Wednesday, May 12, 2010

AP: IMF says Romanian economy may contract this year



Romania's economy may contract by as much as 0.5 percent this year and the government will have to cut spending "drastically" to keep the deficit down, the International Monetary Fund said Monday.

At the end of a mission to assess the country's economic performance, the IMF mission chief to Romania cut the forecast for the country's economic growth this year to between zero and minus 0.5 percent.

The IMF had previously predicted the economy would grow by 0.8 percent, after last year's decline of 7.1 percent.

However, IMF mission chief Jeffrey Franks predicted that the ecomomy would recover to grow by as much as 3.6 percent in 2011.

He said the the impact of the economic crisis was more severe than anticipated, and called the government's plan to "drastically cut expenditure....ambitious and tough," but "necessary".

"Unfortunately, the worsening economic situation, together with continued strong expenditure pressures and slumping revenues, mean that for 2010 the deficit could shoot up to over 9.1 percent of GDP if no corrective action is taken," Franks said.

Franks said the spending cuts mean the budget deficit would be 6.8 percent of GDP in 2010. That is still above Romania's deficit target of 5.9 percent of GDP for 2010.

The comments come after the European Union unveiled a $1 trillion plan to support indebted eurozone countries and stop the spread of a fiscal crisis from Greece.

Only days earlier, Romania's President Traian Basescu announced severe cuts to public wages and pensions, to which unions responded with threats of protests.

Franks said authorities must gradually reduce the number of public workers, which grew by 250,000 people in the boom period of 2006-2008 to about 1.4 million.

The IMF, the European Union and the World Bank put together a euro20 billion ($26.18 billion) bailout last year to help Romania through the economic crisis.

The next IMF disbursement of funds worth euro0.9 billion ($1.15 billion) will become available after the Romanian government makes the agreed cuts, which could be as early as the end of June, Franks said.

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