Wednesday, September 1, 2010

Romania Must Pay Debts, Pass Pension Changes to Get IMF Payment

By Andra Timu and Irina Savu - Aug 31, 2010


Romania must prove it paid overdue debts to private companies and approve changes in its pension system by the end of September to unlock the next installment of its bailout loan, the International Monetary Fund

The government will have to produce documents showing it has made 1.9 billion lei ($567 million) in payments to health- care companies before the IMF board meets in late September, Tony Lybek, the fund’s representative for Romania and Bulgaria, said in an interview yesterday.

Romania is scheduled to receive about 900 million euros ($1.1 billion) as the next tranche in a 20 billion-euro bailout from the IMF, European Commission and other international lenders. The European Union’s second-poorest country took the loan last year because of dwindling budget revenue and pressure on its currency.

The government has “committed to make payments on arrears of 1.9 billion lei,” Lybek said at the Palace of Parliament in Bucharest. “This is a prior action for the review, thus we need to see the documentation that these payments have been made.”

Prime Minister Emil Boc’s government raised the value-added tax by 5 percentage points to 24 percent and cut public wages by 25 percent from July to meet an IMF-agreed budget deficit target of 6.8 percent of gross domestic product and win approval for the previous loan payment.

‘Very Concerned’

The IMF allowed Romania to forgo the overdue debt payments before approving the previous five installments totaling 10.7 million euros.

The Washington-based lender has “been very concerned with the arrears problem because it’s a vicious circle when the government doesn’t pay its bills,” Lybek said.

Lawmakers must also adopt a law streamlining the public pension system and increase the retirement age by late September to qualify for the next payment, Lybek said. The next IMF mission will come to Bucharest in late October or early November, and the fund’s board will meet to decide on that review of the loan program in the second half of December.

“Right now it seems that the economy will be picking up in 2011, which will help revenue and make some room for dealing with the arrears problem,” Lybek said. “The suppliers of goods and services can’t pay their own bills and can’t pay taxes.”

Romania’s economic contraction slowed to an annual rate of 0.5 percent in the second quarter, after a 2.6 percent decline in the previous three months, the National Statistics Institute said Aug. 13. The economy expanded 0.3 percent from the previous period, its first quarterly growth since 2008.

“There could be a smaller decline again in the third quarter because these necessary measures that the government has taken can have a temporary negative effect on economic activity,” Lybek said. “But then, as that effect is being phased out we will see growth picking up.”

The IMF estimates Romania’s economy will contract for a second year in 2010, shrinking by as much as 1.9 percent because of weak domestic demand, before growing by as much as 1.5 percent in 2011.

To contact the reporter on this story: Andra Timu in Bucharest at atimu@bloomberg.net. To contact the reporter on this story: Irina Savu in Bucharest at isavu@bloomberg.net.
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