Romania's preventive agreement with the International Monetary Fund could froze if the country will reduce the VAT on basic food products to 5 percent, according to analysts from ING, quoted by Romanian media. Romanian president Traian Basescu has asked the Parliament to re-examine the law which sets a lower VAT for basic food products. The Romanian Senate has rejected the President's proposal and it is now up to the Chamber of Deputies to cast its vote. ING analysts added that “this has negative implications for the local currency and in general for the Finance Ministry's borrowing costs”.

The Romanian president has asked for a reversal of the lower VAT on basic food products as, according to him, it would lead to lower revenues and increased budget deficit. “I could let the VAT drop law to pass, but only if those who ask me to do this will pledge to pay pensions and salaries. The extra VAT contributes to the state budget, we have a deficit in the pensions budget, the unemployment budget, the healthcare budget,” said president Traian Basescu.

The Senate maintained on Wednesday the decision to reduce the VAT to 5 percent for basic foods, rejecting the president’s request for review.

The Romanian Parliament decided to cut the VAT from 24 to 5 percent on basic food products in October last year. This was voted by accident by the ruling party's Members of the Parliament, as it was a proposal coming from the opposition parties: the Social Democratic Party )PSD), the Conservative Party (PC) and the National Liberal Party (PNL).

Romania will have a EUR 5 billion preventive agreement with the IMF and the European Commission. This would follow the EUR 20 billion bailout package the country has already received from the IMF, the EU and the World Bank.

Irina Popescu, irina.popescu@romania-insider.com