Friday, March 20, 2009

Romania/IMF eye fiscal gap above 3 pct/GDP-sources

By Radu Marinas BUCHAREST, March 20 (Reuters) - The International Monetary Fund and Romania are likely to agree on a government budget deficit above European Union limits this year as they negotiate an IMF-led loan package, sources close to the talks said.

A mission from the Washington-based lender arrived in Bucharest last week to evaluate Romania's battered economy and set out a framework for aid likely to amount to some 20 billion euros.

Romania, an EU state of 22 million, approached Brussels and the IMF for support earlier this month, becoming the third member of the bloc to seek outside help to ride out global financial turmoil, after Hungary and Latvia.

Sources said talks have focused so far on economic growth forecasts to be used to map out this year's budget plans and the size of Romania's targeted fiscal deficit.

The IMF, they said, wants to frame the budget based on a worst-case scenario of a four percent contraction, a sharp reversal from 2008 growth levels that reached above 9 percent early in the year.

"Talks on economic growth forecasts are not over yet but all signs are pointing to a forecast of minus four percent, the Fund's proposal," one source close to the talks told Reuters on Friday.
Such a contraction would "imply" a fiscal shortfall of more than 3 percent of gross domestic product (GDP), the EU limit, they said.

The IMF's representation in Bucharest declined to comment.

The new estimate is in stark contrast with the 2.5 percent positive growth estimate on which the centre-left government has built its 2009 budget law just a couple of months ago, as well as its plan to cap the budget at 2 percent of GDP.

"The government's 2 percent deficit goal for 2009 will be definitely adjusted upwards, probably in the vicinity of 3 percent of GDP or slightly higher. I do not see any obstacles in getting Brussels' consent for such a figure," another official said.

As the global crisis engulfed eastern Europe, Romania has turned from being the EU's fastest-growing economy to one of its most fragile as big hard currency debts and budget deficits accentuated its deep external imbalances.

Many local companies have laid off workers and halted production as western demand for exported goods deteriorated and lendin, which used to power Romania's consumption-led growth in recent years, dried up.

Sources say conditionalities of an IMF-led deal may include raising the retirement age, additional spending cuts in the public sector, especially on some loss-making state-controlled firms or non-performing ones such as railway or mining firms.

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