Friday, December 17, 2010

Romania, Former `Mediocre Student,' Has Gained IMF's Confidence in 2010

Romania has reversed its image as an economic “mediocre student” after the government weathered no- confidence votes and protests to adhere to International Monetary Fund demands for spending and job cuts, said the IMF’s mission chief to the Balkan country.

The second-poorest European Union member after Bulgaria probably will complete in April its 13 billion-euro ($17.4 billion) bailout loan, the eighth accord with the IMF since the 1989 fall of communism, so it can win a precautionary standby agreement, said Jeffrey Franks in a Dec. 14 phone interview from the Washington-based lender’s headquarters.

The government of Prime Minister Emil Boc has struggled to quell parliamentary opposition and street demonstrations to austerity measures designed to keep bailout payments flowing into state coffers. The current agreement, part of a larger 20 billion-euro package reached with other international lenders, would only be the second that the country has completed in 20 years.

Romania “had a reputation of being a pretty mediocre student in terms of completing its reforms and this program has certainly changed the image,” Franks said. “It’s now seen as a country that has made an enormous effort against very long odds to complete some very difficult reforms that were needed.”

The country’s gross domestic product may shrink 1.9 percent this year as the rest of Europe recovers from the global financial crisis, prompting criticism that adhering to the strict demands by the IMF, the European Union and others is keeping the country in recession.

No-Confidence Vote

The opposition Liberal and the Social Democratic parties yesterday asked for a vote of no confidence against Boc’s government over a bill that raises public wages by 15 percent in 2011. He has urged lawmakers to forego debate on the bill and pass it in three days to unlock the next payment from an IMF bailout. The government is relying on a combined 2.4 billion euros in loan payments by March.

The IMF’s board is scheduled to meet in early January to review Romania’s progress.

The pension law, approved by Parliament on Dec. 7 and signed by the president yesterday, is another positive step, Franks said. Boc also called for a quick vote on a wage bill, raised a value-added tax rate to 24 percent, cut public wages 25 percent and reduced the public-sector workforce to bring the deficit to 6.8 percent of gross domestic product this year and 4.4 percent next year.

‘New Arrangement’

“A delay of a week or two would not have any significant effect on the new arrangement,” Franks said. “We are still planning to come to negotiate a follow-up arrangement with the idea that the follow-up arrangement will probably go into effect in April.”

Any new arrangement would include demands for more structural reforms in labor, infrastructure and capital input, said Franks.

“It’s very clear that the state has not completely been restructured,” Franks said. “There are areas in which Romania’s economy still needs to reform in order to be as flexible and productive as it needs to be.”

Eastern European countries, including Romania, have largely avoided any spillover from a sovereign-debt crisis that pushed the cost of insuring Portuguese, Spanish and Italian bonds to records, Franks said. Still, concerns persist that the region may affected by the turmoil.

“We always look at possible spillover effects,” Franks said. “So far eastern European countries have been relatively little affected by difficulties going on in other European Union countries but that’s not necessarily going to be true in the future, so we have to continue to be vigilant on this.”

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

To contact the editor responsible for this story: James M. Gomez in Prague atjagomez@bloomberg.net

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