Tuesday, January 26, 2010

Romania seen receiving IMF/EU loans, struggling with cuts

By Radu Marinas and Luiza Ilie

BUCHAREST, Jan 25 (Reuters) - Romania is widely expected to win approval for delayed loan tranches from an International Monetary Fund-led rescue deal next month, but the government faces a tough task in enforcing cost-cutting reforms. 

Analysts say that after political turmoil in the recession-hit economy put the 20 billion euro ($28 billion) package on hold in November, mass sackings to shrink a bloated administration and planned fiscal reforms may be the next stumbling blocks.

"Playing with jobs, pensioners and the people's purchasing power has never been an easy task ... if public discontent rises nationwide, this could pose a real risk including to the (IMF) programme," said political analyst Bogdan Teodorescu.

Markets have been eagerly awaiting the disbursement of some 3.3 billion worth of IMF/EU loans, while economists say the sum would provide badly-needed budgetary funding and could allow the central bank to further stimulate the economy by cutting rates.

The IMF has a review mission in Bucharest until Jan. 27 to assess the European Union state's progress and is widely expected to give a green light to resumed payments.

"There are very big chances to get the money, but risks to the deal remain ... The ball is in our court. But we will need political consensus to further pursue reforms," said Ionut Dumitru of Raiffeisen Bank in Bucharest.

"Reaching a 5.9 percent budget deficit this year ... which implies state sector redundancies, is a very challenging goal."

Delays in approving pension reform and a fiscal responsibility bill have already pushed back implementation of the agreement and could threaten Romania's ambitious goal of trimming its fiscal deficit from 7.3 percent of gross domestic product in 2009.

Romania has also missed targets to lower government arrears and officials said the Fund was expected to set new deadlines.


Prime Minister Emil Boc, whose centrist coalition relies on a fragile majority in parliament, said on Sunday that a plan to overhaul the country's unsustainable communist-era pay-as-you-go pension system would be approved by the cabinet on Feb. 3.

Under the plan, Romania is seeking to index pensions to inflation rather than to average wages as at present, raise the retirement age and scrap special pensions for "privileged" public job categories.

Boc also said a fiscal responsibility law, to make public spending more efficient, enforce multi-annual budgetary planning and limit the number of budget revisions within a fiscal year, should be approved by the end of March.

Commentators expect the pension bill to face strong opposition from the powerful leftists who advocate a 12 percent hike against a nationwide, IMF-endorsed pay freeze this year.
Meanwhile, some trade unions have threatened to stage nationwide protests next month against plans to sack 100,000 state employees while others have demanded compensation equivalent to 12 months' pay for those whose jobs are axed.

"The only risk I see to the deal is political, the political commitment and will to lower the budget deficit," said Nicolaie Alexandru-Chidesciuc, chief economist at ING Bank in Bucharest.

"The impact of the layoffs on lowering the 2010 budget deficit will not be large because ... most of the savings will be erased by unemployment benefits and compensation pay."

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