Monday, July 6, 2009

IMF says Romania's standby deal on track

By Radu Marinas
BUCHAREST, July 4 (Reuters) - Romania's performance under a two-year IMF loan programme is on track, the International Monetary Fund said on Saturday, but warned populist measures in an election year may quickly undermine its emerging credibility.

Following similar deals by fellow EU states Hungary and Latvia, Romania has secured a 20 billion euro aid package from international lenders including the IMF in a move to shield its vulnerable economy in the wake of a global cash squeeze.

A mission of IMF experts will review Romania's progress in early August when the macroeconomic framework might also be revised, Tonny Lybek, the IMF's regional representative told Reuters, before the Fund approves the loan's second tranche.

Romania recorded a consolidated budget deficit of 2.7 percent of gross domestic product in January-June, meeting the quarterly target agreed under the deal, which also sets an overall 4.6 percent gap ceiling for the end of 2009.

"Preliminary data suggest that Romania remains on track, but a final assessment will only take place during the first review of the programme," Lybek said.

As part of the aid deal, Romania has to implement sweeping public sector reforms aimed at making wage policies more transparent and state spending more efficient.

Lybek said the first quarter's slightly worse than expected GDP contraction of 6.2 percent poses further challenges to the budget that would require a review of tax collection efficiency and further spending prioritising by the centre-left government.

For the second quarter Lybek said he does not rule out "some further (GDP) deterioration" compared to what the Fund had projected and also that an adjustment of the current account deficit could be sharper than originally forecast.

The Fund forecast a 7.5 percent external gap for 2009 from around 12 percent a year before.
Lybek welcomed recent commitments by large foreign-owned banks in Vienna and Brussels to maintain their exposure to Romania that will facilitate an easing of monetary policy.

"Populist measures could be tempting ... but they are extremely dangerous for economic stability as they would quickly undermine the emerging credibility. We thus appreciate ... the government so far has decided to resist such pressures," he said.

Asked if Romania could follow Hungary's lead as the Fund agreed to allow the neighbouring country to raise its budget deficit from an earlier target by one percentage point to 3.9 percent of GDP because of plunging tax revenues, Lybek said:

"Romania and Hungary are two different countries facing different challenges ... however, please note that Romania's budget deficit is already at 4.6 percent of GDP."

"The macroframework might might be reviewed in August so, until then, any discussion on revising the budget deficit is simple speculation," he added.

Mircea Geoana, a ruling coalition party chief said on Friday the government may want to raise this year's budget deficit target if the economic situation worsens.

Some observers say the cabinet faces an uphill battle to agree on details ahead of a presidential poll in the fourth quarter which pits the incumbent Traian Basescu, linked to the coalition's Democrat Liberal Party, against the leftists' Geoana. (Editing by Peter Blackburn)

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