By Radu Marinas
BUCHAREST, May 5 (Reuters) - The International Monetary Fund will agree to bigger budget deficit for Romania as part of the country's 20 billion euro aid deal and tax hikes remain a possibility, a source with direct knowledge of talks told Reuters.
Romania has committed to slashing its budget shortfall to 5.9 percent of gross domestic product this year from 7.2 percent in 2009, but recent disappointing economic data and wider financial instability have suggested the government might ask for more breathing space.
"For sure we are going to see a revision of the budget deficit target. The external conditions have worsened and consequently some macroeconomic indicators," said the source, who declined to be named due to the sensitive nature of the talks.
The source did not specify what the budget deficit target would be raised to.
An IMF mission is in Bucharest until May 7 to review Romania's aid package and local media said on Wednesday the chances of tax hikes have grown as the economy is seen underperforming expectations, hurting government income. [ID:nLDE6440WU]
The possibility of higher taxes hit both the Romanian leu currency EURRON= and the country's blue-chip stocks .BETI earlier in the session.
Asked whether Romania would raise taxes, the source said: "There may be several other options."
The leu recovered some ground and was nearly flat on the session at 4.151 per euro by 1005 GMT. The blue-chip BET stocks index also recovered some of its earlier losses and was down 2.6 percent at 5,276 points.
"I think this (possible tax rises) is just about the IMF pushing the government to do the structural reforms," said Raffaella Tenconi, chief economist at Wood&Co in Prague.
"I don't think the IMF wants tax hikes, but it is giving the government two unpleasant options to force it to meet its reforms deadline." (Additional reporting by Marius Zaharia and Luiza Ilie; Writing by Sam Cage; Editing by Toby Chopra)