Monday, May 10, 2010

IMF loan 'saved' Romania, but economy still sagging: analysts

09 May 2010, 13:21 CET

(BUCHAREST) - A bailout deal signed a year ago with the IMF and the European Union "saved" Romania from bankruptcy, but its economy is still sagging for lack of reforms, analysts say.

The Balkan country was the third EU member, after Hungary and Latvia, and months ahead of Greece, to benefit from a joint rescue plan by the International Monetary Fund (IMF) and the EU, branded by authorities as a "safety belt".

"Romania badly needed the IMF and EU loan, otherwise it would have faced a shortage of cash and its financial system could have collapsed," former finance minister Daniel Daianu told AFP.

However, he added, the recession was more severe than expected and this triggered a serious shortfall in public revenues, "while money squandering continued."

After 10 years of solid growth, the Romanian economy shrank by 7.1 percent in 2009.

The forecast for 2010 is becoming dimmer, with authorities no longer ruling out a further slump of the GDP.

"The international aid package has bought Romania time, but has not solved its problems. The economic reforms must eventually be implemented," Daianu stressed.

Romania had pledged to slash the public deficit from 7.2 percent in 2009 to 5.9 percent this year, in exchange for the 20-billion-euro rescue plan.

But a year after the IMF deal, the promise to trim the bloated civil service and freeze public wages and pensions has mostly remained a dead letter, while the deficit is threatening to balloon beyond the target set by international lenders.

With tough negotiations under way on a new 850 million euro disbursement, president Traian Basescu on Thursday announced a drastic austerity plan including 25-percent reductions in public wages and 15-percent cuts in pensions and unemployment benefits.

The IMF is due to announce Monday if it deems the measures convincing enough for a new instalment to be unblocked.

Central bank governor Mugur Isarescu said the IMF rescue deal had "partly attained its goal, allowing Romania to avoid major disruptions, a serious devaluation of its currency or a default on wage payments."

But he regretted "the adjustment of the private sector was not matched by a similar move in the public sector," which employs 1.4 million people out of total population of 21.5 million.

Unemployment jumped from 4.9 percent in January 2009 to 8.1 percent a year later, but official figures show it was the private sector that bore the brunt of the massive job losses.

"We are witnessing an extreme social and political resistance to the adjustment of public expenses and particularly of the civil servants' pay roll," Isarescu stressed.

Doru Lionachescu of Capital Partners said Romania had signed the deal with international lenders "hoping to use the money for modernizing infrastructures and compensating for the contraction of the private sector."

"But a year later, what we see is that most of the money was spent on wages and social benefits."

"The loan helped buy social peace but delayed the steps that should have been taken in order to cutback public spending," he said.

But Andreea Paul, an economic counsellor of prime minister Emil Boc, said the promised reforms, including a new pension bill, have been launched, even if their effects are only likely to be visible in the long run.

"It really takes a lot of courage to take such steps. The risk of losing voters is enormous," she said.

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