Friday, July 31, 2009

Romania to ask IMF to allow up to 7 pct deficit

By Radu Marinas

BUCHAREST, July 30 (Reuters) - Romania will ask the International Monetary Fund to allow it a higher budget deficit of up to 7 percent of gross domestic produce this year, hoping to follow Hungary in securing easier terms for an aid package.

A senior government official close to talks with the Fund, which started on Wednesday, told Reuters flexibility from the lender was needed because of dwindling state revenues as the Romanian economy plunges deeper into recession.

If successful, Romania would retread the path of fellow European Union member Hungary which has won a Fund reprieve in budget plans, as it struggles to keep a 20 billion euro aid package, led by the IMF, on track.

The Washington-based lender has began a first review of Romania's progress in meeting aid conditions, which include a fiscal deficit target of 4.6 percent of GDP in 2009.

"The negotiating mandate given by the cabinet is a 4.6-7 percent range for the deficit to be raised in IMF talks," the official told Reuters.

Romania's problems are emblematic of wider woes in the region, where shrinking economies have put pressure on budget plans, pushing many above the EU's three-percent limit.

In May, under a similar agreement with the IMF and the EU, Hungary was allowed to hike its deficit ceiling to 3.9 percent of GDP from a previous 2.9 percent target.

Crisis-hit Latvia has been given the nod from the IMF to run a deficit of as much as 10 percent of GDP.

Observers warn skyrocketing deficits raise concerns about fiscal restrain in eastern Europe in the longer term, with many capitals struggling to rein in spending now and, possibly, even when their economies emerge from recession.

PRESIDENTIAL ELECTION

In Romania, a presidential election to be held in late 2009 poses problems for cutbacks.
The election pits politicians from the two ruling parties against each other as main contenders, making it difficult for the government to agree on policies and reforms.

"Seven percent is a big deficit," said Ionut Dumitru of Raiffeisen Bank in Bucharest.
"From the perspective of euro adoption, high deficits (in the region) would be hard to adjust in the coming years."

Mirroring Hungary, facing the worst downturn in two decades as a fall in demand in western Europe has cut jobs and incomes, Romania enforced drastic cuts to meet IMF requirements.
But first-quarter growth data showing a worse than expected contraction at 6.2 percent have prompted officials to say that Romania needs increased funding to finance infrastructure investment and fight financial woes more resolutely.

Analysts said IMF acceptance of a 7 percent deficit would have a harsh knock-on effect in Romania.

"If the IMF accepts such a gap (7 percent), such an agreement will be certainly accompanied by drastic spending adjustment such as an axing of jobs in the public sector," said Rozalia Pal of UniCredit Tiriac Bank in Bucharest.

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