Thursday, March 6, 2008

Romania cuts budget deficit target to 2.3 pct/GDP

By Radu Marinas
BUCHAREST, March 5 Reuters) - Romania's government cut its consolidated budget deficit target for this year to 2.3 percent of gross domestic product from 2.7 percent in a bid to meet EU rules and quell inflationary pressures.

Finance Minister Varujan Vosganian said the cut came primarily from lower spending on state administration but kept cash targeted for key investment projects.

"We cut spending by 1.1 billion euros, which does not imply reductions in important investment spending," Vosganian told a news briefing after the government's weekly meeting.
"In exchange, we drastically reduced spending on furniture, cars and TV acquisitions for ministries."

The European Commission has warned Romania it expected the country's deficit to grow to 3.2 percent of GDP this year and 3.9 percent in 2009, above the bloc's 3 percent ceiling, without spending cuts.

Last month, European Union finance ministers scolded Romania, which joined the bloc in 2007, for allowing its budget gap to increase despite fast economic growth.

But Vosganian said the deficit cut should calm EU concerns and prevent Brussels from launching its excessive deficit procedure against Bucharest.

"Today's revision is a clear signal to the European Union that our government observes its rules," he said.

Analysts say the badly-needed cut would send a positive signal to the markets that the government was determined to cut consumption-related spending in an election year.
"This is a good sign because consumption expenditure was reduced ... on paper. Let's see if it is effectively implemented," said Ionut Dumitru, head of research at Raiffeisen Bank in Bucharest.
Romania has grown robustly in recent years driven by robust foreign investment, efforts by firms to modernise and strong household spending as Romanians race to improve living standards.

However, the spending spree has fanned significant import growth, widening the external shortfall and raising concerns that if foreign cash dries up the country may encounter financial problems.

Consumption-driven government spending has increased the concerns as foreign observers complain that Bucharest's ruling centrists have shown inadequate response to signs of economic overheating.

Rising inflation has already driven the central bank to hike interest rates by 2 percentage points to 9 percent in recent months.

"The spending cut was needed to ... diminish inflationary pressures as we have agreed with the central bank. This is just a first step," Vosganian said. But he said wages in the public sector will remain unnafected by the revision.

The Romanian economy grew by 6 percent last year and is expected to expand by another 6 percent in 2008. (Reporting by Radu Marinas; Writing by Justyna Pawlak; Editing by David Christian-Edwards)

No comments: