The mission of the International Monetary Fund, which is expected in Bucharest on January 26, will propose that the government increase value added tax and speed up the programme of aligning with European Union excise levels. The IMF sees this as the only alternative available to compensate for the loss of revenue caused by introduction of the flat tax and as the way to prevent an outburst of inflationary pressure.
"Inflationary pressures could turn out to be persistent and burst out following salary increases and tax cuts that will fuel consumption, which is very strong already as it is. The government has no other option but to increase indirect taxes, which target consumption, in order to cover the loss of revenue to the state budget," Graeme Justice, IMF's resident representative in Romania, told Ziarul Financiar.
Justice believes the fiscal lever is very important for keeping inflation under control, given that the central bank will be forced to continue reducing interest rates to discourage speculative flows after the upcoming deregulation of the capital account.
"We are already witnessing a dangerous deterioration of the current account deficit, which will probably amount to some 6% of GDP for 2004, due to the strong growth of imports," the IMF representative added, explaining that maintaining macroeconomic stability is crucial if capital inflows in Romania are to be stable, without risk of sudden withdrawals.
Under the circumstances, the IMF believes an adjustment to the budget deficit will be necessary even below the 1.5% of GDP level planned for in the spending and revenue plan of the last government. The safe options for covering the void in budget revenues caused by the reduction of income and profit taxes, for the first part of the year at least, are a VAT increase by at least one percentage poi
