Romania’s Protests Raise Hurdles to Implementing Structural Reform

Romania’s Protests Raise Hurdles to Implementing Structural Reform

Since 12 January, thousands of Romanians in Bucharest and other cities have been rallying against government austerity measures. These protests, described as the largest and most violent in the country in a decade, are a credit negative development that will make it more difficult for the Romanian government to continue along the path of fiscal and structural reform.
The demonstrations were initially prompted by the resignation of a senior government health official, Raed Arafat. Mr. Arafat resigned in opposition to the planned partial privatization of emergency medical services, which was part of the government’s broader efforts to cut costs in the national healthcare system.

Reforming the healthcare system is part of an agreement made with the International Monetary Fund, the European Union and the World Bank, and it underpins a $5 billion emergency credit line the three organizations made available for the Romanian government. This credit line is a particularly important backstop for funding the government’s fiscal deficit as well as the country’s current account deficit, should international capital market volatility stemming from euro area problems reduce market sources of funding in 2012.

Over the past two years, Romania has met all the conditions of the agreement, even when it required politically unpopular but credit positive measures such as cutting public sector jobs and wages, lowering social benefits and increasing the value-added tax. These efforts lowered the fiscal deficit from 9% of GDP in 2009 to an estimated 4.4% of GDP in 2011. Cutting healthcare costs would be the next step in reducing the government’s future liabilities.

Instead, in response to the protests, the government has withdrawn its draft healthcare bill. On 17 January, the government reinstated Mr. Arafat in his previous position, and he will participate in redrafting the healthcare bill.
Although recent events delay the implementation of healthcare reform, it would be credit positive if the final bill meets the conditions prescribed by the International Monetary Fund, the European Union and the World Bank, while also enjoying political and popular legitimacy because of Mr. Arafat’s participation in its formulation.

However, the chances of such a propitious development are diminished by the continuing protests, which have now evolved into a more general expression of discontent over the government’s fiscal consolidation policies. Such dissatisfaction is emerging across Europe and is even stronger in some countries as growth slows and social benefits are cut. Moreover, since 2012 is a national election year in Romania, the endorsement of the protests by opposition political parties is hardly surprising. It does, however, bode ill for building on the fiscal discipline that the government demonstrated over the past year.