Monday, July 5, 2010

IMF to Disburse $1.15 Billion to Romania After VAT Increase

By Irina Savu and Sandrine Rastello

July 3 (Bloomberg) -- The International Monetary Fund’s board of directors agreed to disburse about $1.15 Billion to Romania, which last week increased its sales tax to help meet deficit targets attached to the loan.

Romanian authorities “are taking ambitious adjustment measures to contain the weakening of the fiscal position and set the stage for a sustained improvement in public finances,” IMF First Managing Director John Lipsky said in an e-mailed statement late yesterday. “Balancing the fiscal adjustment between expenditure cuts and tax increases will help cushion its social impact, while at the same time reversing excessive past increases in public wages. ” The IMF had postponed the meeting on Romania after its constitutional court rejected the government’s plan to cut pensions by 15 percent. Romanian authorities decided to raise the value-added tax to meet the 2010 budget deficit.

The government, relying on 20 billion euros ($25 billion) in loans from the IMF and the European Union to finance its deficit, raised the VAT to 24 percent on June 26. While rejecting the pension cuts, the court on June 25 upheld a 25 percent reduction in wages for public workers.

The leu strengthened as much as 1.2 percent to 4.2891 per euro, the most since May 2009, and traded 1.1 percent higher at 4.2937 in Bucharest yesterday, the largest rally among more than 170 global currencies tracked by Bloomberg.

Economic Impact

Romania’s economy, mired in the worst recession in two decades, will probably contract at least 1 percent in 2010, more than previously forecast, because of the VAT increase and wage cuts, Finance Minister Sebastian Vladescu said on June 29. There will probably be “higher inflation and a different exchange rate” because of the tax increase, according to Vladescu, who declined to give a figure because the ministry is still working on a new forecast.

The IMF said it granted Romania a waiver for not meeting end-of-June criteria for the loan.

The IMF and the government estimate GDP will contract as much as 0.5 percent this year after shrinking a record 7.1 percent in 2009. The central bank, which left its benchmark rate unchanged at a record-low 6.25 percent to contain inflation, forecasts year-end inflation will be 3.7 percent. It will discuss a new forecast on Aug. 4.

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