform to microeconomic improvements.

“The new plan focuses on cutting local administration arrears, on the health sector, on social assistance, and on the transport and energy sectors, where we have the largest number of state-owned enterprises. The measures we have to implement range from shutting companies down to privatising them or recapitalising them. We have a range of instruments to make these companies run better, which will bring more dividends to the government and stimulate the private economy as well,” says Mr Dragoi.

There is another significant challenge: the next parliamentary election looms in November 2012. Mr Dragoi is adamant that, under the twin threats of an EU Excessive Deficit Procedure and a loss of market confidence if fiscal discipline slips, there will be no repeat of the 2008 budget overruns. And the new local administration law prevents local governments borrowing further if they are already in arrears.

“I do not think any other government has taken the measures that this coalition has taken, cutting salaries, pensions and social benefits in the middle of a full recession. We realised it is more important to emerge from the crisis economically stronger than to give up half way through. All the burden has been suffered, and if we change course now all the suffering will have been for nothing,” says Mr Dragoi.

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