Friday, August 6, 2010

Romanian economy seen contracting 1.9 pct in 2010


By ALISON MUTLER
BUCHAREST, ROMANIA

Romania's ailing economy will shrink by 1.9 percent this year before returning to growth in 2011, the International Monetary Fund said Wednesday.

Jeffrey Franks, the IMF's mission chief to Romania, said the country could expect growth of 1.5 to 2 percent in 2011 if the government continued to reduce debt by cutting budgetary spending.

Franks was speaking at the end of a 10-day review of Romania's public finances, weeks after the fund disbursed a loan installment of euro900 million ($1.16 billion).

Romania took a euro20 billion rescue loan from the IMF, the European Union and the World Bank last year, when its economy contracted by 7.1 percent. Some of the money was used to pay pensions and wages.

There were doubts whether the latest installment would be disbursed on time due to political disagreement on what measures needed to be taken to cut the budget deficit.

Romania's government hiked the sales tax from 19 to 24 percent and cut public sector wages by one-fourth in July to maintain the deficit at 6.8 percent of GDP.

"The government took the extremely tough measures which were necessary," said Franks, adding that the sales tax increase would lead to an inflation rate of 7.5 to 8 percent this year.

He recommended that no further changes be made to the fiscal system until the end of 2011. "Many investors look....for stability and predictability of those policies," said Franks.

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