Tuesday, July 27, 2010

IMF reviews Romanian austerity measures

The Financial Times
By Chris Bryant in Vienna

Published: July 26 2010

An International Monetary Fund mission arrived in Romania on Monday to review the recession-hit country’s progress in implementing painful austerity measures.

Little more than a week after the suspension of budgetary talks with neighbouring Hungary led to a fresh bout of investor anxiety, the IMF’s negotiations in Bucharest are set to take place amid heightened market scrutiny of government debt levels.

In order to secure the latest tranche of its €20bn ($26bn) IMF/EU loan facility, Romania in May announced some of the continent’s toughest budget cuts, including a 25 per cent reduction in public sector pay.

The government was also later forced to raise value added tax by 5 percentage points (to 24 per cent) after the country’s constitutional courtblocked a blanket cut in pensions.

Tens of thousands of public sector job losses are also due to follow in the coming months as the government battles to keep this year’s budget deficit within a revised 6.8 per cent target.

In contrast to Hungary’s government which is resisting calls for fresh austerity, Bucharest is sticking to its fiscal obligations in spite of fierce resistance from opposition politicians and trade unions.

However, analysts warn that the public sector cuts and tax increases will hit domestic demand in the short term, harming the country’s economic growth prospects.

Neil Shearing at Capital Economics lowered his 2010 growth forecast on Monday from -1 per cent to -2.5 per cent, adding that the economy would also “do well to stagnate in 2011”.

Romania is reliant on IMF financing to help plug a shortfall in public spending but appears unwilling to pay what it considers high rates to borrow money on debt markets.

The finance ministry on Monday again reduced the size of a six-month treasury bill tender rather than accept yields above 7 per cent.

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