By Justyna Pawlak
BUCHAREST, Feb 4 (Reuters) - Romania could slide into recession this year because persistent imbalances in the economy and slow reforms have left it ill-prepared for global downturn, the International Monetary Fund said on Wednesday.
In a statement released after a regular visit to Romania, the IMF gave its backing to economic plans unveiled last month by Bucharest's new centre-left government, saying it 'strongly supported' its pledge to slash the budget deficit to 2 percent of gross domestic product from some 5 percent last year.
But 'risks will remain high', the Fund said, adding budget targets were based on optimistic growth assumptions that may threaten the deficit.
'Economic activity will be weak and GDP growth may well turn negative in 2009,' the Washington-based lender said.
In a sharp reversal of fortune, Romania is seen as one of the European Union's most risky economies, even though it was its fastest-growing in the early parts of 2008. Underlying these risks, two major rating agencies grade its debt as 'junk'.
Most economists say the vulnerability comes from its high dependence on foreign cash to fuel growth, and excessive domestic borrowing and spending, which have been exacerbated by loose fiscal policy in recent years.
The Fund confirmed these concerns, pointing to large government spending and a tripling of public sector wages over the last 3 years.
'Slow action on structural reforms has left the economy less productive and less flexible in its ability to respond to the downturn,' the IMF said.
The Fund gave no forecast for economic growth this year but the Reuters consensus prediction sees Romania expanding by 1.7 percent.
GRADUAL RATE CUTS ONLY
Despite dwindling economic activity, the IMF recommended that the central bank remains vigilant about inflation and said there was only limited room for monetary easing.
'The monetary authority has little room to ease monetary policy until a credible macroeconomic policy package is in place to stabilise the economy and reduce the fiscal deficit,' the IMF said in a statement.
'And even then, the central bank should only move to gradual policy easing if balance of payments pressures abate.'
The central bank cut interest rates earlier on Wednesday, shaving off a quarter point to bring the key rate to 10 percent, in its first easing in 19 months.