By Irina Savu
May 10 (Bloomberg) -- Romania will face “major” challenges this year, including the possible contraction of its economy, as the government seeks to reduce spending on wages and pensions, said Jeffrey Franks, head of the International Monetary Fund’s mission to Romania.
The IMF will release its next loan installment of 850 million euros ($1.1 billion) only after the government implements its planned spending cuts, Franks said today at a news conference in Bucharest.
“The key message is that the economic uncertainties in the world, particularly in Europe, mean Romania cannot delay their adjustments,” Franks said, speaking at the end of a country visit along with European Commission officials.
The IMF will allow Romania to run a budget deficit of 6.8 percent of gross domestic product as a lingering recession erodes revenue. The deficit goal, which was raised from a previously agreed 5.9 percent, requires the government cut wages, pensions and unemployment benefits. The Washington-based IMF wants Romania to narrow the budget shortfall further in 2011 to 4.4 percent.
Fabienne Ilzkovitz, head of the European Commission mission to Romania, said at the same event that the commission will approve the release of its next tranche of loans. Romania’s economic recovery will be delayed as demand remains “weak,” she said.
The economy probably contracted in the first quarter, Franks said, noting that IMF agreed to the revision in the budget-deficit target because of the worsening economic conditions.
Romania has taken positive steps in the last nine months, including stabilization of the exchange rate and reducing capital flight, Franks said.
Romania’s government, which is relying on a 20 billion-euro bailout led by the IMF to stay afloat, pledged to cut wage costs by 25 percent from June and pensions and unemployment benefits by 15 percent this year to help narrow its budget deficit from 7.2 percent of gross domestic product last year.
Finance Minister Sebastian Vladescu said yesterday the government’s plans to cut spending would help trim a budget deficit that would have reached 9.1 percent this year.
The government ran a budget deficit of 8.22 billion lei in the first quarter of the year, below the 8.25 billion lei required by the IMF under the bailout. The country has already passed a so-called fiscal responsibility law which imposed long- term budget planning also required by the IMF and Parliament is currently debating a second law which indexes pension with inflation, which has June deadline.
The government has already frozen wages for state workers, raised some taxes and created a new tax on many service providers, including restaurants and hairdressers.