IMF, EU allow Romania to raise budget deficit

11/08/2009

Romania is in a "severe recession", the IMF said on Monday, citing an economic contraction of up to 8.5% this year.

(Agerpres, Nine O'clock - 11/08/09; Reuters, AP, AFP, Mediafax, Agerpres, European Commission - 10/08/09)

The head of the IMF mission to Romania, Jeffrey Franks, holds a press conference in Bucharest on Monday (August 10th). [Getty Images]

Romania will be allowed to run a higher budget deficit this year and next to prevent its economic situation from worsening, the IMF and the European Commission (EC) said on Monday (August 10th). The country, however, will be required to implement a series of measures, including reducing spending and public sector wages, so the gap doesn't expand.

A 20-billion-euro, IMF-led rescue package was announced for the country in March to help it cushion the impact of the financial crisis. In May, the Fund approved a two-year stand-by arrangement for Romania worth nearly13 billion euros and the EU agreed to contribute another 5 billion euros to the bailout, including loans from the World Bank and the European Bank for Reconstruction and Development (EBRD).

If Bucharest had followed better economic policies late last year, it would be in a better position now, Jeffrey Franks, the IMF's mission chief for Romania said on Monday.

Presenting the results of the Fund's first review of Romania's performance under the rescue package, he said the country can expect to face economic contraction of more than 8% this year, up from the 4.1% the Washington-based institution forecast in March.

The IMF also revised its budget deficit projections for 2009 -- from the 4.6% of GDP at the start of the programme to 7.3% of GDP. EC experts said that figure would translate into 7.8% of GDP under EU accounting rules.

"This represents a very severe recession facing Romania," Franks said. "Romania is not in a position to finance such a large public deficit." According to him, the current situation was the outcome of "worse than expected" deterioration and lower domestic demand during the first two quarters of 2009.

The IMF however sees prospects for a reversal in 2010, when the Romanian economy is likely to register a "modest positive growth" of between 0.5% and 1% of GDP.

An EC statement said agreement has been reached on further measures to ensure that the budget deficit for 2010 would be less than 6% of GDP, or 6.5% under EU rules. Those would be aimed mainly at cutting spending and reducing the size of public sector wages, "while giving priority to investment projects co-financed with EU funds", it explained.

Citing sources close to the talks, Romanian news agency Mediafax said meeting the budget gap target for next year would require a "2.5% decrease of the structural deficit" by implementing structural reforms, including layoffs in the public sector.

Franks however rejected speculation about the IMF mission having asked the Romanian government to lay off 150,000 or any other number of civil servants.

"The IMF discussed the budgetary deficit and the need to cut expenditures, but [it] does not suggest the means through which this would be done," he was quoted as saying.

Romania has already received 5 billion euros under its 13-billion-euro stand-by arrangement with the IMF. The Fund is expected to provide another 1.9 billion euros in September and a further 1.5 billion euros in December.

The EU provided 1.5 billion euros to Romania in July, the first instalment of its 5-billion-euro contribution to the multilateral aid package. A second instalment is expected to be disbursed following a new EC assessment in October.